UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
x
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
COMMISSION FILE NUMBER: 814-00813
OFS Capital Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware
(State or jurisdiction of
incorporation or organization)
10 S. Wacker Drive, Suite 2500
Chicago, Illinois
(Address of principal executive offices)
46-1339639
(I.R.S. Employer
Identification No.)
60606
(Zip Code)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:
(847) 734-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class
Common Stock, $0.01 par value per share
6.25% Notes due 2023
6.375% Notes due 2025
6.50% Notes due 2025
5.95% Notes due 2026
Trading Symbol(s)
OFS
OFSSG
OFSSL
OFSSZ
OFSSI
Name of each exchange on which registered
The Nasdaq Global Select Market
The Nasdaq Global Select Market
The Nasdaq Global Select Market
The Nasdaq Global Select Market
The Nasdaq Global Select Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter periods as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
☐
☒
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
The aggregate market value of the registrant's voting shares of common stock held by non-affiliates of the registrant as of June 30, 2020, was approximately $47.2 million based on $4.52 per
share, the last reported sale price of the shares of common stock on the Nasdaq Global Select Market. For the purpose of calculating this amount only, shares held by certain stockholders and by
directors and executive officers of the registrant have been excluded. On March 4, 2021, there were 13,408,859 shares outstanding of the Registrant’s common stock, $0.01 par value.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) YES ☐ NO x
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement relating to the registrant’s 2021 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A with the Securities and Exchange
Commission, are incorporated by reference in Part III of this Annual Report on Form 10-K as indicated herein.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
TABLE OF CONTENTS
PART 1
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART III
Item 15.
Item 16.
Signatures
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
Page
3
27
59
59
59
60
61
71
73
99
100
169
169
169
170
170
170
170
170
171
174
175
OFS Capital Corporation, our logo and other trademarks of OFS Capital Corporation are the property of OFS Capital Corporation. All other
trademarks or trade names referred to in this Annual Report on Form 10-K are the property of their respective owners.
Defined Terms
We have used “we,” “us,” “our,” “our company,” and “the Company” to refer to OFS Capital Corporation in this report. We also have used several other
terms in this report, which are explained or defined below:
1940 Act
Administration Agreement
Advisers Act
Affiliated Account
Affiliated Fund
Annual Distribution Requirement
ASC
ASC Topic 820
ASC Topic 946
ASU
BDC
BLA
BNP Facility
Board
CLO
Code
Company
DRIP
EBITDA
Exchange Act
FASB
FDIC
GAAP
HPCI
ICTI
Indicative Prices
Investment Advisory Agreement
IPO
LIBOR
Net Loan Fees
OCCI
Offering
OFS
OFS Advisor
OFSC
OFS Services
Investment Company Act of 1940, as amended
Administration Agreement between the Company and OFS Services dated November 7, 2012
Investment Advisers Act of 1940, as amended
An account, other than the Company, managed by OFS Advisor or an affiliate of OFS Advisor
Certain other funds, including other BDCs and registered investment companies managed by OFS Advisor
Distributions to our stockholders, for each taxable year, of at least 90% of our ICTI
Accounting Standards Codification, as issued by the FASB
ASC Topic 820, "Fair Value Measurements and Disclosures"
ASC Topic 946, "Financial Services-Investment Companies"
Accounting Standards Updates, as issued by the FASB
Business Development Company under the 1940 Act
Business Loan Agreement, as amended, with Pacific Western Bank, as lender, which provides the Company with a
senior secured revolving credit facility
A secured revolving credit facility that provides for borrowings in an aggregate principal amount up to $150,000,000
issued pursuant to a Revolving Credit and Security Agreement by and among OFSCC-FS, the lenders from time to
time parties thereto, BNP Paribas, as administrative agent, OFSCC-FS Holdings, LLC, a wholly owned subsidiary of
the Company, as equityholder, the Company, as servicer, Citibank, N.A., as collateral agent and Virtus Group, LP, as
collateral administrator
The Company's board of directors
Collateralized loan obligation
Internal Revenue Code of 1986, as amended
OFS Capital Corporation and its consolidated subsidiaries
Distribution reinvestment plan
Earnings before interest, taxes, depreciation, and amortization
Securities Exchange Act of 1934, as amended
Financial Accounting Standards Board
Federal Deposit Insurance Corporation
Accounting principles generally accepted in the United States
Hancock Park Corporate Income, Inc., a Maryland corporation and non-traded BDC for whom OFS Advisor serves
as investment adviser
Investment company taxable income, which is generally net ordinary income plus net short-term capital gains in
excess of net long-term capital losses
Market quotations, prices from pricing services or bids from brokers or dealers
Investment Advisory and Management Agreement between the Company and OFS Advisor dated November 7, 2012
Initial Public Offering
London Interbank Offered Rate
The cumulative amount of fees, such as origination fees, discounts, premiums and amendment fees that are deferred
and recognized as income over the life of the loan
OFS Credit Company, Inc., a Delaware corporation and a non-diversified, closed-end management investment
company for whom OFS Advisor serves as investment adviser
Follow-on public offering of 3,625,000 shares of our common stock in April 2017
The collective activities and operations of OFSAM, its subsidiaries, and certain affiliates
OFS Capital Management, LLC, a wholly owned subsidiary of OFSAM and registered investment advisor under the
Advisers Act
Orchard First Source Capital, Inc., a wholly owned subsidiary of OFSAM
OFS Capital Services, LLC, a wholly owned subsidiary of OFSAM and affiliate of OFS Advisor
1
OFSAM
OFSCC-FS
OFSCC-FS Assets
OFSCC-MB
OID
Order
Parent
PIK
Portfolio Company Investment
Prime Rate
PWB Credit Facility
Reunderwriting Analysis
RIC
SBA
SBIC
SBIC Acquisition
SBIC Act
SBIC I LP
SEC
Securities Act
Secured Revolver Amendment
Staffing Agreement
Stock Repurchase Program
Structured Finance Notes
Synthetic Rating Analysis
Transaction Price
Unsecured Notes
Unsecured Notes Due April 2025
Unsecured Notes Due October 2025
Unsecured Notes Due October 2026
Unsecured Notes Due September 2023
Unsecured Notes Due February 2026
Orchard First Source Asset Management, LLC, a full-service provider of capital and leveraged finance solutions to
U.S. corporations
OFSCC-FS, LLC, an indirect wholly owned subsidiary of the Company
Assets held by the Company through OFSCC-FS
OFSCC-MB, LLC, a wholly owned subsidiary taxed under subchapter C of the Code and generally holds the
equity investments of the Company that are taxed as pass-through entities
Original issue discount
An exemptive relief order from the SEC to permit us to co-invest in portfolio companies with Affiliated Funds in a
manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory
requirements and other pertinent factors, subject to compliance with certain conditions
OFS Capital Corporation
Payment-in-kind, non-cash interest or dividends payable as an addition to the loan or equity security producing the
income
A debt or equity investment in a portfolio company. Portfolio Company Investments exclude Structured Finance
Notes
United States Prime interest rate
Senior secured revolving credit facility between the Company and Pacific Western Bank, as lender
A discount rate method based upon a hypothetical recapitalization of the entity given its current operating
performance and current market condition
Regulated investment company under the Code
U.S. Small Business Administration
A fund licensed under the SBA small business investment company program
The Company's acquisition of the remaining ownership interests in SBIC I LP and OFS SBIC I GP, LLC on
December 4, 2013
Small Business Investment Act of 1958, as amended
OFS SBIC I, LP, a wholly owned SBIC subsidiary of the Company
U.S. Securities and Exchange Commission
Securities Act of 1933, as amended
The amended Business Loan Agreement with Pacific Western Bank, as lender, dated February 17, 2021
Staffing Agreement between the Company and OFSC dated November 7, 2012
The open market stock repurchase program for shares of the Company’s common stock under Rule 10b-18 of the
Exchange Act
CLO mezzanine debt and CLO subordinated debt positions
A discount rate method that assigns a surrogate debt rating to the entity based on known industry standards for
assigning such ratings and then estimates the discount rate based on observed market yields for actual rated debt
The cost of an arm's length transaction occurring in the same security
The combination of the Unsecured Notes Due September 2023, the Unsecured Notes Due April 2025, the Unsecured
Notes Due October 2025 and the Unsecured Notes Due October 2026
The Company's $50.0 million aggregate principal amount of 6.375% notes due April 30, 2025
The Company's $48.5 million aggregate principal amount of 6.5% notes due October 30, 2025
The Company's $54.3 million aggregate principal amount of 5.95% notes due October 31, 2026
The Company’s $25.0 million aggregate principal amount of 6.25% notes due September 30, 2023
The Company’s $100.0 million aggregate principal amount of 4.75% notes due February 10, 2026
2
As used in this Annual Report on Form 10-K, except as otherwise indicated, the terms “OFS Capital,” “the Company,” “we,” “us,” and “our”
refer to OFS Capital Corporation and its consolidated subsidiaries.
PART I
Item 1. Business
GENERAL
We are an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a BDC under the
1940 Act, which imposes certain investment restrictions on our portfolio. Our investment objective is to provide our stockholders with both current income
and capital appreciation primarily through debt investments and, to a lesser extent, equity investments. Our investment strategy is to maintain a credit
investment portfolio focused primarily on investments in middle-market companies in the United States. We use the term “middle-market” to refer to
companies that may exhibit one or more of the following characteristics: number of employees between 150 and 2,000; revenues between $15 million and
$300 million; annual EBITDA between $5 million and $50 million; generally, private companies owned by private equity firms or owners/operators; and
enterprise value between $10 million and $500 million. For additional information about how we define the middle-market, see “—Investment
Criteria/Guidelines.”
Our investment strategy focuses primarily on investments in middle-market companies in the United States, including senior secured loans, which
includes first-lien, second-lien and unitranche loans, as well as subordinated loans and, to a lesser extent, warrants and other equity securities. Our
investments may be directly originated or may be purchased in the U.S. leveraged loan market for Broadly Syndicated Loans (as defined below). 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
assets, as defined by the 1940 Act, are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio
companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed
on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market
capitalization of less than $250 million, in each case organized in the United States. Conversely, may invest up to 30% of our portfolio in opportunistic
investments not otherwise eligible under BDC regulations. Specifically, as part of this 30% basket, we may consider investments in investment funds that
are operating pursuant to certain exceptions to the 1940 Act and in advisers to similar investment funds, as well as in debt or equity of middle-market
portfolio companies located outside of the United States and debt and equity of public companies that do not meet the definition of eligible portfolio
companies because their market capitalization of publicly traded equity securities exceeds the levels provided for in the 1940 Act. We have, and may
continue to, make opportunistic investments in Structured Finance Notes and other non-qualifying assets (discussed below), consistent with our investment
strategy.
We have executed our investment strategy, in part, through SBIC I LP, a licensee under the SBA’s SBIC program, which is subject to SBA
regulations and policies, including periodic audits by the SBA. On a stand-alone basis, SBIC I LP held approximately $223.8 million and $249.6 million in
assets, or approximately 46% and 46% of our total consolidated assets, at December 31, 2020 and 2019, respectively. As part of our plans to focus on
lower-yielding, first lien senior secured loans to larger borrowers, which we believe will improve our overall risk profile, SBIC I LP is repaying over time
its outstanding SBA debentures prior to the scheduled maturity dates of its debentures. We do not expect to make new investments through SBIC I LP,
other than follow-on investments. We believe that investing in more senior loans to larger borrowers is consistent with our view of the private loan market
and will reduce our overall leverage on a consolidated basis. For additional information regarding the regulation of SBIC I LP, see “Regulation—Small
Business Investment Company Regulations.”
We also execute on our investment strategy, in part, through OFSCC-FS, which established the BNP Facility on June 20, 2019, to provide borrowings of
up to $150.0 million. We believe that the BNP Facility will enable us to provide more first lien loans to large companies at more competitive pricing, due to
this lower cost of financing. On a stand-alone basis, OFSCC-FS held approximately $72.4 million and $92.5 million in assets at December 31, 2020 and
2019, respectively, which accounted for approximately 15% and 17% of our total consolidated assets, respectively.
As of December 31, 2020, the fair value of our debt investment portfolio totaled $321.4 million in 49 portfolio companies, of which 95% was
comprised of senior secured loans and 5% of subordinated loans, respectively, and approximately $64.5 million in equity investments, at fair value, in 10
portfolio companies in which we also held debt investments and thirteen portfolio companies in which we solely held equity investments. We also have
twelve investments in Structured Finance Notes with a fair value of $56.4 million.
A BDC is generally not permitted to incur indebtedness unless immediately after such borrowing it has an asset coverage ratio for total borrowings
of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, Section 61(a)(2) of the 1940 Act permits BDCs to be
subject to a minimum asset coverage ratio of 150%, if specific conditions are satisfied, when issuing senior securities (i.e., the amount of debt may not
exceed 66 2/3% of the value of our assets).
3
On May 3, 2018, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the
application of Section 61(a)(2) of the 1940 Act and, as a result, the asset coverage ratio test applicable to us was decreased from 200% to 150%, effective
May 3, 2019. See "Item 1A. Risk Factors — Risks Related to our Business and Structure — Because we have received the approval of our Board, we are
subject to 150% Asset Coverage effective May 3, 2019." Additionally, we received exemptive relief from the SEC effective November 26, 2013, which
allows us to exclude our SBA guaranteed debentures from the definition of senior securities in the statutory asset coverage ratio under the 1940 Act.
Consistent with our strategy to maintain a portfolio of credit investments, our historic debt levels of $315.2 million and $359.2 million resulted in
asset coverage ratios of 176% and 180% as of December 31, 2020 and December 31, 2019, respectively.
We have elected to be treated for tax purposes as a RIC under Subchapter M of the Code. To continue to qualify as a RIC, we must, among other
things, meet certain source-of-income and asset diversification requirements. Pursuant to this election, we generally will not have to pay corporate-level
taxes on any income we distribute to our stockholders.
Our investment activities are managed by OFS Advisor and supervised by our Board, a majority of whom are independent of us, OFS Advisor and
its affiliates. Under the Investment Advisory Agreement we have agreed to pay OFS Advisor an annual base management fee based on the average value of
our total assets (other than cash and cash equivalents but including assets purchased with borrowed funds and including assets owned by any consolidated
entity) as well as an incentive fee based on our investment performance. We have elected to exclude from the base management fee calculation any base
management fee that would be owed in respect of the intangible assets resulting from the SBIC Acquisition. OFS Advisor also serves as the investment
adviser, sub-adviser or collateral manager to CLOs and other assets, including HPCI, a non-traded BDC with an investment strategy similar to the
Company's, OCCI, a non-diversified, externally managed, closed-end management investment company that has registered as an investment company
under the 1940 Act that primarily invests in Structured Finance Notes, CMFT Securities Investments, LLC, a wholly owned subsidiary of CIM Real Estate
Finance Trust, Inc., a corporation that qualifies as a real estate investment trust, and CIM Real Assets & Credit Fund, an externally managed registered
investment company under the 1940 Act that operates as an interval fund that invests primarily in a combination of real estate, credit and related
investments. See "Item 1A. Risk Factors — Risks Related to OFS Advisor and its Affiliates — We have potential conflicts of interest related to obligations
that OFS Advisor or its affiliates may have to other clients," and "Item 1A. Risk Factors — Risks Related to OFS Advisor and its Affiliates — We have
potential conflicts of interest related to obligations that OFS Advisor or its affiliates may have to other clients"
Also, we have entered into an Administration Agreement with OFS Services. Under our Administration Agreement, we have agreed to reimburse
OFS Services for our allocable portion (subject to the review and approval of our Board) of overhead and other expenses incurred by OFS Services in
performing its obligations under the Administration Agreement. See “—Management and Other Agreements–Administration Agreement.”
About OFS and Our Advisor
OFS is a full-service provider of capital and leveraged finance solutions to U.S. companies. As of December 31, 2020, OFS had 50 full-time employees.
OFS is headquartered in Chicago, Illinois and also has offices in New York, New York and Los Angeles, California. Under the Staffing Agreement, OFSC
makes experienced investment professionals available to OFS Advisor and provides OFS Advisor with access to the senior investment personnel of OFS
and its affiliates. The Staffing Agreement also provides OFS Advisor with access to deal flow generated by OFS and its affiliates in the ordinary course of
their businesses and commits the members of OFS Advisor’s investment committee to serve in that capacity.
Our investment activities are managed by OFS Advisor, our investment adviser. OFS Advisor is responsible for sourcing potential investments,
conducting research and diligence on potential investments and equity sponsors, analyzing investment opportunities, structuring our investments and
monitoring our investments and portfolio companies on an ongoing basis. As our investment adviser, OFS Advisor allocates investment opportunities
among us and any other clients fairly and equitably over time in accordance with its allocation policy. See "Regulation — Exemptive Relief". OFS Advisor
is a registered investment adviser under the Advisers Act and a wholly-owned subsidiary of OFSAM.
Our relationship with OFS Advisor is governed by and dependent on the Investment Advisory Agreement and may be subject to conflicts of interest. See
"Item 1A. Risk Factors — Risks Related to OFS Advisor and its Affiliates." OFS Advisor provides us with advisory services in exchange for a base
management fee and incentive fee; see “Management and Other Agreements—Investment Advisory Agreement”. Our management fee includes assets
purchased with borrowed funds and assets owned by any consolidated entity; therefore, OFS Advisor will benefit when we incur debt or use leverage. Our
Board is charged with protecting our interests by monitoring how OFS Advisor addresses these and other conflicts of interest associated with its
management services and compensation. While our Board is not expected to review or approve each borrowing or incurrence of leverage, our independent
directors periodically review OFS Advisor’s services and fees as well as its portfolio management decisions and portfolio performance.
4
OFS Advisor capitalizes on the deal origination and sourcing, credit underwriting, due diligence, investment structuring, execution, portfolio
management and monitoring experience of OFS’s professionals. The senior management team of OFS, including Bilal Rashid and Jeffrey Cerny, provides
services to OFS Advisor. These managers have developed a broad network of contacts within the investment community, and possess an average of over 20
years of experience investing in debt and equity securities of middle-market companies. In addition, these managers have extensive experience investing in
assets that constitute our primary focus and have expertise in investing across all levels of the capital structure of middle-market companies.
Competitive Strengths and Core Competencies
Deep Management Team Experienced in All Phases of Investment Cycle and Across All Levels of the Capital Structure. We are managed by OFS
Advisor, which has access to the resources and expertise of OFS’s investment professionals through a staffing agreement with OFSC. As of December 31,
2020, OFS’s credit and investment professionals (including all investment committee members) employed by OFSC had an average of over 15 years of
investment experience with strong institutional backgrounds.
Significant Investment Capacity. The net proceeds of equity and debt offerings and borrowing capacity under our credit facilities will provide us with a
substantial amount of capital available for deployment into new investment opportunities in our targeted asset class.
Scalable Infrastructure Supporting the Entire Investment Cycle. We believe that our loan acquisition, origination and sourcing, underwriting,
administration and management platform is scalable (that is, it can be expanded on a cost-efficient basis within a timeframe that meets the demands of
business growth). Our platform extends beyond origination and sourcing and includes a regimented credit monitoring system. We believe that our careful
approach, which involves ongoing review and analysis by an experienced team of professionals, should enable us to identify problems early and to assist
borrowers before they face difficult liquidity constraints.
Extensive Loan Sourcing Capabilities. OFS Advisor gives us access to the deal flow of OFS. We believe OFS’s 20-year history as a middle-market
lending platform, extensive relationships with potential borrowers and other lenders, and its market position make it a leading lender to many sponsors and
other deal sources, especially in the currently under-served lending environment.
Structuring with a High Level of Service and Operational Orientation. We provide client-specific and creative financing structures to our portfolio
companies. Based on our experience in lending to, and investing in, middle-market companies, we believe that the middle-market companies we target, as
well as sponsor groups we may pursue, require a higher level of service, creativity and knowledge than has historically been provided by other service
providers more accustomed to participating in commodity-like loan transactions.
Rigorous Credit Analysis and Approval Procedures. OFS Advisor utilizes an established, disciplined investment process of OFS for reviewing lending
opportunities, structuring transactions and monitoring investments. Using a disciplined approach to lending, OFS Advisor seeks to minimize credit losses
through effective underwriting, comprehensive due diligence investigations, structuring and, where appropriate, the implementation of restrictive debt
covenants.
Our Administrator
We do not have any direct employees, and our day-to-day investment operations are managed by OFS Advisor. We have a chief executive officer, chief
financial officer, chief compliance officer, chief accounting officer, corporate secretary and, to the extent necessary, our Board may elect to appoint
additional officers going forward. Our officers are employees of OFSC, an affiliate of OFS Advisor, and a portion of the compensation paid to our officers
is paid by us pursuant to the Administration Agreement. All of our executive officers are also officers of OFS Advisor.
OFS Services, an affiliate of OFS Advisor, provides the administrative services necessary for us to operate. OFS Services furnishes us with office
facilities and equipment, necessary software licenses and subscriptions and clerical, bookkeeping and recordkeeping services at such facilities. OFS
Services oversees our financial reporting as well as prepares our reports to stockholders and all other reports and materials required to be filed with the SEC
or any other regulatory authority. OFS Services also manages the determination and publication of our net asset value and the preparation and filing of our
tax returns and generally monitors the payment of our expenses and the performance of administrative and professional services rendered to us by others.
OFS Services may retain third parties to assist in providing administrative services to us. To the extent that OFS Services outsources any of its functions,
we will pay the fees associated with such functions at cost, on a direct basis.
Market Opportunity
Our investment strategy is focused primarily on investments in middle-market companies in the United States. We find the middle-market attractive for
the following reasons:
5
Large Target Market. According to the National Center for the Middle Market, as of the fourth quarter of 2020 there were approximately 200,000
companies in the United States with annual revenues between $10 million and $1.0 billion. We believe that these middle-market companies represent a
significant growth segment of the U.S. economy and often require substantial capital investments to grow. Middle-market companies have historically
constituted the vast bulk of OFS’s portfolio companies since its inception, and constituted the majority of our portfolio as of December 31, 2020. We
believe that this market segment will continue to produce significant investment opportunities for us.
Specialized Lending Requirements with High Barriers to Entry. We believe that several factors render many U.S. financial institutions ill-suited to lend
to U.S. middle-market companies. For example, based on the experience of our management team, lending to private middle-market companies in the
United States (a) is generally more labor-intensive than lending to larger companies due to the smaller size of each investment and the fragmented nature of
information for such companies, (b) requires due diligence and underwriting practices consistent with the demands and economic limitations of the middle-
market and (c) may also require more extensive ongoing monitoring by the lender. As a result, middle-market companies historically have been served by a
limited segment of the lending community. As a result of the unique challenges facing lenders to middle-market companies, we believe that there are high
barriers to entry that a new lender must overcome.
Robust Demand for Debt Capital. We believe that private equity firms have significant committed but uncalled capital, a large portion of which is still
available for investment in the United States. Subject to market conditions, we expect the large amount of unfunded buyout commitments will drive
demand for leveraged buyouts over the next several years, which should, in turn, create leveraged lending opportunities for us.
Competition
Our primary competitors include public and private funds, other BDCs, commercial and investment banks, commercial finance companies and, to the
extent they provide an alternative form of financing, private equity and hedge funds. Many of our competitors are substantially larger and have
considerably greater financial, technical, and marketing resources than we do. Some competitors may have access to funding sources that are not available
to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider
variety of investments and establish more relationships than us. Further, many of our competitors are not subject to the regulatory restrictions that the 1940
Act imposes on us as a BDC, or to the distribution and other requirements we must satisfy to maintain our RIC status.
We expect to continue to use the expertise of the investment professionals of OFS to which we have access, to assess investment risks and determine
appropriate pricing for our investments in portfolio companies. In addition, we expect that the relationships of the senior members of OFS and its affiliates
will enable us to learn about, and compete effectively for, financing opportunities with attractive middle-market companies in the industries in which we
seek to invest. See "Item 1A. Risk Factors - We operate in a highly competitive market for investment opportunities, which could reduce returns and result
in losses" for additional information concerning the competitive risks we face.
Investment Criteria/Guidelines
Our investment objective is to generate current income and capital appreciation by investing primarily in middle-market companies in the United States.
We focus on investments in senior secured loans, including first lien, second lien, and unitranche loans, as well as subordinated loans and, to a lesser extent,
warrants and other equity securities and Structured Finance Notes. In particular, we believe that structured equity with debt investments (i.e., typically
senior secured unitranche loans, often with warrant coverage, and, at times, in companies with no financial sponsor) represent a strong relative value
opportunity offering the borrower the convenience of dealing with one lender, which may result in a higher blended rate of interest to us than we might
expect to receive under a traditional multi-tranche structure. We expect that our investments in the equity securities of portfolio companies, such as
warrants, preferred stock, common stock and other equity interests, will principally be made in conjunction with our debt investments. Generally, we do not
expect to make investments in companies or securities that OFS Advisor determines to be distressed investments (such as discounted debt instruments that
have either experienced a default or have a significant potential for default), other than follow-on investments in portfolio companies of ours. We intend to
continue to generate strong risk-adjusted net returns by assembling a diversified portfolio of investments across a broad range of industries.
We target U.S. middle-market companies through OFS’s access to a network of financial institutions, private equity sponsors, investment banks,
consultants and attorneys, and our proprietary database of borrowers developed over OFS’s more than 20 years in lending to middle-market companies. A
typical targeted borrower will exhibit certain of the following characteristics:
•
•
•
number of employees between 150 and 2,000;
revenues between $15 million and $300 million;
annual EBITDA between $5 million and $50 million;
6
•
•
•
•
•
•
•
•
generally, private companies owned by private equity firms or owners/operators;
enterprise value between $10 million and $500 million;
effective and experienced management teams;
defensible market share;
solid historical financial performance, including a steady stream of cash flow;
high degree of recurring revenue;
diversity of customers, markets, products and geography; and
differentiated products or services.
While we believe that the characteristics listed above are important in identifying and investing in prospective portfolio companies, not all of these
criteria will be met by each prospective portfolio company.
Due Diligence and Investment Process Overview
We employ a thorough and disciplined underwriting and due diligence process that is conducted in accordance with established credit policies and
procedures, and that is focused on investment recovery. Our process involves a comprehensive analysis of a prospective portfolio company’s market,
operational, financial, and legal position, as well as its future prospects. In addition to our own analysis, we may use the services of third parties for
environmental reviews, quality of earnings reports, industry surveys, background checks on key managers, and insurance reviews.
We seek to invest in companies that have experienced and incentivized management teams, that have stable and predictable cash flows, and that have
defensible market positions. We underwrite our investments with the expectation that we will hold them for a number of years, and we structure and
document our investments accordingly.
Our due diligence and underwriting process typically addresses the following elements (although certain elements may not be included in every due
diligence undertaking):
Prospective Portfolio Company Characteristics - focusing on primary drivers of the company’s revenues and cash flows, including its key
products and services; customer and supplier concentrations, and contractual relationships; depth, breadth, and quality of company management, as well as
the extent to which the management team is appropriately compensated with equity incentives; and any regulatory, labor, or litigation matters impacting the
company.
Industry and Competitive Overview - including industry size and the company’s position within it; growth potential and barriers to entry;
governmental, regulatory, or technological issues potentially affecting the industry; and cyclicality or seasonality risks associated with the industry.
Financial Analysis - involving an understanding of the company’s historical financial results, focusing on actual operating trends experienced over
time, in order to forecast future performance, including in various sensitized performance scenarios; attention to projected cash flows, debt service
coverage, and leverage multiples under such scenarios; and an assessment of enterprise valuations and debt repayment/investment recovery prospects given
such sensitized performance scenarios.
Investment Documentation - focusing on obtaining the best legal protections available to us given our position within the capital structure,
including, as appropriate, financial covenants; collateral liens and stock pledges; review of loan documents of other of the prospective portfolio company’s
creditors; and negotiation of inter-creditor agreements.
Portfolio Review/Risk Monitoring
We view active portfolio monitoring as a vital part of our investment process, and we benefit from a portfolio management system developed by OFS
that includes daily, weekly, monthly, and quarterly components, and that involves comprehensive review of the performance of each of our portfolio
companies. As part of the portfolio management process, OFS Advisor performs ongoing risk assessments on each of our investments and assigns each
debt investment a credit rating based on OFS’s internal ratings scale.
We categorize debt investments into the following risk categories based on relevant information about the ability of borrowers to service their debt:
1 (Low Risk) – The debt investment has mostly satisfactory asset quality and liquidity, as well as good leverage capacity. It maintains predictable and
strong cash flows from operations. The trends and outlook for the portfolio company's operations, balance sheet, and industry are neutral to favorable.
Collateral, if appropriate, has maintained value and would be
7
capable of being liquidated on a timely basis. Overall a debt investment with a 1 risk rating is considered to be of investment grade quality.
2 (Below Average Risk) – The debt investment has acceptable asset quality, moderate excess liquidity, and modest leverage capacity. It could have some
financial/non-financial weaknesses which are offset by strengths; however, the credit demonstrates an ample current cash flow from operations. The trends
and outlook for the portfolio company's operations, balance sheet, and industry are generally positive or neutral to somewhat negative. Collateral, if
appropriate, has maintained value and would be capable of being liquidated successfully on a timely basis.
3 (Average) – The debt investment has acceptable asset quality, somewhat strained liquidity, and minimal leverage capacity. It is at times characterized
by acceptable cash flows from operations. Under adverse market conditions, the debt service could pose difficulties for the borrower. The trends and
conditions of the portfolio company's operations and balance sheet are neutral to slightly negative.
4 (Special Mention) – The debt investment has not lost, and is not expected to lose, principal or interest but it possesses credit deficiencies or potential
weaknesses which deserve management’s close and continued attention. The portfolio company’s operations and/or balance sheet have demonstrated an
adverse trend or deterioration which, while serious, has not reached the point where the liquidation of debt is jeopardized. These weaknesses are generally
considered correctable by the borrower in the normal course of business but may weaken the asset or inadequately protect our credit position if not checked
or corrected.
5 (Substandard) – The debt investment is protected inadequately by the current enterprise value or paying capacity of the obligor or of the collateral, if
any. The portfolio company has well-defined weaknesses based upon objective evidence, such as recurring or significant decreases in revenues and cash
flows. These assets are characterized by the possibility that we may sustain loss if the deficiencies are not corrected. The possibility that liquidation would
not be timely (e.g., bankruptcy or foreclosure) requires a Substandard classification even if there is little likelihood of loss.
6 (Doubtful) – The debt investment has all the weaknesses inherent in those classified as Substandard, with the additional factor that the weaknesses are
pronounced to the point that collection or liquidation in full, on the basis of currently existing facts, conditions and values, is deemed uncertain. The
possibility of loss on a Doubtful asset is high but, because of certain important and reasonably specific pending factors which may strengthen the asset, its
classification as an estimated loss is deferred until its more exact status can be determined.
7 (Loss) – The debt investment is considered almost fully uncollectible and of such little value that its continuance as an asset is not warranted. It is
generally a credit that is no longer supported by an operating company, a credit where the majority of our assets have been liquidated or sold and a few
assets remain to be sold over many months or even years, or a credit where the remaining collections are expected to be minimal.
As of December 31, 2020, we had debt investments in 49 portfolio companies, totaling $321.4 million at fair value, of which $0.0 million, $263.9
million, $45.3 million, and $11.7 million, and $0.5 million were rated 2, 3, 4, 5, and 6, respectively.
Investment Committees
OFS Advisor’s Pre-Allocation Investment Committee, Broadly Syndicated Investment Committee, Structured Credit Investment Committee and Middle-
Market Investment Committee, (collectively, the “Advisor Investment Committees”), are responsible for the overall asset allocation decisions and the
evaluation and approval of investments of OFS Advisor’s advisory clients.
The Middle-Market Investment Committee, which is comprised of Richard Ressler (Chairman), Jeffrey Cerny, Kyde Sharp and Bilal Rashid, along with
the investment committee for SBIC I LP (the “SBIC Investment Committee”), which is comprised of Bilal Rashid, Jeffrey Cerny and Tod Reichert, are
responsible for the evaluation and approval of all the investments made by us directly or through our wholly owned subsidiaries, as appropriate.
The process employed by the Advisor Investment Committees, including the Middle-Market Investment Committee and the SBIC Investment
Committee, is intended to bring the diverse experience and perspectives of the committees’ members to the investment process. The Middle-Market
Investment Committee and SBIC Investment Committee serve to provide investment consistency and adherence to our core investment philosophy and
policies. The Middle-Market Investment Committee and SBIC Investment Committee also determine appropriate investment sizing and implement ongoing
monitoring requirements of our investments.
In certain instances, management may seek the approval of our Board prior to making an investment. In addition to reviewing investments, the meetings
of the Middle-Market Investment Committee and SBIC Investment Committee, where applicable, serve as a forum to discuss credit views and outlooks.
Potential transactions and deal flows are reviewed on a regular basis. Members of the investment team are encouraged to share information and views on
credits with members of the
8
Middle-Market Investment Committee and SBIC Investment Committee, where applicable, early in their analysis. We believe this process improves the
quality of the analysis and assists the deal team members in working efficiently.
Investments
We pursue an investment strategy focused primarily on investments in middle-market companies in the United States. We focus on investments in loans,
in which OFS Advisor’s investment professionals have expertise, including investments in first-lien, unitranche, second-lien, and mezzanine loans and, to a
lesser extent, on warrants and other equity securities and Structured Finance Notes. We seek to create a diverse portfolio by making investments in the
securities of middle-market companies that we expect to range generally from $3.0 million to $25.0 million each, although we expect this investment size
will vary proportionately with the size of our capital base.
Structure of Investments
We anticipate that our loan portfolio will continue to contain investments of the following types with the following characteristics:
Senior Secured First-Lien Loans. First-lien senior secured loans comprise, and will continue to comprise, a significant portion of our investment
portfolio. We obtain security interests in the assets of these portfolio companies as collateral in support of the repayment of these loans (in certain cases,
subject to a payment waterfall). The collateral takes the form of first-priority liens on specified assets of the portfolio company borrower and, typically,
first-priority pledges of the ownership interests in the borrower. Our first lien loans may provide for moderate loan amortization in the early years of the
loan, with the majority of the amortization deferred until loan maturity.
Senior Secured Unitranche Loans. Unitranche loans are loans that combine both senior and subordinated debt into one loan under which the
borrower pays a single blended interest rate that is intended to reflect the relative risk of the secured and unsecured components. We typically structure our
unitranche loans as senior secured loans. We obtain security interests in the assets of these portfolio companies as collateral in support of the repayment of
these loans. This collateral takes the form of first-priority liens on the assets of a portfolio company and, typically, first-priority pledges of the ownership
interests in the company. We believe that unitranche lending represents a significant growth opportunity for us, offering the borrower the convenience of
dealing with one lender, which may result in a higher blended rate of interest to us than we might realize in a traditional multi-tranche structure. Unitranche
loans typically provide for moderate loan amortization in the initial years of the facility, with the majority of the amortization deferred until loan maturity.
Unitranche loans generally allow the borrower to make a large lump sum payment of principal at the end of the loan term, and there is a risk of loss if the
borrower is unable to pay the lump sum or refinance the amount owed at maturity. In many cases, we will be the sole lender, or we, together with our
affiliates, will be the sole lender, of unitranche loans, which can afford us additional influence with a borrower in terms of monitoring and, if necessary,
remediation in the event of under performance.
Senior Secured Second-lien Loans. Second-lien senior secured loans obtain security interests in the assets of these portfolio companies as
collateral in support of the repayment of such loans. This collateral typically takes the form of second-priority liens on the assets of a portfolio company,
and we may enter into an inter-creditor agreement with the holders of the portfolio company’s first-lien senior secured debt. These loans typically provide
for no contractual loan amortization in the initial years of the facility, with all amortization deferred until loan maturity. These loans are categorized as
Senior Secured Loans in our consolidated schedule of investments included in the financial statements included elsewhere in this prospectus supplement.
Broadly Syndicated Loans. Broadly Syndicated Loans (whose features are similar to those described under “Senior Secured First-Lien Loans”
and “Senior Secured Second-Lien Loans” above) are typically originated and structured by banks on behalf of large corporate borrowers with employee
counts, revenues, EBITDAs and enterprise values larger than the middle-market characteristics described above. The proceeds of Broadly Syndicated
Loans are often used for leveraged buyout transactions, mergers and acquisitions, recapitalizations, refinancings, and financing capital expenditures.
Broadly Syndicated Loans are typically distributed by the arranging bank to a diverse group of investors primarily consisting of: CLOs; senior secured loan
and high yield bond mutual funds; closed-end funds, hedge funds, banks, and insurance companies; and finance companies. A borrower must comply with
various covenants contained in a loan agreement or note purchase agreement between the borrower and the holders of the Broadly Syndicated Loan (the
“Loan Agreement”). In a typical Broadly Syndicated Loan, an administrative agent (the “Agent”) administers the terms of the Loan Agreement. In such
cases, the Agent is normally responsible for the collection of principal and interest payments from the borrower and the apportionment of these payments to
the credit of all institutions that are parties to the Loan Agreement. We will generally rely upon the Agent or an intermediate participant to receive and
forward to us our portion of the principal and interest payments on the Broadly Syndicated Loan. Additionally, we normally will rely on the Agent and the
other loan investors to use appropriate credit remedies against the borrower. The Agent is typically responsible for monitoring compliance with covenants
contained in the Loan Agreement based upon reports prepared by the borrower. The Agent may monitor the value of the collateral and, if the value of the
collateral declines, may accelerate the Broadly Syndicated Loan, may give the borrower an opportunity to provide additional collateral or
9
may seek other protection for the benefit of the participants in the Broadly Syndicated Loan. The Agent is compensated by the borrower for providing these
services under a Loan Agreement, and such compensation may include special fees paid upon structuring and funding the Broadly Syndicated Loan and
other fees paid on a continuing basis. The Broadly Syndicated Loans in which we invest may include loans that are considered “covenant-lite” loans,
because of their lack of a full set of financial maintenance covenants.
These above loans are categorized as Senior Secured Loans in our consolidated schedule of investments included in "Part II, Item 8. Financial Statements
and Supplementary Data."
Subordinated (“Mezzanine”) Loans. These investments are typically structured as unsecured, subordinated loans that typically provide for
relatively high, fixed interest rates that provide us with significant current interest income. These loans typically will have interest-only payments (often
representing a combination of cash pay and payment-in-kind ("PIK") interest) in the early years, with amortization of principal deferred to maturity.
Mezzanine loans generally allow the borrower to make a large lump sum payment of principal at the end of the loan term, and there is a risk of loss if the
borrower is unable to pay the lump sum or refinance the amount owed at maturity. Mezzanine investments are generally more volatile than secured loans
and may involve a greater risk of loss of principal. Mezzanine loans often include a PIK feature (meaning a feature allowing for the payment of interest in
the form of additional principal amount of the loan instead of in cash), which effectively operates as negative amortization of loan principal, thereby
increasing credit risk exposure over the life of the loan. These loans are categorized as Subordinated Loans in our consolidated schedule of investments
included in the financial statements included elsewhere in this prospectus supplement.
These above loan is categorized as Subordinated Loans in our consolidated schedule of investments included in “Part II, Item 8. Financial Statements and
Supplementary Data.”
Equity Securities. Equity securities typically consist of either a direct minority equity investment in common or membership/partnership interests
or preferred stock of a portfolio company, and are typically not control-oriented investments. Our preferred equity investments typically contain a fixed
dividend yield based on the par value of the equity security. Preferred equity dividends may be paid in cash at a stipulated date, usually quarterly, and are
participating and/or cumulative. We may structure such equity investments to include provisions protecting our rights as a minority-interest holder, as well
as a “put,” or right to sell such securities back to the issuer, upon the occurrence of specified events. In many cases, we may also seek to obtain registration
rights in connection with these equity interests, which may include demand and “piggyback” registration rights, which grants us the right to register our
equity interest when either the portfolio company or another investor in the portfolio company files a registration statement with the SEC to issue
securities. Our equity investments typically are made in connection with debt investments to the same portfolio companies. These securities are categorized
as a Preferred Equity or Common Equity in our consolidated schedule of investments included in “Part II, Item 8. Financial Statements and Supplementary
Data.”
Warrants. In some cases, we may receive nominally priced warrants to buy a minority equity interest in the portfolio company in connection with
a loan. As a result, as a portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We may structure
such warrants to include provisions protecting our rights as a minority-interest holder, as well as a put to sell such securities back to the issuer, upon the
occurrence of specified events. In many cases, we may also seek to obtain registration rights in connection with these equity interests, which may include
demand and “piggyback” registration rights. These securities are categorized as Warrants in our consolidated schedule of investments included in “Part II,
Item 8. Financial Statements and Supplementary Data.”
Structured Finance Notes. Structured Finance Notes include the subordinated debt or mezzanine debt positions of a CLO. We may purchase
interests in the subordinated debt (colloquially referred to as “equity securities”) or the mezzanine debt, generally considered the tranches rated BB to B, of
CLOs—which are collateralized by portfolios primarily consisting of below-investment-grade senior secured loans with a large number of distinct
underlying U.S. borrowers across various industry sectors. The subordinated debt tranches of CLOs are unrated, represent the first loss position in a CLO
structure, are typically leveraged 9 to 13 times which translates to approximately 11% to 8% of a CLOs’ capital structure, respectively. The leverage can
magnify our gains and losses on such investments. CLO subordinated debt positions are entitled to recurring distributions which are generally equal to the
residual cash flow of payments received from underlying securities less contractual payments to more senior CLO debt holders and fund expenses.
Economically, CLO subordinated debt is equity-like in that it represents the residual interest in the CLO assets that bears the ultimate risk of loss and
receives the benefits of success, but lacks features enabling its holders to direct the operations of the entity typically associated with equity instruments.
Mezzanine debt is typically the tranches immediately senior to the subordinated debt and representing approximately 4% to 7% of the CLOs’ capital
structures. Mezzanine debt tranches represent the second loss position, and can become the residual interest if assets are insufficient to retire the mezzanine
tranche at par.
General Structuring Considerations. We tailor the terms of each investment to the facts and circumstances of the transaction and the prospective
portfolio company, negotiating a structure that protects our rights and manages our risk while
10
creating incentives for the portfolio company to achieve its business plan and improve its operating results. We seek to limit the downside potential of our
investments by:
•
•
•
selecting investments that we believe have a very low probability of loss;
requiring a total return on our investments (including both interest and potential equity appreciation) that we believe will compensate us
appropriately for credit risk; and
negotiating covenants in connection with our investments that afford our portfolio companies as much flexibility in managing their businesses as
possible, consistent with the preservation of our capital. Such restrictions may include affirmative and negative covenants, default penalties, lien
protection, change of control provisions and board rights, including either observation or rights to a seat on the board of directors under some
circumstances.
We expect to hold most of our investments to maturity or repayment, but we may sell some of our investments earlier if a liquidity event occurs, such as
a sale, recapitalization or worsening of the credit quality of the portfolio company.
MANAGEMENT AND OTHER AGREEMENTS
Investment Advisory Agreement
OFS Advisor is registered as an investment adviser under the Advisers Act. OFS Advisor is a wholly owned subsidiary of OFSAM. Pursuant to the
Investment Advisory Agreement with and subject to the overall supervision of our Board and in accordance with the 1940 Act, OFS Advisor provides
investment advisory services to us. Under the terms of the Investment Advisory Agreement, OFS Advisor:
•
•
•
•
determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;
assists us in determining what securities we purchase, retain or sell;
identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio
companies); and
executes, closes, services and monitors the investments we make.
Management and Incentive Fee
For providing these services, OFS Advisor receives a fee from us, consisting of two components—a base management fee and an incentive fee.
The base management fee is calculated at an annual rate of 1.75% based on the average value of our total assets (other than cash and cash equivalents but
including assets purchased with borrowed amounts and including assets owned by any consolidated entity), adjusted for stock issuances and stock
purchases, at the end of the two most recently completed calendar quarters. We have excluded from the base management fee calculation any base
management fee that would be owed in respect of the intangible assets resulting from the SBIC Acquisition. The base management fee is payable quarterly
in arrears. Base management fees for any partial quarter are prorated based on the number of days in the quarter.
On June 11, 2019, OFS Advisor agreed to reduce a portion of its base management fee by reducing the portion of such fee from 0.4375% per quarter
(1.75% annualized) to 0.25% per quarter (1.00% annualized) of the average value of the portion of the total assets held by the Company through OFSCC-
FS (the "OFSCC-FS Assets"), at the end of the two most recently completed calendar quarters to the extent that such portion of the OFSCC-FS Assets are
financed using leverage (also calculated on an average basis) that causes the Company’s statutory asset coverage ratio to fall below 200%. When
calculating its statutory asset coverage ratio, the Company excludes its SBA guaranteed debentures from its total outstanding senior securities as permitted
pursuant to exemptive relief granted by the SEC dated November 26, 2013. Effective as of January 1, 2020 and January 1, 2021, OFS Advisor agreed to
further reduce the base management fee to 0.25% per quarter (1.00% annualized) of the average value of the portion of total assets held by the Company
through OFSCC-FS at the end of the two most recently completed calendar quarters without regard to the statutory asset coverage ratio. The base
management fee reduction by OFS Advisor is renewable on an annual basis and the amount of the base management fee reduced with respect to the
OFSCC-FS Assets shall not be subject to recoupment by OFS Advisor. This agreement was renewed for the 2021 calendar year on February 16, 2021.
The incentive fee has two parts. One part ("Part One") is calculated and payable quarterly in arrears based on our pre-incentive fee net investment
income for the immediately preceding calendar quarter. “Pre-incentive fee net investment income” means interest income, dividend income and any other
income (including any other fees such as commitment, origination and sourcing, structuring, diligence and consulting fees or other fees that we receive
from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the
quarter (including the base management fee, any expenses payable under the Administration Agreement and any interest expense and dividends paid on
any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in
11
the case of investments with a deferred interest or dividend feature (such as original issue discount, or "OID", debt instruments with PIK interest, equity
investments with accruing or PIK dividend, and zero coupon securities), accrued income that we have not yet received in cash.
Pre-incentive fee net investment income does not include any realized gains, realized losses, unrealized capital appreciation or unrealized capital
depreciation. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a quarter where we incur a loss. For example, if
we receive pre-incentive fee net investment income in excess of the hurdle rate (as defined below) for a quarter, we will pay the applicable incentive fee
even if we have incurred a loss in that quarter due to realized capital losses and unrealized capital depreciation.
Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less indebtedness and
before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter, is compared to a fixed
“hurdle rate” of 2.0% per quarter. If market interest rates rise, we may be able to invest our funds in debt instruments that provide for a higher return, which
would increase our pre-incentive fee net investment income and make it easier for OFS Advisor to surpass the fixed hurdle rate and receive an incentive fee
based on such net investment income. There is no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there is no
clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle rate, and there is no delay of payment if prior quarters are below
the quarterly hurdle rate. Pre-incentive fee net investment income fees are prorated for any partial quarter based on the number of days in such quarter.
•
•
We pay OFS Advisor an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:
no incentive fee in any calendar quarter in which the pre-incentive fee net investment income does not exceed the hurdle rate;
100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that
exceeds the hurdle rate but is less than 2.5% in any calendar quarter. We refer to this portion of our pre-incentive fee net investment income
(which exceeds the hurdle rate but is less than 2.5%) as the “catch-up” provision. The catch-up is meant to provide OFS Advisor with 20.0% of
the pre-incentive fee net investment income as if a hurdle rate did not apply if this pre-incentive fee net investment income exceeds 2.5% in any
calendar quarter; and
•
20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.5% in any calendar quarter.
The following is a graphical representation of the calculation of the income-related portion of the incentive fee:
Quarterly Incentive Fee Based on Net Investment Income
The second part ("Part Two") of the incentive fee (the “Capital Gains Fee”) is determined and payable in arrears as of the end of each calendar year (or
upon termination of the Investment Advisory Agreement, as of the termination date) and is calculated at the end of each applicable year by subtracting
(a) the sum of our cumulative aggregate realized capital losses and our aggregate unrealized capital depreciation from (b) our cumulative aggregate realized
capital gains. If such amount is positive at the end of such year, then the Capital Gains Fee for such year is equal to 20.0% of such amount, less the
aggregate amount of Capital Gains Fees paid in all prior years. If such amount is negative, then there is no Capital Gains Fee for such year. The Company
accrues the Capital Gains Fee if, on a cumulative basis, the sum of net realized capital gains and (losses) plus net unrealized appreciation and (depreciation)
is positive.
The cumulative aggregate realized capital gains are calculated as the sum of the differences, if positive, between (a) the net sales price of each
investment in our portfolio when sold and (b) the accreted or amortized cost basis of such investment.
The cumulative aggregate realized capital losses are calculated as the sum of the amounts by which (a) the net sales price of each investment in
our portfolio when sold is less than (b) the accreted or amortized cost basis of such investment.
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The aggregate unrealized capital depreciation is calculated as the sum of the differences, if negative, between (a) the valuation of each investment
in our portfolio as of the applicable Capital Gains Fee calculation date and (b) the accreted or amortized cost basis of such investments. Unrealized capital
appreciation is accrued, but not paid until said appreciation is realized. We accrue the Capital Gains Fee if, on a cumulative basis, the sum of the net
realized capital gains (and losses) plus net unrealized appreciation (and depreciation) is positive. OFS Advisor has excluded from the Capital Gains Fee
calculation the realized gain with respect to the step acquisitions resulting from the SBIC Acquisition. The Capital Gains Fee for any partial year is prorated
based on the number of days in such year.
Expenses recognized under the Investment Advisory Agreement with OFS Advisor for the years ended December 31, 2020, 2019, and 2018 are
presented below:
Base management fees
Incentive fees:
Income Incentive Fee
Incentive fee waiver
Examples of Incentive Fee Calculation
Example 1—Income Related Portion of Incentive Fee:
Assumptions
• Hurdle rate(1) = 2.0%
• Management fee(2) = 0.44%
2020
Year Ended December 31,
2019
2018
$
7,605 $
8,271 $
2,025
(441)
4,760
—
6,335
4,409
(22)
◦ Other estimated expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
(1) Represents a quarter of the 8.0% annualized hurdle rate.
(2) Represents a quarter of the 1.75% annualized management fee, which became effective October 31, 2013.
(3) Excludes estimated offering expenses.
Alternative 1
Additional Assumptions
•
•
Investment income (including interest, dividends, fees, etc.) = 1.25%
Pre-incentive fee net investment income (investment income – (management fee + other expenses)) = 0.61%
Pre-incentive fee net investment income does not exceed the hurdle rate, therefore there is no incentive fee.
Alternative 2
Additional Assumptions
•
•
Investment income (including interest, dividends, fees, etc.) = 2.80%
Pre-incentive fee net investment income (investment income – (management fee + other expenses)) = 2.16%
Pre-incentive fee net investment income exceeds hurdle rate, therefore there is an incentive fee.
Incentive Fee
=
=
=
=
100% × “Catch-Up” + the greater of 0% AND (20% × (pre-incentive fee net investment income – 2.5%))
(100% ×(2.16% – 2.0%)) + 0%
100% × 0.16%
0.16%
13
Alternative 3
Additional Assumptions
•
•
Investment income (including interest, dividends, fees, etc.) = 3.50%
Pre-incentive fee net investment income (investment income – (management fee + other expenses)) = 2.86%
Pre-incentive fee net investment income exceeds hurdle rate, therefore there is an incentive fee.
Incentive Fee
=
=
=
=
=
100% × “Catch-Up” + the greater of 0% AND (20% × (pre-incentive fee net investment income – 2.5%))
(100% × (2.5% – 2.0%)) + (20% × (2.86% – 2.5%))
0.5% + (20% × 0.36%)
0.5% + 0.07%
0.57%
Example 2—Capital Gains Portion of Incentive Fee:
Alternative 1
Assumptions
• Year 1: $20 million investment made in Company A (“Investment A”), and $30 million investment made in Company B (“Investment B”)
• Year 2: Investment A is sold for $50 million and fair market value (“FMV”) of Investment B determined to be $32 million
• Year 3: FMV of Investment B determined to be $25 million
• Year 4: Investment B sold for $31 million
The capital gains portion of the incentive fee, if any, would be:
• Year 1: None (no sales transactions)
• Year 2: $6 million (20% multiplied by $30 million realized capital gains on sale of Investment A)
• Year 3: None; $5 million (20% multiplied by $30 million cumulative realized capital gains less $5 million cumulative unrealized capital
depreciation) less $6 million (Capital Gains Fee paid in Year 2)
• Year 4: $200,000; $6.2 million (20% multiplied by $31 million cumulative realized capital gains) less $6 million (Capital Gains Fee paid in Year
2)
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Alternative 2
Assumptions
• Year 1: $20 million investment made in Company A (“Investment A”), $30 million investment made in Company B (“Investment B”) and $25
million investment made in Company C (“Investment C”)
• Year 2: Investment A sold for $50 million, FMV of Investment B determined to be $25 million and FMV of Investment C determined to be $25
million
• Year 3: FMV of Investment B determined to be $27 million and Investment C sold for $30 million
• Year 4: FMV of Investment B determined to be $35 million
• Year 5: Investment B sold for $20 million
The capital gains portion of the incentive fee, if any, would be:
• Year 1: None (no sales transactions)
• Year 2: $5 million (20% multiplied by $30 million realized capital gains on Investment A less $5 million unrealized capital depreciation on
Investment B)
• Year 3: $1.4 million; $6.4 million (20% multiplied by $32 million ($35 million cumulative realized capital gains on Investment A and Investment
C less $3 million cumulative unrealized capital depreciation on Investment B)) less $5 million (Capital Gains Fee paid in Year 2)
• Year 4: $0.6 million; $7 million (20% multiplied by $35 million (cumulative realized capital gains on Investment A and Investment C)) less $6.4
million (cumulative Capital Gains Fee paid in all prior years)
• Year 5: None; $5 million (20% multiplied by $25 million ($35 million cumulative realized capital gains on Investments A and C less $10 million
realized capital losses on Investment B)) less $7 million (cumulative Capital Gains Fee paid in all prior years))
Payment of Our Expenses
All investment professionals of OFS Advisor and/or its affiliates, when and to the extent engaged in providing us with investment advisory and
management services, and the compensation and routine overhead expenses of personnel allocable to these services, are provided and paid for by OFS
Advisor and not by us. We bear all other out-of-pocket costs and expenses of our operations and transactions. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Results of Operations—Key Financial Measures—Expenses.”
Duration and Termination
Unless terminated earlier as described below, the Investment Advisory Agreement will remain in effect from year to year if approved annually by
our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, and, in either case, if also approved by a majority of
our directors who are not “interested persons” as defined in the 1940 Act. The Investment Advisory Agreement automatically terminates in the event of its
assignment, as defined in the 1940 Act, by OFS Advisor and may be terminated by either party without penalty upon not less than 60 days’ written notice
to the other. The holders of a majority of our outstanding voting securities may also terminate the Investment Advisory Agreement without penalty upon
not less than 60 days’ written notice. See “Item 1A. Risk Factors—Risks Related to our Business and Structure—We are dependent upon the OFS senior
professionals for our future success and upon their access to the investment professionals and partners of OFS and its affiliates.”
Administration Agreement
Pursuant to the Administration Agreement, OFS Services, an affiliate of OFS Advisor, provides the administrative services necessary for us to operate.
OFS Services furnishes us with office facilities and equipment, necessary software licenses and subscriptions and clerical, and bookkeeping and record
keeping services at such facilities. Under the Administration Agreement, OFS Services performs, or oversees the performance of, our required
administrative services, which include being responsible for the financial records that we are required to maintain and preparing reports to our stockholders
and all other reports and materials required to be filed with the SEC or any other regulatory authority. In addition, OFS Services assists us in determining
and publishing our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders,
and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Under the
Administration Agreement, OFS Services provides managerial assistance on our behalf to certain portfolio companies that accept our offer to provide such
assistance. Payments under the Administration Agreement are equal to an amount based upon our allocable portion (subject to the review and approval of
our Board) of OFS Services’ overhead in performing its obligations under the Administration Agreement, including
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rent, information technology, and our allocable portion of the cost of our officers, including our chief executive officer, chief financial officer, chief
compliance officer, chief accounting officer, and their respective staffs. The Administration Agreement may be renewed annually with the approval of our
Board, including a majority of our directors who are not “interested persons.” The Administration Agreement may be terminated by either party without
penalty upon 60 days’ written notice to the other party. To the extent that OFS Services outsources any of its functions, we pay the fees associated with
such functions at cost without incremental profit to OFS Services.
Expenses recognized under the Administration Agreement with OFS Services for the years ended December 31, 2020, 2019, and 2018 are
presented below:
Administration fees
Indemnification
2020
Year Ended December 31,
2019
2018
$
1,855 $
1,747 $
1,601
The Investment Advisory Agreement and the Administration Agreement both provide that OFS Advisor, OFS Services and their affiliates’ respective
officers, directors, members, managers, stockholders and employees are entitled to indemnification from us from and against any claims or liabilities,
including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken
or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement or the Administration Agreement, except where attributable
to willful misfeasance, bad faith or gross negligence in the performance of such person’s duties or reckless disregard of such person’s obligations and duties
under the Investment Advisory Agreement or the Administration Agreement.
Board Approval of the Investment Advisory and Administrative Agreements
Our Board, including our independent directors, approved the continuation of the Investment Advisory Agreement at a meeting held on April 2, 2020. In
reaching a decision to approve the continuation of the Investment Advisory Agreement, the Board reviewed a significant amount of information and
considered, among other things:
•
•
•
•
•
•
the nature, quality and extent of the advisory and other services to be provided to us by OFS Advisor;
the fee structures of comparable externally managed BDCs that engage in similar investing activities;
our projected operating expenses and expense ratio compared to BDCs with similar investment objectives;
any existing and potential sources of indirect income to OFS Advisor from its relationship with us and the profitability of that relationship,
including through the Investment Advisory Agreement;
information about the services to be performed and the personnel performing such services under the Investment Advisory Agreement; and
the organizational capability and financial condition of OFS Advisor and its affiliates.
Based on the information reviewed and the discussion thereof, the Board, including a majority of the non-interested directors, concluded that the
investment advisory fee rates are reasonable in relation to the services to be provided and approved the Investment Advisory Agreement as being in the best
interests of our stockholders.
Our board also reviewed services provided under the Administrative Agreement, and approved its continuation at the April 2, 2020 meeting.
License Agreement
We have entered into a license agreement with OFSAM under which OFSAM has agreed to grant us a non-exclusive, royalty-free license to use the
name “OFS”. Under this agreement, we have a right to use the “OFS” name for so long as OFS Advisor or one of its affiliates remains our investment
adviser. Other than with respect to this limited license, we have no legal right to the “OFS” name. This license agreement will remain in effect for so long
as the Investment Advisory Agreement with OFS Advisor is in effect.
REGULATION
General
We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs
and their affiliates (including any investment advisers or sub-advisers), principal
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underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors be persons other than “interested persons,” as that
term is defined in the 1940 Act.
In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC
unless approved by “a majority of our outstanding voting securities” as defined in the 1940 Act. A majority of the outstanding voting securities of a
company is defined under the 1940 Act as the lesser of: (a) 67% or more of such company’s voting securities present at a meeting if more than 50% of the
outstanding voting securities of such company are present or represented by proxy, or (b) more than 50% of the outstanding voting securities of such
company. We do not anticipate any substantial change in the nature of our business.
We generally cannot issue and sell our common stock at a price below net asset value per share. We may, however, issue and sell our common
stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value of our common stock if (1) our Board
determines that such sale is in our best interests and the best interests of our stockholders, and (2) our stockholders have approved our policy and practice
of making such sales within the preceding 12 months. In any such case, the price at which our securities are to be issued and sold may not be less than a
price which, in the determination of our Board, closely approximates the market value of such securities. On June 23, 2020, our stockholders approved a
proposal to authorize us, with approval of our Board, to sell or otherwise issue shares of our common stock (during a twelve-month period) at a price below
our then-current net asset value per share in one or more offerings, subject to certain limitations (including that the cumulative number of shares sold
pursuant to such authority does not exceed 25% of our then outstanding common stock immediately prior to each such sale).
The 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC
permitting the BDC to do so. On August 4, 2020, we received exemptive relief from the SEC to permit us to co-invest in portfolio companies with certain
Affiliated Funds in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and
other pertinent factors, subject to compliance with certain conditions. The Order superseded a previous co-investment order we received on October 12,
2016 and provides us with greater flexibility to enter into co-investment transactions with Affiliated Funds. We are generally permitted to co-invest with
Affiliated Funds if under the terms of the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make
certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid,
are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned
and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.
In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs, through December 31, 2020, we were
permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates, even if such other funds
had not previously invested in such existing portfolio company. Without this order, affiliated funds would not be able to participate in such co-investments
with us unless the affiliated funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the
conditional exemptive order expired on December 31, 2020, the SEC’s Division of Investment Management has indicated that until March 31, 2022, it will
not recommend enforcement action, to the extent that any BDC with an existing co-investment order continues to engage in certain transactions described
in the conditional exemptive order, pursuant to the same terms and conditions described therein.
We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such
securities, we may, for the purpose of public resale, be deemed an “underwriter” as that term is defined in the Securities Act. Our intention is to not write
(sell) or buy put or call options to manage risks associated with the publicly traded securities of our portfolio companies, except that we may enter into
hedging transactions to manage the risks associated with interest rate fluctuations. However, we may purchase or otherwise receive warrants to purchase
the common stock of our portfolio companies in connection with acquisition financing or other investments. Similarly, in connection with an acquisition,
we may acquire rights to require the issuers of acquired securities or their affiliates to repurchase them under certain circumstances. We also do not intend
to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Prior to January 19, 2021, except for registered
money market funds, we generally were prohibited from acquiring more than 3% of the voting stock of any registered investment company, investing more
than 5% of the value of our total assets in the securities of one investment company, or investing more than 10% of the value of our total assets in the
securities of more than one investment company without obtaining exemptive relief from the SEC. However, the SEC adopted new rules, which became
effective on January 19, 2021, that allow us to acquire the securities of other investment companies in excess of the 3%, 5%, and 10% limitations without
obtaining exemptive relief if we comply with certain conditions. With regard to that portion of our portfolio invested in securities issued by investment
companies, it should be noted that such investments might subject our stockholders to additional expenses as they will be indirectly responsible for the
costs and expenses of such companies. None of our investment policies are fundamental and may be changed without stockholder approval.
Qualifying Assets
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Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in section 55(a) of the 1940 Act, which are referred to as
“qualifying assets,” unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s assets, as defined by the 1940 Act.
The principal categories of qualifying assets relevant to our business are the following:
(a) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited
exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an
eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is
defined in the 1940 Act as any issuer that:
•
•
•
is organized under the laws of, and has its principal place of business in, the United States;
is not an investment company (other than a small business investment company wholly-owned by the BDC) or a company that would be an
investment company but for certain exclusions under the 1940 Act; and
satisfies either of the following:
◦
◦
does not have any class of securities listed on a national securities exchange or has any class of securities listed on a national
securities exchange subject to a $250 million market capitalization maximum; or
is controlled by a BDC or a group of companies including a BDC, the BDC actually exercises a controlling influence over the
management or policies of the eligible portfolio company, and, as a result, the BDC has an affiliated person who is a director of the
eligible portfolio company;
(b) Securities of any eligible portfolio company which we control;
(c) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in
transactions incident to such a private transaction, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to
the purchase of its securities, was unable to meet its obligations as they came due without material assistance other than conventional lending or
financing arrangements;
(d) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and
we already own 60% of the outstanding equity of the eligible portfolio company;
(e) Securities received in exchange for or distributed on or with respect to securities described above, or pursuant to the exercise of warrants or rights
relating to such securities; and
(f) Cash, cash equivalents, U.S. government securities or high-quality debt securities that mature in one year or less from the date of investment.
Control, as defined by the 1940 Act, is presumed to exist where a BDC beneficially owns more than 25% of the outstanding voting securities of
the portfolio company.
The regulations defining qualifying assets may change over time. We may adjust our investment focus as needed to comply with and/or take
advantage of any regulatory, legislative, administrative or judicial actions in this area.
Managerial Assistance to Portfolio Companies
A BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making
investments in the types of securities described in (a), (b) or (c) above. However, in order to count portfolio securities as qualifying assets for the purpose of
the 70% test, the BDC must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and
solvent companies described above) significant managerial assistance. Where the BDC purchases such securities in conjunction with one or more other
persons acting together, the BDC will satisfy this test if one of the other persons in the group makes available such managerial assistance, although this may
not be the sole method by which the BDC satisfies the requirement to make available managerial assistance. Making available managerial assistance
means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so
provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company. With respect
to an SBIC, making available managerial assistance means making loans to a portfolio company.
Temporary Investments
Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash equivalents, U.S.
government securities, repurchase agreements and high-quality debt investments that mature in one year or less from the date of investment, which we refer
to, collectively, as temporary investments, so that 70% of our assets, as defined by the 1940 Act, are qualifying assets or temporary investments. We may
invest in highly rated commercial paper, U.S.
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Government agency notes, and U.S. Treasury bills or repurchase agreements relating to such securities that are fully collateralized by cash or securities
issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the
simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price that is greater than the purchase price by an amount that
reflects an agreed-upon interest rate. Consequently, repurchase agreements are functionally similar to loans. There is no percentage restriction on the
proportion of our assets that may be invested in such repurchase agreements. However, the 1940 Act and certain diversification tests in order to qualify as a
RIC for U.S. federal income tax purposes typically require us to limit the amount we invest with any one counterparty. Accordingly, we do not intend to
enter into repurchase agreements with a single counterparty in excess of this limit. OFS Advisor monitors the creditworthiness of the counterparties with
which we enter into repurchase agreement transactions.
Warrants and Options
Under the 1940 Act, a BDC is subject to restrictions on the amount of warrants, options, restricted stock or rights to purchase shares of capital stock that
it may have outstanding at any time. Under the 1940 Act, we may generally only offer warrants provided that (i) the warrants expire by their terms within
ten years, (ii) the exercise or conversion price is not less than the current market value at the date of issuance, (iii) our stockholders authorize the proposal
to issue such warrants, and our Board approves such issuance on the basis that the issuance is in the best interests of OFS Capital and its stockholders and
(iv) if the warrants are accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities
accompanying them has been publicly distributed. The 1940 Act also provides that the amount of our voting securities that would result from the exercise
of all outstanding warrants, as well as options and rights, at the time of issuance may not exceed 25% of our outstanding voting securities. In particular, the
amount of capital stock that would result from the conversion or exercise of all outstanding warrants, options or rights to purchase capital stock cannot
exceed 25% of the BDC’s total outstanding shares of capital stock.
Senior Securities
A BDC generally is not permitted to incur indebtedness unless immediately after such borrowing it has an asset coverage ratio for total borrowings
of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, Section 61(a)(2) of the 1940 Act provides that a BDC
may reduce its asset coverage ratio, provided that certain conditions are met. Specifically, Section 61(a)(2) provides that in order for a BDC whose common
stock is traded on a national securities exchange to be subject to 150% asset coverage, the BDC must either obtain: (i) approval of the required majority of
its non-interested directors who have no financial interest in the proposal, which would become effective one year after the date of such approval, or (ii)
obtain stockholder approval (of more than 50% of the votes cast for the proposal at a meeting in which quorum is present), which would become effective
on the first day after the date of such stockholder approval.
On May 3, 2018, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the
application of Section 61(a)(2) of the 1940 Act and, as a result, the asset coverage ratio test applicable to us was decreased from 200% to 150%, effective
May 3, 2019. See "Item 1A. Risk Factors — Risks Related to our Business and Structure — Because we have received the approval of our Board, we are
subject to 150% Asset Coverage effective May 3, 2019." Additionally, we received exemptive relief from the SEC effective November 26, 2013, which
allows us to exclude our SBA guaranteed debentures from the definition of senior securities in the statutory asset coverage ratio under the 1940 Act.
We may borrow money when the terms and conditions available are favorable to do so and are aligned with our investment strategy and portfolio
composition. The use of borrowed funds or the proceeds of preferred stock to make investments would have its own specific benefits and risks, and all of
the costs of borrowing funds or issuing preferred stock would be borne by holders of our common stock.
For a discussion of the risks associated with leverage, see “Item 1A. Risk Factors—Risks Related to BDCs—Regulations governing our operation as a
BDC affect our ability to and the way in which we raise additional capital. As a BDC, we will need to raise additional capital, which will expose us to risks,
including the typical risks associated with leverage.”
Compliance with the Sarbanes-Oxley Act of 2002 and the Nasdaq Global Select Market Corporate Governance Regulations
The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) imposes a wide variety of regulatory requirements on publicly held companies and
their insiders. Many of these requirements affect us. The Sarbanes-Oxley Act has required us to review our policies and procedures to determine whether
we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all future
regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.
In addition, the Nasdaq Global Select Market has adopted various corporate governance requirements as part of its listing standards. We believe
we are in compliance with such corporate governance listing standards. We will continue to
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monitor our compliance with all future listing standards and will take actions necessary to ensure that we are in compliance therewith.
Exemptive Relief
We are generally prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval
of our Board who are not interested persons and, in some cases, prior approval by the SEC. The SEC has interpreted the BDC prohibition on transactions
with affiliates to prohibit all “joint transactions” between entities that share a common investment adviser. Further, the 1940 Act generally prohibits BDCs
from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting the BDC to do so.
On August 4, 2020, we received exemptive relief from the SEC to permit us to co-invest in portfolio companies with certain Affiliated Funds in a manner
consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors,
subject to compliance with certain conditions. The Order superseded a previous co-investment order we received on October 12, 2016 and provides us with
greater flexibility to enter into co-investment transactions with Affiliated Funds. We are generally permitted to co-invest with Affiliated Funds if under the
terms of the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection
with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to us and our
stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned and (2) the transaction is consistent
with the interests of our stockholders and is consistent with our investment objective and strategies.
In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs, through December 31, 2020, we were
permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates even if such other funds
had not previously invested in such existing portfolio company. Without this order, affiliated funds would not be able to participate in such co-investments
with us unless the affiliated funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the
conditional exemptive order has expired, the SEC’s Division of Investment Management has indicated that until March 31, 2022, it will not recommend
enforcement action, to the extent that any BDC with an existing coinvestment order continues to engage in certain transactions described in the conditional
exemptive order, pursuant to the same terms and conditions described therein.
The staff of the SEC has granted no-action relief permitting purchases of a single class of privately placed securities provided that the adviser
negotiates no term other than price and certain other conditions are met. As a result, unless under the Order, we only expect to co-invest on a concurrent
basis with certain funds advised by OFS Advisor when each of us will own the same securities of the issuer and when no term is negotiated other than
price. Any such investment would be made, subject to compliance with existing regulatory guidance, applicable regulations and OFS Advisor’s allocation
policy. If opportunities arise that would otherwise be appropriate for us and for another fund advised by OFS Advisor to invest in different securities of the
same issuer, OFS Advisor will need to decide which fund will proceed with the investment. The decision by OFS Advisor to allocate an opportunity to
another entity could cause us to forego an investment opportunity that we otherwise would have made. Moreover, except in certain circumstances, we will
be unable to invest in any issuer in which another fund advised by OFS Advisor has previously invested.
Small Business Investment Company Regulations
Our wholly owned subsidiary, SBIC I LP, is an SBIC and must comply with SBA regulations.
SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to
eligible small businesses and invest in the equity securities of small businesses. The SBIC license enabled SBIC I LP to receive SBA-guaranteed debenture
funding, subject to the issuance of a leverage commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse,
interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not
required to be paid prior to maturity but may be prepaid without penalty twice each year on certain dates. The interest rate of SBA-guaranteed debentures is
fixed at the time of issuance at a market-driven spread over U.S. Treasury Notes with 10-year maturities.
SBA regulations currently limit the amount that an SBIC may borrow to up to a maximum of $150 million (or $175 million with SBA approval)
when it has at least $75 million in regulatory capital (or $87.5 million with approval to borrow up to $175 million), receives a leverage commitment from
the SBA and has been through an examination by the SBA subsequent to licensing.
The investments of an SBIC are limited to loans to, and equity securities of, eligible small businesses. Under present SBA regulations, eligible
small businesses generally include businesses that (together with their affiliates) have a tangible net worth (total assets less goodwill less total liabilities)
not exceeding $19.5 million and have average annual net income after U.S. federal income taxes not exceeding $6.5 million (average net income to be
computed without benefit of any carryover loss) for the two most recent fiscal years. In addition, an SBIC must devote 25% of its investment activity to
“smaller concerns,” as
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defined by the SBA. A smaller concern generally includes businesses that have a tangible net worth not exceeding $6 million and have average annual net
income after U.S. federal income taxes not exceeding $2 million (average net income to be computed without benefit of any net carryover loss) for the two
most recent fiscal years. SBA regulations also provide alternative criteria to determine eligibility, which may include, among other things, the industry in
which the business is engaged, the number of employees of the business, its gross sales, and the extent to which the SBIC is proposing to participate in a
change of ownership of the business. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of
such businesses and provide them with consulting and advisory services.
The SBA prohibits an SBIC from providing funds to small businesses for certain purposes, such as relending, real estate or investing in companies
outside of the United States, and from providing funds to businesses engaged in a few prohibited industries and to certain “passive” (i.e., non-operating)
companies. In addition, without prior SBA approval, an SBIC may not invest an amount equal to more than approximately 30% of the SBIC’s regulatory
capital in any one company and its affiliates.
SBICs must invest idle funds that are not being used to make investments permitted under SBA regulations in the following limited types of
securities: (i) direct obligations of, or obligations guaranteed as to principal and interest by, the U.S. government, which mature within 15 months from the
date of the investment; (ii) repurchase agreements with federally insured institutions with a maturity of seven days or less (and the securities underlying the
repurchase obligations must be direct obligations of or guaranteed by the federal government); (iii) certificates of deposit with a maturity of one year or
less, issued by a federally insured institution; (iv) a deposit account in a federally insured institution that is subject to a withdrawal restriction of one year or
less; (v) a checking account in a federally insured institution; or (vi) a reasonable petty cash fund.
SBA regulations include restrictions on a “change of control” or other transfers of limited partnership interests in an SBIC. In addition, SBIC I LP
may also be limited in its ability to make distributions to us if it does not have sufficient accumulated net profit, in accordance with SBA regulations.
SBIC I LP is subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios
and other covenants.
The SBA, as a creditor, will have a superior claim to the SBIC I LP’s assets over our stockholders in the event that SBIC I LP is liquidated or the
SBA exercises its remedies under the SBA debentures issued by SBIC I LP in the event of a default.
Income distributions from SBIC I LP are limited to a statutory measurement of “retained earnings available for distribution”, which generally is
measured by adjusting undistributed net realized earnings for unrealized depreciation on investments, calculated in accordance with SBA regulations.
Additionally, all return of capital distributions from SBIC I LP currently require the pre-approval of the SBA. During the year ended December 31, 2020,
SBIC I LP distributed a return of capital distribution of $8.1 million to us.
As part of our plans to focus on lower-yielding, first lien senior secured loans to larger borrowers, which we believe will improve our overall risk
profile, SBIC I LP is repaying over time its outstanding SBA debentures prior to the scheduled maturity dates of its debentures. We do not expect to make
new investments through SBIC I LP, other than follow-on investments. We believe that investing in more senior loans to larger borrowers is consistent with
our view of the private loan market and will reduce our overall leverage on a consolidated basis.
Other
We are subject to periodic examination by the SEC for compliance with the Exchange Act, and the 1940 Act.
We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement.
Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to OFS Capital or our stockholders arising from
willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.
We and OFS Advisor each have adopted and implemented written policies and procedures reasonably designed to prevent violation of relevant
federal securities laws, will review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and have
designated a chief compliance officer to be responsible for administering the policies and procedures.
Our internet address is www.ofscapital.com. We make available free of charge on our website our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the SEC.
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Codes of Ethics
We and OFS Advisor have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal
investments and restricts certain personal securities transactions. Personnel subject to either code may invest in securities for their personal investment
accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements. Our
code of ethics is available, free of charge, on our website at www.ofscapital.com. The code of ethics is available on the EDGAR Database on the SEC’s
website at http://www.sec.gov. You may also obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following e-mail
address: publicinfo@sec.gov.
Proxy Voting Policies and Procedures
We have delegated our proxy voting responsibility to OFS Advisor. The proxy voting policies and procedures of OFS Advisor are set out below.
The guidelines are reviewed periodically by OFS Advisor and our directors who are not “interested persons,” and, accordingly, are subject to change. For
purposes of these proxy voting policies and procedures described below, “we,” “our” and “us” refer to OFS Advisor.
Introduction. As an investment adviser registered under the Advisers Act, we have a fiduciary duty to act solely in the best interests of our clients.
As part of this duty, we recognize that we must vote client securities in a timely manner free of conflicts of interest and in the best interests of our clients.
These policies and procedures for voting proxies for our investment advisory clients are intended to comply with Section 206 of, and Rule
206(4)-6 under, the Advisers Act.
Proxy Policies. We vote proxies relating to our portfolio securities in what we perceive to be the best interest of our clients. We review on a case-
by-case basis each proposal submitted to a stockholder vote to determine its effect on the portfolio securities held by our clients. In most cases we will vote
in favor of proposals that we believe are likely to increase the economic value of the underlying portfolio securities held by our clients. Although we will
generally vote against proposals that may have a negative effect on our clients’ portfolio securities, we may vote for such a proposal if there exist
compelling long-term reasons to do so.
Our proxy voting decisions are made by those senior officers who are responsible for monitoring each of our clients’ investments. To ensure that
our vote is not the product of a conflict of interest, we require that (1) anyone involved in the decision-making process disclose to our chief compliance
officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and
(2) employees involved in the decision-making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to
reduce any attempted influence from interested parties. Where conflicts of interest may be present, we will disclose such conflicts to our client, including
with respect to OFS Capital, those directors who are not interested persons and we may request guidance from such persons on how to vote such proxies
for their account.
Proxy Voting Records. You may obtain information about how we voted proxies for the Company free of charge, by making a written request for
proxy voting information to: OFS Capital Corporation, 10 S. Wacker Drive, Suite 2500, Chicago, Illinois 60606, Attention: Investor Relations, or by
calling OFS Capital Corporation at (847) 734-2000. The SEC also maintains a website at http://www.sec.gov that contains such information.
Privacy Principles
We are committed to maintaining the privacy of our stockholders and to safeguarding their nonpublic personal information. The following information is
provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share
information with select other parties.
Generally, we do not receive any nonpublic personal information relating to our stockholders, although certain nonpublic personal information of
our stockholders may become available to us. We do not disclose any nonpublic personal information about our stockholders or former stockholders to
anyone, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third-party administrator).
We restrict access to nonpublic personal information about our stockholders to employees of OFS Advisor and its affiliates with a legitimate
business need for the information. We maintain physical, electronic and procedural safeguards designed to protect the nonpublic personal information of
our stockholders.
Material U.S. Federal Income Tax Considerations
Election to be Taxed as a RIC. We have elected to be taxed as a RIC under Subchapter M of the Code. As a RIC, we are not required to pay corporate-
level U.S. federal income taxes on any income that we distribute to our stockholders from our otherwise taxable earnings and profits. To maintain our
qualification as a RIC, we must, among other things, meet certain
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source-of-income and asset diversification requirements, as described below. In addition, to receive RIC tax treatment, we must meet the Annual
Distribution Requirement. The excess of net long-term capital gains over net short-term capital losses, if any ("Net Capital Gains"), are not a component of
the Annual Distribution Requirement, but impacts taxable income if not distributed as discussed below.
Taxation as a RIC. If we:
• maintain our qualification as a RIC; and
•
satisfy the Annual Distribution Requirement;
then we will not be subject to U.S. federal income tax on the portion of our ICTI or Net Capital Gains we distribute to stockholders. We will be subject to
U.S. federal income tax at the regular corporate rates on any ICTI or Net Capital Gain not distributed (or deemed distributed) to our stockholders.
We are also subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner an
amount at least equal to the sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of our capital gain net income (both long-term
and short-term) for the one-year period ending October 31 in that calendar year (or, if we so elect, for that calendar year) and (3) any income and gains
recognized, but not distributed, in preceding years and on which we paid no U.S. federal income tax (the “Excise Tax Avoidance Requirement”). We may
choose to retain a portion of our ordinary income and/or capital gain net income in any year and pay the 4% U.S. federal excise tax on the retained
amounts.
•
•
In order to maintain our qualification as a RIC for U.S. federal income tax purposes, we must, among other things:
continue to qualify as a BDC under the 1940 Act at all times during each taxable year;
derive in each taxable year at least 90% of our gross income from dividends, interest, certain payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock, securities, or foreign currencies and other income (including but not limited to gains
from options, futures or forward contracts) derived with respect to our business of investing in such stock, securities or currencies, and net income
derived from interests in “qualified publicly traded partnerships,” as such term is defined in the Code (the "90% Income Test"); and
•
diversify our holdings so that at the end of each quarter of the taxable year:
◦
◦
at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other
securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of our assets and
10% of the outstanding voting securities of such issuer; and
no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other
RICs, of one issuer, of two or more issuers that we control (as determined under applicable tax rules) and that are engaged in the same,
similar or related trades or businesses or of one or more qualified publicly traded partnerships (the “Diversification Tests”).
We may invest in partnerships, including qualified publicly traded partnerships, which may result in our being subject to state, local or foreign
income taxes, franchise taxes, or withholding liabilities.
We are required to recognize ICTI in circumstances in which we have not received a corresponding payment in cash. For example, we hold debt
obligations that are treated under applicable tax rules as issued with OID and debt instruments with PIK interest, and we must include in ICTI each year the
portion of the OID and PIK interest that accrues for that year (as it accrues over the life of the obligation), irrespective of whether the cash representing
such income is received by us in that taxable year. The continued recognition of non-cash ICTI may cause difficulty in meeting the Annual Distribution
Requirement. We may be required to sell investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital,
or forgo new investment opportunities to meet this requirement. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax
treatment and thus become subject to corporate-level U.S. federal income tax.
We are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we are not
permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage”
tests are met. Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio
and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual
Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not
advantageous. See “Regulation—Senior Securities.”
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Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things, (1)
treat dividends that would otherwise qualify for the dividends received deduction or constitute qualified dividend income as ineligible for such treatment,
(2) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (3) convert lower-taxed long-term capital gain into higher-taxed
short-term capital gain or ordinary income, (4) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (5)
cause us to recognize income or gain without receipt of a corresponding distribution of cash, (6) adversely affect the time as to when a purchase or sale of
stock or securities is deemed to occur, (7) adversely alter the characterization of certain complex financial transactions and (8) produce income that will not
be considered "qualifying income" for purposes of the 90% Income Test. We will monitor our transactions and may make certain tax elections to mitigate
the potential adverse effect of these provisions, but there can be no assurance that any adverse effects of these provisions will be mitigated.
Our investments in Structured Finance notes are “passive foreign investment company” (a “PFIC”) investments, which can subject us to U.S.
federal income tax on our allocable share of a portion of any “excess distribution” received on, or any gain from the disposition of, such shares even if our
allocable share of such income is distributed as a taxable dividend to our stockholders. Additional charges in the nature of interest generally would also be
imposed on us for the deemed delay in our reporting of such excess distribution and the earning of such income by underlying PFIC. However, we have
elected, and expect to continue to elect, to treat our investments in PFICs as a “qualified electing funds” under the Code (a “QEF”), and in lieu of the
foregoing requirements, we will be required to include in income each year our proportionate share of the ordinary earnings and net capital gain of the QEF,
even if such income is not distributed by the QEF. In lieu of a QEF election, we may in the future elect to mark-to-market at the end of each taxable year
our shares in a PFIC; in this case, we will recognize as ordinary income our allocable share of any increase in the value of such shares, and as ordinary loss
our allocable share of any decrease in such value to the extent that any such decrease does not exceed prior increases included in its income. Under either
election, we may be required to recognize in a year income in excess of distributions from PFICs and proceeds from dispositions of PFIC stock during that
year, and such income will nevertheless be subject to the Annual Distribution Requirement and will be taken into account for purposes of the 4% U.S.
federal excise tax.
Some of the income and fees that we recognize may result in ICTI that will not be "qualifying income" for the 90% Income Test. In order to
ensure that such income and fees do not disqualify us as a RIC for a failure to satisfy the 90% Income Test, we may recognize such income and fees
directly or indirectly through one or more entities taxed as corporations for U.S. federal income tax purposes. Such corporations are required to pay U.S.
corporate income tax on their earnings, which ultimately reduces our return on such income and fees.
Failure to Qualify as a RIC. If we are unable to maintain our qualification as a RIC, we will be subject to tax on all of our ICTI and Net Capital Gains at
regular corporate rates; we will not receive a dividend deduction for any distributions to our stockholders. Distributions would not be required, and any
distributions would be taxable to our stockholders as ordinary dividend income that would, for qualifying non-corporate U.S. stockholders, be eligible for
the current 20% maximum rate to the extent of our current and accumulated earnings and profits (subject to limitations under the Code). Subject to certain
limitations under the Code, corporate distributions would be eligible for the dividends-received deduction. Distributions in excess of our current and
accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis (reducing that basis accordingly),
and any remaining distributions would be treated as a capital gain. To qualify again to be taxed as a RIC in a subsequent year, we would be required to
distribute to our stockholders our earnings and profits attributable to non-RIC years. In addition, if we failed to qualify as a RIC for a period greater than
two taxable years, then we would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of
income, over aggregate loss that would have been realized if we had been liquidated) or, alternatively, be subject to taxation on such built-in gain
recognized for a period of five years, in order to qualify as a RIC in a subsequent year.
Conflicts of Interests
BDCs generally are prohibited under the 1940 Act from knowingly participating in certain transactions with their affiliates without the prior approval of
their independent directors and, in some cases, of the SEC. Those transactions include purchases and sales, and so-called “joint” transactions, in which a
BDC and one or more of its affiliates engage in certain types of profit-making activities. Any person that owns, directly or indirectly, five percent or more
of a BDC’s outstanding voting securities will be considered an affiliate of the BDC for purposes of the 1940 Act, and a BDC generally is prohibited from
engaging in purchases from, sales of assets to, or joint transactions with, such affiliates, absent the prior approval of the BDC’s independent directors.
Additionally, without the approval of the SEC, a BDC is prohibited from engaging in purchases from, sales of assets to, or joint transactions with, the
BDC’s officers, directors, and employees, and advisor (and its control affiliates).
BDCs may, however, invest alongside certain related parties or their respective other clients in certain circumstances where doing so is consistent with
current law and SEC staff interpretations. For example, a BDC may invest alongside such accounts consistent with guidance promulgated by the SEC staff
permitting the BDC and such other accounts to purchase
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interests in a single class of privately placed securities so long as certain conditions are met, including that the BDC’s advisor, acting on the BDC’s behalf
and on behalf of other clients, negotiates no term other than price. Co-investment with such other accounts is not permitted or appropriate under this
guidance when there is an opportunity to invest in different securities of the same issuer or where the different investments could be expected to result in a
conflict between the BDC’s interests and those of other accounts.
Conflicts Related to Portfolio Investments. Conflicts may arise when we make an investment in conjunction with an investment being made by an
Affiliated Account, or in a transaction where an Affiliated Account has already made an investment. Investment opportunities are, from time to time,
appropriate for more than one account in the same, different or overlapping securities of a portfolio company’s capital structure. Conflicts arise in
determining the terms of investments, particularly where these accounts may invest in different types of securities in a single portfolio company. Questions
arise as to whether payment obligations and covenants should be enforced, modified or waived, or whether debt should be restructured, modified or
refinanced.
We may invest in debt and other securities of companies in which Affiliated Accounts hold those same securities or different securities, including equity
securities. In the event that such investments are made by us, our interests will at times conflict with the interests of such Affiliated Accounts, particularly
in circumstances where the underlying company is facing financial distress. Decisions about what action should be taken, particularly in troubled situations,
raise conflicts of interest, including, among other things, whether or not to enforce claims, whether or not to advocate or initiate a restructuring or
liquidation inside or outside of bankruptcy, and the terms of any work-out or restructuring. The involvement of Affiliated Accounts at both the equity and
debt levels could inhibit strategic information exchanges among fellow creditors, including among us or Affiliated Accounts. In certain circumstances, we
or an Affiliated Account may be prohibited from exercising voting or other rights and may be subject to claims by other creditors with respect to the
subordination of their interest.
In the event that we or an Affiliated Account has a controlling or significantly influential position in a portfolio company, that account may have the
ability to elect some or all of the board of directors of such a portfolio company, thereby controlling the policies and operations of such portfolio company,
including the appointment of management, future issuances of securities, payment of dividends, incurrence of debt and entering into extraordinary
transactions. In addition, a controlling account is likely to have the ability to determine, or influence, the outcome of operational matters and to cause, or
prevent, a change in control of such a company. Such management and operational decisions may, at times, be in direct conflict with other accounts that
have invested in the same portfolio company that do not have the same level of control or influence over the portfolio company.
If additional capital is necessary as a result of financial or other difficulties, or to finance growth or other opportunities, the accounts may or may not
provide such additional capital, and if provided each account will supply such additional capital in such amounts, if any, as determined by OFS Advisor. In
addition, a conflict arises in allocating an investment opportunity if the potential investment target could be acquired by us, an Affiliated Account, or a
portfolio company of an Affiliated Account. Investments by more than one account of OFS Advisor or its affiliates in a portfolio company also raise the
risk of using assets of an account of OFS Advisor or its affiliates to support positions taken by other accounts of OFS Advisor or its affiliates, or that an
account may remain passive in a situation in which it is entitled to vote. In addition, there may be differences in timing of entry into, or exit from, a
portfolio company for reasons such as differences in strategy, existing portfolio or liquidity needs, different account mandates or fund differences, or
different securities being held. These variations in timing may be detrimental to us.
The application of our or an Affiliated Account's governing documents and the policies and procedures of OFS Advisor are expected to vary based on
the particular facts and circumstances surrounding each investment by two or more accounts, in particular when those accounts are in different classes of an
issuer’s capital structure (as well as across multiple issuers or borrowers within the same overall capital structure) and, as such, there may be a degree of
variation and potential inconsistencies, in the manner in which potential or actual conflicts are addressed.
Co-Investment with Affiliates. On August 4, 2020, we received exemptive relief from the SEC to permit us to co-invest in portfolio companies with
certain Affiliated Funds in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory
requirements and other pertinent factors, subject to compliance with certain conditions. The Order superseded a previous co-investment order we received
on October 12, 2016 and provides us with greater flexibility to enter into co-investment transactions with Affiliated Funds. We are generally permitted to
co-invest with Affiliated Funds if under the terms of the Order, a "required majority" (as defined in Section 57(o) of the 1940 Act) of our independent
directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the
consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part
of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and
strategies.
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In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs, through December 31, 2020, we were
permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates, even if such other funds
had not previously invested in such existing portfolio company. Without this order, affiliated funds would not be able to participate in such co-investments
with us unless the affiliated funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the
conditional exemptive order expired on December 31, 2020, the SEC’s Division of Investment Management has indicated that until March 31, 2022, it will
not recommend enforcement action, to the extent that any BDC with an existing co-investment order continues to engage in certain transactions described
in the conditional exemptive order, pursuant to the same terms and conditions described therein.
When we invest alongside Affiliated Accounts, OFS Advisor will, to the extent consistent with applicable law, regulatory guidance, or the Order, allocate
investment opportunities in accordance with its allocation policy. Under this allocation policy, if two or more investment vehicles with similar or
overlapping investment strategies are in their investment periods, an available opportunity will be allocated based on the provisions governing allocations
of such investment opportunities in the relevant organizational, offering or similar documents, if any, for such investment vehicles. In the absence of any
such provisions, OFS Advisor will consider the following factors and the weight that should be given with respect to each of these factors:
•
•
•
•
•
•
•
•
investment guidelines and/or restrictions, if any, set forth in the applicable organizational, offering or similar documents for the investment
vehicles;
the status of tax restrictions and tests and other regulatory restrictions and tests;
risk and return profile of the investment vehicles;
suitability/priority of a particular investment for the investment vehicles;
if applicable, the targeted position size of the investment for the investment vehicles
level of available cash for investment with respect to the investment vehicles;
total amount of funds committed to the investment vehicles; and
the age of the investment vehicles and the remaining term of their respective investment periods, if any.
When not relying on the Order, priority as to opportunities will generally be given to clients that are in their “ramp-up” period, or the period
during which the account has yet to reach sufficient scale such that its investment income covers its operating expenses, over the accounts that are outside
their ramp-up period but still within their investment or re-investment periods. However, application of one or more of the factors listed above, or other
factors determined to be relevant or appropriate, may result in the allocation of an investment opportunity to a fund no longer in its ramp-up period over a
fund that is still within its ramp-up period.
In situations where co-investment with Affiliated Accounts is not permitted or appropriate, OFS Advisor will need to decide which account will proceed
with the investment. The decision by OFS Advisor to allocate an opportunity to another entity could cause us to forego an investment opportunity that we
otherwise would have made. These restrictions, and similar restrictions that limit our ability to transact business with our officers or directors or their
affiliates, may limit the scope of investment opportunities that would otherwise be available to us.
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Item 1A. Risk Factors
RISK FACTORS
Investing in our securities involves a number of significant risks. In addition to the other information contained in this Annual Report on Form 10-K, you
should consider carefully the following information before making an investment in our securities. The risks set out below are not the only risks we face.
Additional risks and uncertainties not presently known to us or not presently deemed material by us might also impair our operations and performance. If
any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, our
net asset value and the trading price of our securities could decline, and you may lose all or part of your investment. The risk factors described below are
the principal risk factors associated with an investment in our securities as well as those factors generally associated with an investment company with
investment objectives, investment policies, capital structure or trading markets similar to ours.
Summary Risk Factors
We are subject to risks related to our business and structure.
• Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our
revenue growth and profitability.
• Due to the COVID-19 pandemic or other disruptions in the economy, we may reduce, defer or eliminate our dividends and choose to incur US
federal excise tax in order preserve cash and maintain flexibility.
• Historical data regarding our business, results of operations, financial condition and liquidity does not reflect the impact of the COVID-19
pandemic and related containment measures and therefore does not purport to be representative of our future performance.
• We may leverage our portfolio, which would magnify the potential for gain or loss on amounts invested and will increase the risk of investing in
us.
• Our investment portfolio is recorded at fair value, with our Board having final responsibility for overseeing, reviewing and determining, in
accordance with the 1940 Act, the fair value of our investments. As a result, there will be uncertainty as to the value of our portfolio investments.
• Our financial condition and results of operations depend on OFS Advisor’s ability to effectively manage and deploy capital, and we are dependent
upon the OFS senior professionals for our future success and upon their access to the investment professionals and partners of OFSAM and its
affiliates.
• OFS Advisor and OFS Services each has the right to resign on 60 days’ notice, and we may not be able to find a suitable replacement within that
time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.
There are significant potential conflicts of interest which could impact our investment returns.
•
• Our incentive fee structure may incentivize OFS Advisor to pursue speculative investments, use leverage when it may be unwise to do so, refrain
from de-levering when it would otherwise be appropriate to do so, or include optimistic assumptions in the determination of net investment
income.
• A general increase in interest rates may have the effect of making it easier for OFS Advisor to receive incentive fees, without necessarily resulting
in an increase in our net earnings.
• OFS Advisor’s liability is limited under the Investment Advisory Agreement, and we have agreed to indemnify OFS Advisor against certain
liabilities, which may lead OFS Advisor to act in a riskier manner on our behalf than it would when acting for its own account.
• We may not replicate the historical results achieved by OFSAM or other entities managed or sponsored by OFSAM and its other affiliates.
• Our Board may change our operating policies and strategies without stockholder approval, the effects of which may be adverse.
• We will be subject to corporate-level U.S. federal income tax if we are unable to maintain our tax treatment as a RIC.
• Our subsidiaries and portfolio companies may be unable to make distributions to us that will enable us to meet RIC requirements, which could
result in the imposition of an entity-level tax.
• We may choose to pay distributions in our own common stock, in which case, our stockholders may be required to pay U.S. federal income taxes
•
in excess of the cash distributions they receive.
Because we expect to distribute substantially all of our ordinary income and net realized capital gains to our stockholders, we may need additional
capital to finance the acquisition of new investments and such capital may not be available on favorable terms, or at all.
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Significant stockholders may control the outcome of matters submitted to our stockholders or adversely impact the market price of our securities.
•
• Our ability to enter into transactions with our affiliates is restricted, which may limit the scope of investments available to us.
•
Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.
We are subject to risks related to our investments.
•
Events outside of our control, including public health crises, have negatively affected and will continue to negatively affect our investments and
our results of operations.
• Our investments in private and middle-market portfolio companies are generally considered lower credit quality obligations, are risky, and we
could lose all or part of our investment.
• Our investments in Structured Finance Notes carry additional risks to the risks associated with investing in private debt. risks.
• Our investments in Structured Finance Notes are more likely to suffer a loss of all or a portion of their value in the event of a default.
• We are a non-diversified management investment company within the meaning of the 1940 Act, and therefore we are not limited by the 1940 Act
•
with respect to the proportion of our assets that may be invested in securities of a single issuer.
If we make subordinated investments, the obligors or the portfolio companies may not generate sufficient cash flow to service their debt
obligations to us.
• Uncertainty relating to the LIBOR calculation process may adversely affect the value of any portfolio of LIBOR-indexed, floating-rate debt
securities.
We are subject to risks relating to our securities.
Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.
• Due to the recent COVID-19 pandemic, our shares of common stock have traded and could continue to trade at a discount from NAV.
•
• Our common stock may trade below its net asset value per share, which limits our ability to raise additional equity capital.
•
There is a risk that stockholders may not receive distributions or that our distributions may not grow over time and a portion of our distributions
may be a return of capital.We are subject to risks related to our business and structure.
Risks Related to the COVID-19 Pandemic
Global economic, political and market conditions caused by the current public health crisis have adversely affected, and may continue to adversely
affect our business, results of operations and financial condition and those of our portfolio companies.
A novel strain of coronavirus (“COVID-19”) initially appeared in China in late 2019 and rapidly spread to other countries, including the United
States. In an attempt to slow the spread of the coronavirus, governments in many jurisdictions, including the United States, placed restrictions on travel,
issued “stay at home” orders and ordered the temporary closure of "non-essential" businesses, such as factories and retail stores. These restrictions and
closures have impacted supply chains, consumer demand and the operations of many businesses. As jurisdictions around the United States and the world
continue to experience surges in cases of COVID-19 and governments consider pausing the lifting of or re-imposing restrictions, there is considerable
uncertainty surrounding the full economic impact of the coronavirus and the long-term effects on the U.S. and global financial markets.
Any disruptions in the capital markets, as a result of the COVID-19 pandemic or otherwise, may increase the spread between the yields realized
on risk-free and higher risk securities and can result in illiquidity in parts of the capital markets, significant write-offs in the financial sector and re-pricing
of credit risk in the broadly syndicated market. These and any other unfavorable economic conditions created by the COVID-19 pandemic and related
restrictions and closures could increase our funding costs, limit our access to the capital markets and result in a decision by lenders not to extend credit to
us. During most of 2020, the occurrence of these events negatively impacted the fair value of the investments that we held, and if they were to continue,
worsen, or occur again in the future, could limit our investment originations (including as a result of the investment professionals of OFS Advisor diverting
their time to the restructuring of certain investments), negatively impact our operating results and limit our ability to grow. In addition, our success depends
in substantial part on the management, skill and acumen of OFS Advisor, whose operations may be adversely impacted, including through quarantine
measures and travel restrictions imposed on its investment professionals or service providers, or any related health issues of such investment professionals
or service providers. Though all of OFS Advisor’s employees are able to work remotely, these closures have nevertheless affected
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many of our borrowers and many businesses through which we seek new borrowers, resulting in significant declines in new loans and investments
throughout 2020. These effects, individually or in the aggregate, have had, and may in the future continue to have, an adverse impact on our business,
financial condition, operating results and cash flows and such adverse impacts may be material.
In addition, the COVID-19-related restrictions and closures and related market conditions resulted in, and if re-imposed in the future, could further
result in, certain of our portfolio companies halting or significantly curtailing operations and negative impacts to the supply chains of certain of our
portfolio companies. The financial results of middle-market companies in which we primarily invest, have experienced deterioration, which could
ultimately lead to difficulty in meeting debt service requirements and an increase in defaults, and further deterioration will further depress the outlook for
middle-market companies. Further, adverse economic conditions have decreased, and may in the future decrease, the value of collateral securing some of
our loans and the value of our equity investments. Such conditions have required, and may in the future require, us to modify the payment terms of our
investments, including changes in PIK interest provisions and/or cash interest rates. The performance of certain of our portfolio companies has been, and in
the future may be, negatively impacted by these economic or other conditions, which can result in our receipt of reduced interest income from our portfolio
companies and/or realized and unrealized losses related to our investments, and, in turn, may adversely affect distributable income and have a material
adverse effect on our results of operations. In addition, as governments ease COVID-19 related restrictions, certain of our portfolio companies may
experience increases in health and safety expenses, payroll costs and other operating expenses. The COVID-19 pandemic has also led to significant interest
rate reductions by the Federal Reserve, including dropping certain rates to near zero, and market uncertainty, which has had, and may continue to have, a
materially adverse effect on us.
As the potential impact of the COVID-19 pandemic remains difficult to predict, the extent to which the COVID-19 pandemic could negatively
affect our and our portfolio companies’ operating results or the duration or reoccurrence of any potential business or supply-chain disruption is uncertain.
Any potential impact to our results of operations will depend to a large extent on future developments regarding the duration and severity of the COVID-19
pandemic and the actions taken by governments (including stimulus measures or the lack thereof) and their citizens to contain the COVID-19 pandemic or
treat its impact, all of which are beyond our control. We monitor developments in economic, political and market conditions and seek to manage our
investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.
Due to the COVID-19 pandemic or other disruptions in the economy, we may not be able to increase our dividends and may reduce or defer
our dividends and choose to incur US federal excise tax in order preserve cash and maintain flexibility.
As a BDC, we are not required to make any distributions to stockholders other than in connection with our election to be taxed as a RIC under
subchapter M of the Code. In order to maintain our tax treatment as a RIC, we must distribute to stockholders for each taxable year at least 90% of our
investment company taxable income (i.e., net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses).
If we qualify for taxation as a RIC, we generally will not be subject to corporate-level US federal income tax on our investment company taxable income
and net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) that we timely distribute to stockholders.
We will be subject to a 4% US federal excise tax on undistributed earnings of a RIC unless we distribute each calendar year at least the sum of (i) 98.0% of
our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the
calendar year, and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no
federal income tax.
Under the Code, we may satisfy certain of our RIC distributions with dividends paid after the end of the current year. In particular, if we pay a
distribution in January of the following year that was declared in October, November, or December of the current year and is payable to stockholders of
record in the current year, the dividend will be treated for all U.S. federal tax purposes as if it were paid on December 31 of the current year. In addition,
under the Code, we may pay dividends, referred to as “spillover dividends,” that are paid during the following taxable year that will allow us to maintain
our qualification for taxation as a RIC and eliminate our liability for corporate-level U.S. federal income tax. Under these spillover dividend procedures, we
may defer distribution of income earned during the current year until December of the following year. For example, we may defer distributions of income
earned during 2020 until as late as December 31, 2021. However, if we choose to pay a spillover dividend, we will still incur the 4% U.S. federal excise tax
on some or all of the distribution.
Due to the COVID-19 pandemic or other disruptions in the economy, we anticipate that we may take certain actions with respect to the timing and
amounts of our distributions in order to preserve cash and maintain flexibility. For example, we anticipate that we may not be able to increase our
dividends. In addition, we may reduce our dividends and/or defer our dividends to the following taxable year. If we defer our dividends, we may choose to
utilize the spillover dividend rules discussed above and incur the 4% U.S. federal excise tax on such amounts. To further preserve cash, we may combine
these reductions or deferrals of dividends with one or more distributions that are payable partially in our stock as discussed below under the risk factor “We
may in the future choose to pay distributions in our own stock, in which case stockholders may be required to pay tax in excess of the cash they receive”.
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Risks Related to Our Business and Structure
We are dependent upon the OFS senior professionals for our future success and upon their access to the investment professionals and partners of
OFS and its affiliates.
We do not have any internal management capacity or employees. We will depend on the diligence, skill and network of business contacts of the OFS
senior professionals to achieve our investment objective. Our future success will depend, to a significant extent, on the continued service and coordination
of the OFS senior management team, particularly Bilal Rashid, Senior Managing Director and President of OFSC, and Jeffrey Cerny, Senior Managing
Director and Treasurer of OFSC. Each of these individuals is an employee at will of OFSC. In addition, we rely on the services of Richard Ressler,
Chairman of the executive committee of OFSAM and Chairman of certain of the Advisor Investment Committees, pursuant to a consulting agreement with
Orchard Capital Corporation. The departure of Mr. Ressler or any of the senior managers of OFSC, or of a significant number of its other investment
professionals, could have a material adverse effect on our ability to achieve our investment objective.
We expect that OFS Advisor will continue to evaluate, negotiate, structure, close and monitor our investments in accordance with the terms of the
Investment Advisory Agreement. We can offer no assurance, however, that OFS senior professionals will continue to provide investment advice to us. If
these individuals do not maintain their existing relationships with OFS and its affiliates and do not develop new relationships with other sources of
investment opportunities, we may not be able to grow our investment portfolio or achieve our investment objective. In addition, individuals with whom the
OFS senior professionals have relationships are not obligated to provide us with investment opportunities. Therefore, we can offer no assurance that such
relationships will generate investment opportunities for us.
OFS Advisor is a subsidiary of OFSAM that has no employees and depends upon access to the investment professionals and other resources of OFS and
its affiliates to fulfill its obligations to us under the Investment Advisory Agreement. OFS Advisor also depends upon OFS to obtain access to deal flow
generated by the professionals of OFS and its affiliates. Under a Staffing Agreement between OFSC, a subsidiary of OFSAM that employs OFS’s
personnel, and OFS Advisor, OFSC has agreed to provide OFS Advisor with the resources necessary to fulfill these obligations. The Staffing Agreement
provides that OFSC will make available to OFS Advisor experienced investment professionals and access to the senior investment personnel of OFSC for
purposes of evaluating, negotiating, structuring, closing and monitoring our investments. We are not a party to this Staffing Agreement and cannot assure
stockholders that OFSC will fulfill its obligations under the agreement. If OFSC fails to perform, we cannot assure stockholders that OFS Advisor will
enforce the Staffing Agreement or that such agreement will not be terminated by either party or that we will continue to have access to the investment
professionals of OFSC and its affiliates or their information and deal flow.
The investment committees that oversee our investment activities are provided by OFS Advisor under the Investment Advisory Agreement. The loss of
any member of the Advisor Investment Committees or of other OFS senior professionals could limit our ability to achieve our investment objective and
operate as we anticipate. This could have a material adverse effect on our financial condition and results of operation.
Our business model depends to a significant extent upon strong referral relationships with financial institutions, sponsors and investment
professionals. Any inability of OFS Advisor to maintain or develop these relationships, or the failure of these relationships to generate investment
opportunities, could adversely affect our business.
We depend upon OFS Advisor to maintain relationships with financial institutions, sponsors and investment professionals, and we will continue to
rely to a significant extent upon these relationships to provide us with potential investment opportunities. If OFS Advisor fails to maintain such
relationships, or to develop new relationships with other sources of investment opportunities, we will not be able to grow our investment portfolio. In
addition, individuals with whom the principals of OFS Advisor have relationships are not obligated to provide us with investment opportunities, and,
therefore, we can offer no assurance that these relationships will generate investment opportunities for us in the future.
Our financial condition and results of operation will depend on our ability to manage our business effectively.
Our ability to achieve our investment objective and grow will depend on our ability to manage our business. This will depend, in turn, on the
ability of the Advisor Investment Committees to identify, invest in and monitor companies that meet our investment criteria. The achievement of our
investment objectives on a cost-effective basis will depend upon the Advisor Investment Committees' ability to execute our investment process, their ability
to provide competent, attentive and efficient services to us and, to a lesser extent, our access to financing on acceptable terms. OFS Advisor has substantial
responsibilities under the Investment Advisory Agreement. OFS Advisor's senior professionals and other personnel of OFS Advisor's affiliates, including
OFSC, may be called upon to provide managerial assistance to our portfolio companies. These activities may distract them or slow our rate of investment.
Any failure to manage our business and our future growth effectively could have a material adverse effect on our business, financial condition and results
of operations.
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To the extent PIK interest and PIK dividends constitute a portion of our income, we will be required to include such income in taxable and
accounting income prior to receipt of cash representing such income.
Our investments may include contractual PIK interest or PIK dividends, which represents contractual interest or dividends added to a loan balance or
equity security and due at the end of such loan’s or equity security’s term. To the extent PIK interest and PIK dividends constitute a portion of our income,
we will be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash.
Such risks include:
•
•
•
•
•
The higher interest or dividend rates of PIK instruments reflect the payment deferral and increased risk associated with these instruments, and PIK
instruments often represent a significantly higher risk than non-PIK instruments.
Even if the accounting conditions for income accrual are met, the borrower could still default when our actual collection is supposed to occur at
the maturity of the obligation.
PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the
deferred payments and the value of any associated collateral. PIK income may also create uncertainty about the source of our cash distributions.
For accounting purposes, any cash distributions to stockholders representing PIK income are not treated as coming from paid-in capital. As a
result, despite the fact that a distribution representing PIK income could be paid out of amounts invested by our stockholders, the 1940 Act does
not require that stockholders be given notice of this fact by reporting it as a return of capital.
PIK interest or dividends have the effect of generating investment income at a compounding rate, thereby further increasing the incentive fees
payable to OFS Advisor. Similarly, all things being equal, the deferral associated with PIK interest or dividends also decreases the investment
principal-to-value ratio at a compounding rate.
A significant amount 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.
Many of our portfolio investments take the form of securities that are not publicly traded. The fair value of securities and other investments that are not
publicly traded may not be readily determinable. We value these securities at fair value as determined in good faith by our Board, including to reflect
significant events affecting the value of our securities. All of our investments (other than cash and cash equivalents) are classified as Level 3 under
Accounting Standards Codification Topic 820, Fair Value Measurement and Disclosures (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 are
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 presently retain the services of independent service providers to prepare the valuation of these securities.
The types of factors that the Board takes into account in determining the fair value of our investments generally include, as appropriate, comparison to
third-party yield benchmarks and 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 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 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 securities.
We adjust quarterly the valuation of our portfolio to reflect our Board's determination of the fair value of each investment in our portfolio. Any changes
in fair value are recorded in our statement of income as net change in unrealized appreciation or depreciation.
We are subject to additional regulations due to SBIC I LP's status as a Small Business Investment Company.
Our current investment strategy includes SBIC I LP, which is regulated by the SBA. The SBA regulations require that a licensed SBIC be periodically
examined and audited by the SBA to determine its compliance with the relevant SBA regulations. If SBIC I LP 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 its ability to make new investments. The SBA, as a creditor, will have a superior claim to SBIC I LP’s assets over SBIC I
LP’s limited partners and our stockholders in the event SBIC I LP is liquidated or the SBA exercises its remedies under the SBA
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debentures issued by SBIC I LP in the event of a default. 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 or any rule or regulation promulgated thereunder. These actions
by the SBA would, in turn, negatively affect us because of our ownership interest in SBIC I LP.
The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits an SBIC from providing funds
to small businesses for certain purposes, such as relending, real estate or investing in companies outside of the United States, and providing funds to
businesses engaged in a few prohibited industries and to certain “passive” (i.e., non-operating) companies. In addition, without prior SBA approval, an
SBIC may not invest an amount equal to more than approximately 30% of the SBIC’s regulatory capital in any one company and its affiliates.
SBIC I LP is subject to ongoing regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial
ratios and other covenants. In addition, SBIC I LP may also be limited in its ability to make distributions to us if it does not have sufficient accumulated net
profit, in accordance with SBA regulations. These requirements may make it more difficult for us to achieve our investment objectives.
We finance our investments with borrowed money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of
investing in us.
The use of leverage magnifies the potential for gain or loss on amounts invested. The use of leverage is generally considered a speculative investment
technique and increases the risks associated with investing in our securities. We may pledge up to 100% of our assets and may grant a security interest in all
of our assets, other than assets held in SBIC I LP and OFSCC-FS, and our ownership interest in SBIC I LP and SBIC I GP, under the terms of any debt
instruments we may enter into with lenders. In addition, under the terms of any credit facility or other debt instrument we enter into, we are likely to be
required by its terms 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 equity 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 dividend payments on our common stock or preferred stock. Our ability to service our debt will depend largely on our
financial performance and will be subject to prevailing economic conditions and competitive pressures. Moreover, because the management fee payable to
OFS Advisor is payable based on our total assets (other than cash and cash equivalents and intangible assets related to the SBIC Acquisition but including
assets purchased with borrowed amounts and including assets owned by any consolidated entity), OFS Advisor has a financial incentive to incur leverage
which may not be consistent with our stockholders’ interests. In addition, our common stockholders will 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 management fee payable to OFS Advisor.
On May 3, 2018, the Board, including a "required majority" (as such item is determined in section 57(o) of the 1940 Act) of the Board, approved
the application of a reduced 150% asset coverage ratio to us; therefore provided certain conditions are met, we are subject to the reduced asset coverage
ratio as of May 3, 2019. See "Item 1A. Risk Factors--Risks Related to our Business and Structure--Because we have received the approval of our Board, we
are subject to 150% effective May 3, 2019." As of December 31, 2020, our asset coverage ratio was 176%, excluding the debt held by SBIC I LP.
The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of
expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing in the table below.
Corresponding return to common stockholder
(1)
(10)%
(36.2)%
Assumed Return on Our Portfolio (Net of Expenses)
—%
(9.7)%
(5)%
(22.9)%
5%
3.6%
10%
16.9%
(1) Assumes $442.3 million in investments at fair value, $316.0 million in projected debt outstanding as of February 2021, $166.6 million in net assets, and
an average cost of funds of 5.10%. Assumptions are based on our financial condition and our expected average cost of funds as of February 2021.
Based on our projected outstanding indebtedness of $315.2 million as of February 2021 and the average cost of funds of 5.10% as of that date, our
investment portfolio must experience an annual return of 3.64% at least to cover interest payments on the outstanding debt.
This example is for illustrative purposes only, and actual interest rates on our borrowings are likely to fluctuate. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources— Borrowings” for additional information.
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The amount of our debt outstanding increased due to the issuance of the Unsecured Notes and the establishment of the BNP Facility.
Our ability to generate sufficient cash flow in the future is, to some extent, subject to general economic, financial, competitive, legislative and regulatory
factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flows from operations to meet the
payment obligations of our debt.
Because we have received the approval of our Board, we became subject to 150% Asset Coverage effective May 3, 2019.
The 1940 Act generally prohibits a BDC from incurring indebtedness unless immediately after such borrowing it has an asset coverage for total
borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, Section 61(a)(2) of the 1940 Act allows a
BDC to increase the maximum amount of leverage it may incur from an asset coverage ratio of 200% to an asset coverage ratio of 150%, if certain
requirements are met.
On May 3, 2018, our Board approved the application of the reduced asset coverage ratio to us made available under the Section 61(a)(2) of the 1940 Act.
As a result, we were able to increase our leverage up to an amount that reduces our asset coverage ratio from 200% to 150% (i.e., the amount of debt may
not exceed 66 2/3% of the value of our assets) effective May 3, 2019. Leverage magnifies the potential for loss on investments in our indebtedness and on
invested equity capital. As we use leverage to partially finance our investments, you will experience increased risks of investing in our securities. If the
value of our assets increases, then the additional leverage would cause the net asset value attributable to our common stock to increase more sharply than it
would have had we not increased our leverage. Conversely, if the value of our assets decreases, the additional leverage would cause net asset value to
decline more sharply than it otherwise would have had we not increased our leverage. Similarly, any increase in our income in excess of interest payable on
the borrowed funds would cause our net investment income to increase more than it would without the additional leverage, while any decrease in our
income would cause net investment income to decline more sharply than it would have had we not increased our leverage. Such a decline could negatively
affect our ability to pay common stock dividends, scheduled debt payments or other payments related to our securities. Leverage is generally considered a
speculative investment technique. See “Risks Related to Our Business and Structure - We finance our investments with borrowed money, which magnifies
the potential for gain or loss on amounts invested and may increase the risk of investing in us.”
In addition, the ability of BDCs to increase their leverage will increase the capital available to BDCs and thus competition for the investments that we
seek to make. This may negatively impact pricing on the investments that we do make and adversely affect our net investment income and results of
operations.
Changes in interest rates will affect our cost of capital and net investment income.
To the extent we borrow money or issue preferred stock to make investments, our net investment income will depend, in part, upon the difference
between the rate at which we borrow funds or pay dividends on preferred stock and the rate at which we invest those funds. As a result, we can offer no
assurance that a significant change in market interest rates will 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. Such techniques may include various interest rate
hedging activities to the extent permitted by the 1940 Act.
A rise in the general level of interest rates typically leads to higher interest rates applicable to our debt investments. Accordingly, an increase in interest
rates may result in an increase of the amount of incentive fees payable to OFS Advisor.
We may enter into reverse repurchase agreements, which are another form of leverage.
We may enter into reverse repurchase agreements as part of our management of our temporary investment portfolio. Under a reverse repurchase
agreement, we will effectively pledge our assets as collateral to secure a short-term loan. Generally, the other party to the agreement makes the loan in an
amount equal to a percentage of the fair value of the pledged collateral. At the maturity of the reverse repurchase agreement, we will be required to repay
the loan and correspondingly receive back our collateral. While used as collateral, the assets continue to pay principal and interest which are for our benefit.
Our use of reverse repurchase agreements, if any, involves many of the same risks involved in our use of leverage, as the proceeds from reverse
repurchase agreements generally will be invested in additional securities. There is a risk that the market value of the securities acquired in the reverse
repurchase agreement may decline below the price of the securities that we have sold but remain obligated to purchase. In addition, there is a risk that the
market value of the securities retained by us may decline. If a buyer of securities under a reverse repurchase agreement were to file for bankruptcy or
experience insolvency, we may be adversely affected. Also, in entering into reverse repurchase agreements, we would bear the risk of loss to the extent that
the proceeds of such agreements at settlement are less than the fair value of the underlying securities being pledged. In addition, due to the interest costs
associated with reverse repurchase agreements transactions, our net asset value would decline, and, in some cases, we may be worse off than if we had not
used such instruments.
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Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited.
In November 2020, the SEC adopted a rule regarding the ability of a BDC (or a registered investment company) to use derivatives and other
transactions that create future payment or delivery obligations. Under the newly-adopted rule, BDCs that use derivatives would be subject to a value-at-risk
leverage limit, a derivatives risk management program and testing requirements and requirements related to board reporting. These new requirements will
apply unless the BDC qualifies as a “limited derivatives user,” as defined in the rule. Under the new rule, a BDC may enter into an unfunded commitment
agreement that is not a derivatives transaction, such as an agreement to provide financing to a portfolio company, if the BDC has, among other things, a
reasonable belief, at the time it enters into such an agreement, that it will have sufficient cash and cash equivalents to meet its obligations with respect to all
of its unfunded commitment agreements, in each case as it becomes due. Collectively, these requirements may limit our ability to use derivatives and/or
enter into certain other financial contracts.
We may in the future determine to fund a portion of our investments with preferred stock, which would magnify the potential for gain or loss and
the risks of investing in us in the same way as our borrowings.
Preferred stock, which is another form of leverage, has the same risks to our common stockholders as borrowings because the dividends on any preferred
stock we issue must be cumulative. Payment of such dividends and repayment of the liquidation preference of such preferred stock must take preference
over any dividends or other payments to our common stockholders, and preferred stockholders are not subject to any of our expenses or losses and are not
entitled to participate in any income or appreciation in excess of their stated preference.
We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses.
A number of entities compete with us to make the types of investments that we plan to make. We compete with public and private funds, other
BDCs, commercial and investment banks, commercial finance companies and, to the extent they provide an alternative form of financing, private equity
and hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do.
For example, some of our competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have
higher risk tolerances or different risk assessments than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940
Act imposes on us as a BDC or the source of income, asset diversification and distribution requirements we must satisfy to maintain our RIC tax treatment.
These characteristics could allow our competitors to consider a wider variety of instruments, establish more relationships and offer better pricing and more
flexible structuring than we are able to. The competitive pressures we face may have a material adverse effect on our business, financial condition and
results of operations. As a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we
may not be able to identify and make investments that are consistent with our investment objective.
With respect to the investments we make, we will not seek to compete based primarily on the interest rates we will offer, and we believe that some of our
competitors may make loans with interest rates that will be lower than the rates we offer. In the secondary market for acquiring existing loans, we expect to
compete generally on the basis of pricing terms. With respect to all investments, we may lose some investment opportunities if we do not match our
competitors’ pricing, terms and structure. However, if we match our competitors’ pricing, terms and structure, we may experience decreased net interest
income, lower yields and increased risk of credit loss. We may also compete for investment opportunities with OFSAM and its other affiliates or accounts
managed by OFSAM or one of its other affiliates. Although OFS Advisor will allocate opportunities in accordance with its policies and procedures,
allocations to such other accounts will reduce the amount and frequency of opportunities available to us and may not be in the best interests of us and our
stockholders. Moreover, the performance of investments will not be known at the time of allocation.
We may suffer credit losses.
Investment in middle-market companies is highly speculative and involves a high degree of risk of credit loss, and therefore our securities may not be
suitable for someone with a low tolerance for risk. These risks are likely to increase during volatile economic periods, such as the U.S. and many other
economies have recently been experiencing.
We will be subject to corporate-level U.S. federal income tax if we are unable to maintain our tax treatment as a RIC.
We have elected to be treated as a RIC under Subchapter M of the Code, but no assurance can be given that we will be able to maintain tax treatment as a
RIC. As a RIC, we are not required to pay corporate-level U.S. federal income taxes on our income and capital gains distributed (or deemed distributed) to
our stockholders, provided that we satisfy certain distribution and other requirements. To continue to qualify for tax treatment as a RIC under the Code and
to be relieved of federal taxes on income and gains distributed to our stockholders, we must meet certain source-of-income, asset diversification and
distribution requirements. The distribution requirement for a RIC is satisfied if we distribute at least 90% of our net ordinary income and net short-term
capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. Because we use debt financing, and may, in the future,
issue preferred stock, we are subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit
agreements or preferred stock that could, under certain
34
circumstances, restrict us from making distributions necessary to qualify for tax treatment as a RIC. If we are unable to obtain cash from other sources, we
may fail to maintain our qualification for the tax benefits available to RICs and, thus, may be subject to corporate-level U.S. federal income tax. To
maintain our qualification 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 RIC status. Because most of our investments are in
private or thinly traded public companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses. If we fail to
continue to qualify for tax treatment as a RIC for any reason and become subject to corporate-level U.S. federal income tax, the resulting corporate taxes
could substantially reduce our net assets, the amount of income available for distributions to stockholders and the amount of our distributions and the
amount of funds available for new investments. Such a failure would have a material adverse effect on us and our stockholders.
Our subsidiaries and portfolio companies may be unable to make distributions to us that will enable us to meet RIC requirements, which could
result in the imposition of an entity-level tax.
In order for us to maintain our tax treatment as a RIC and to minimize corporate-level taxes, we are required to distribute on an annual basis substantially
all of our taxable income, which includes income from our subsidiaries and portfolio companies. SBIC I LP may be limited by the SBIC Act and SBA
regulations governing SBICs from making certain distributions to us that may be necessary to enable us to continue to qualify as a RIC. Distributions from
SBIC I LP currently require the prior approval of the SBA. In addition, distributions from OFSCC-FS to us are restricted by the terms and conditions of the
BNP Facility. If our subsidiaries and portfolio companies are unable to make distributions to us, this may result in loss of RIC tax treatment and a
consequent imposition of a corporate-level federal income tax on us.
We may have difficulty paying our required distributions if we recognize income before, or without, receiving cash representing such income.
For U.S. federal income tax purposes, we will include in income certain amounts that we have not yet received in cash, such as the accretion of OID.
This may arise if we purchase assets at a discount, receive warrants in connection with the making of a loan or in other circumstances, or through
contracted PIK interest or dividends (meaning interest or dividends paid in the form of additional principal amount of the loan or equity security instead of
in cash), which represents contractual interest or dividends added to the loan balance or equity security and due at the end of the investment term. Such
OID, which could be significant relative to our overall investment activities, or increases in loan or equity investment balances as a result of contracted PIK
arrangements, will be included in income before we receive any corresponding cash payments. We also may be required to include in income certain other
amounts that we will not receive in cash.
Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the
requirement to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to
maintain the tax benefits available to RICs. In such a case, we may have to sell some of our investments at times and/or at prices we would not consider
advantageous, raise additional debt or equity capital or reduce new investment originations and sourcings to meet these distribution requirements. If we sell
built-in-gain assets, we may be required to recognize taxable income in respect of the built-in-gain on such assets. In such a case, we would have to
distribute all of our taxable gain (including the built-in-gain) in respect of such sale to avoid the imposition of entity-level tax on such gain. If we are not
able to obtain such cash from other sources, we may fail to maintain the tax benefits available to RICs and thus be subject to corporate-level U.S. federal
income tax.
We may in the future choose to pay distributions in our own stock, in which case stockholders may be required to pay tax in excess of the cash they
receive.
We distribute taxable distributions that are payable in cash or shares of our common stock at the election of each stockholder. In accordance with
guidance issued by the Internal Revenue Service, a publicly traded RIC should generally be eligible to treat a distribution of its own stock as fulfilling its
RIC distribution requirements if each stockholder is permitted to elect to receive his or her distribution in either cash or stock of the RIC (even where there
is a limitation on the percentage of the distribution payable in cash, provided that the limitation is at least 20%), subject to the satisfaction of certain
guidelines. If too many stockholders elect to receive their distributions in cash, each such stockholder would receive a pro rata share of the total cash to be
distributed and would receive the remainder of their distribution in shares of stock. If this and certain other requirements are met, for U.S. federal income
tax purposes, the amount of the distribution paid in stock generally will be a taxable distribution in an amount equal to the amount of cash that could have
been received instead of stock. If we decide to make any distributions consistent with this guidance that are payable in part in our stock, stockholders
receiving such distribution would be required to include the full amount of the distribution (whether received in cash, our stock, or a combination thereof)
as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current
and accumulated earnings and profits for United States 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, it may be subject to
transaction
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fees (e.g., broker fees or transfer agent fees) and the sales proceeds may be less than the amount included in income with respect to the dividend, depending
on the market price of our 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 stock. In addition, if a significant number of our
stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.
Because we expect to distribute substantially all of our net investment income and net realized capital gains to our stockholders, we may need
additional capital to finance our growth and such capital may not be available on favorable terms or at all.
We have elected to be taxed for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. If we meet certain requirements, including
source of income, asset diversification and distribution requirements, and if we continue to qualify as a BDC, we will continue to qualify for tax treatment
as RIC under the Code and will not have to pay corporate-level taxes on income we distribute to our stockholders as dividends, allowing us to substantially
reduce or eliminate our corporate-level U.S. federal tax liability. Because we received the approval of our Board, we are generally required to meet a
coverage ratio of total assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of at least
150% at the time we issue any debt or preferred stock. See "Item 1A. Risk Factors - Because we received the approval of our Board, we are subject to
150% Asset Coverage, effective May 3, 2019". This requirement limits the amount that we may borrow. Because we will continue to need capital to grow
our investment portfolio, this limitation may prevent us from incurring debt or preferred stock and require us to raise additional equity at a time when it
may be disadvantageous to do so. We cannot assure investors that debt and equity financing will be available to us on favorable terms, or at all, and debt
financings may be restricted by the terms of any of our outstanding borrowings. In addition, as a BDC, we are generally not permitted to issue common
stock priced below net asset value without stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease new
lending and investment activities, and our net asset value could decline.
Our PWB Credit Facility contains various covenants and restrictions which, if not complied with, could accelerate our repayment obligations
under the PWB Credit Facility or limit its use, thereby materially and adversely affecting our liquidity, financial condition, results of operations and
ability to pay distributions.
The PWB Credit Facility provides us with a senior secured revolving line of credit of up to $25.0 million, with maximum availability equal to 50% of the
aggregate outstanding principal amount of eligible loans included in the borrowing base and otherwise specified in the PWB Credit Facility. The PWB
Credit Facility is guaranteed by OFSCC-MB and secured by all of our current and future assets excluding assets held by SBIC I LP, OFSCC-FS, and our
SBIC I LP and SBIC I GP partnership interests. The PWB Credit Facility contains customary terms and conditions, including, without limitation,
affirmative and negative covenants such as information reporting requirements, a minimum tangible net asset value, a minimum quarterly net investment
income after incentive fees and a covenant restricting net losses, such that on each quarterly testing period, commencing on December 31, 2020, we shall
not have incurred quarterly net losses (income after adjustments to the investment portfolio for gains and losses, realized and unrealized, also shown as net
increase (decrease) in net assets resulting from operations) in excess of $1,000,000, in three of the trailing four quarters. The PWB Credit Facility also
contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect,
breach of covenant, cross-default to other indebtedness, bankruptcy, change in investment advisor, and the occurrence of a material adverse change in our
financial condition. The PWB Credit Facility permits us to fund additional investments as long as we are within the conditions set out in the PWB Credit
Facility. Our continued compliance with these covenants depends on many factors, some of which are beyond our control, and there are no assurances that
we will continue to comply with these covenants. Our failure to satisfy these covenants could result in foreclosure by our lender, which would accelerate
our repayment obligations under the PWB Credit Facility and thereby have a material adverse effect on our business, liquidity, financial condition, results
of operations and ability to pay distributions to our stockholders. We had $0.6 million and $-0- outstanding under the PWB Credit Facility as of
December 31, 2020 and March 4, 2021, respectively. Availability under the PWB Credit Facility as of December 31, 2020 was $19.4 million based on the
stated advance rate of 50% under the borrowing base.
Adverse developments in the credit markets may impair our ability to secure debt financing.
During the economic downturn in the United States that began in mid-2007, many commercial banks and other financial institutions stopped lending or
significantly curtailed their lending activity. In addition, in an effort to stem losses and reduce their exposure to segments of the economy deemed to be
high risk, some financial institutions limited routine refinancing and loan modification transactions and even reviewed the terms of existing facilities to
identify bases for accelerating the maturity of existing lending facilities. As a result, should we experience another economic downturn in the United States,
it may be difficult for us to obtain desired financing to finance the growth of our investments on acceptable economic terms, or at all.
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If we are unable to consummate credit facilities on commercially reasonable terms, our liquidity may be reduced significantly. If we are unable to
repay amounts outstanding under any facility we may enter into and are declared in default or are unable to renew or refinance any such facility, it would
limit our ability to initiate significant originations or to operate our business in the normal course. These situations may arise due to circumstances that we
may be unable to control, such as inaccessibility of the credit markets, a severe decline in the value of the U.S. dollar, a further economic downturn or an
operational problem that affects third parties or us, and could materially damage our business. Moreover, we are unable to predict when economic and
market conditions may become more favorable. Even if such conditions improve broadly and significantly over the long term, adverse conditions in
particular sectors of the financial markets could adversely impact our business.
Changes in the laws or regulations governing our business, or changes in the interpretations thereof, and any failure by us to comply with these
laws or regulations, could have a material adverse effect on our, and our portfolio companies’ business, results of operations or financial condition.
We and our portfolio companies are subject to regulation by laws at the U.S. federal, state and local levels, including those that govern BDCs, SBICs,
RICs, or non-depository commercial lenders. These laws and regulations, including applicable accounting standards, as well as their interpretation, may
change from time to time, and new laws, regulations, accounting standards and interpretations may also come into effect. Any such new or changed laws or
regulations could have a material adverse effect on our business.
We are also subject to judicial and administrative decisions that affect our operations, including our loan originations, maximum interest rates, fees and
other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. If these
laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements than those in which we
currently conduct business, we may have to incur significant expenses in order to comply, or we might have to restrict our operations. If we do not comply
with applicable laws, regulations and decisions, we may lose licenses needed for the conduct of our business and may be subject to civil fines and criminal
penalties.
In addition, changes to the laws and regulations governing our operations related to permitted investments may cause us to alter our investment strategy.
Such changes could result in material differences to the strategies and plans set forth in this Annual Report on Form 10-K and our accounting practices
described in this Annual Report on Form 10-K, and may shift our investment focus from the areas of expertise of OFS Advisor to other types of
investments in which OFS Advisor may have little or no expertise or experience. Any such changes, if they occur, could have a material adverse effect on
our results of operations and the value of a stockholder’s investment.
Over the last several years, there has been an increase in regulatory attention to the extension of credit outside of the traditional banking sector, raising
the possibility that some portion of the non-bank financial sector will be subject to new or different regulation. While it cannot be known at this time
whether these regulations will be implemented or what form they will take, increased regulation of non-bank credit extension could negatively impact our
operations, cash flows or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our
business.
Legislative or other actions relating to taxes could have a negative effect on us.
Significant U.S. federal tax reform legislation was recently enacted that, among other things, permanently reduces the maximum federal corporate
income tax rate, reduces the maximum individual income tax rate (effective for taxable years 2018 through 2025), restricts the deductibility of business
interest expense, changes the rules regarding the calculation of net operating loss deductions that may be used to offset taxable income, expands the
circumstances in which a foreign corporation will be treated as a “controlled foreign corporation” and, under certain circumstances, requires accrual
method taxpayers to recognize income for U.S. federal income tax purposes no later than the income is taken into account as revenue in an applicable
financial statement. Prospective investors are urged to consult their tax advisors regarding the effects of the legislation on an investment in us.
We cannot predict with certainty how any future changes in the tax laws might affect us, our investors or our portfolio investments. New legislation and
any U.S. Treasury regulations, administrative interpretations or court decisions interpreting such legislation could significantly and negatively affect our
ability to qualify for tax treatment as a RIC or the U.S. federal income tax consequences to us and our investors of such qualification, or could have other
adverse consequences. Investors are urged to consult with their tax advisor regarding tax legislative, regulatory or administrative developments and
proposals and their potential effect on an investment in our securities.
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Changes to United States tariff and import/export regulations may have a negative effect on our portfolio companies and, in turn, harm us.
There has been on-going discussion and commentary regarding potential significant changes to United States trade policies, treaties and tariffs. There is
significant uncertainty about the future relationship between the United States and other countries with respect to the trade policies, treaties and tariffs.
These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of
global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. Any of
these factors could depress economic activity and restrict our portfolio companies’ access to suppliers or customers and have a material adverse effect on
their business, financial condition and results of operations, which in turn would negatively impact us.
The effect of global climate change may impact the operations of our portfolio companies.
There may be evidence of global climate change. Climate change creates physical and financial risk and some of our portfolio companies may be
adversely affected by climate change. For example, the needs of customers of energy companies vary with weather conditions, primarily temperature and
humidity. To the extent weather conditions are affected by climate change, energy use could increase or decrease depending on the duration and magnitude
of any changes. Increases in the cost of energy could adversely affect the cost of operations of our portfolio companies if the use of energy products or
services is material to their business. A decrease in energy use due to weather changes may affect some of our portfolio companies’ financial condition,
through decreased revenues. Extreme weather conditions in general require more systems backup, adding to costs, and can contribute to increased system
stresses, including service interruptions.
Loss of tax treatment as a RIC would reduce our net asset value and distributable income.
We have qualified as a RIC under the Code. As a RIC we do not have to pay federal income taxes on our income (including realized gains) that we
distribute to our stockholders, provided that we satisfy certain distribution and other requirements. Accordingly, we are not permitted under accounting
rules to establish reserves for taxes on our unrealized capital gains. If we fail to qualify for tax treatment as a RIC in any year, to the extent that we had
unrealized gains, we would have to establish reserves for taxes, which would reduce our net asset value and the amount potentially available for
distribution. In addition, if we, as a RIC, were to decide to make a deemed distribution of net realized capital gains and retain the net realized capital gains,
we would have to establish appropriate reserves for taxes that we would have to pay on behalf of stockholders. It is possible that establishing reserves for
taxes could have a material adverse effect on the value of our common stock.
Our Board may change our investment objectives, operating policies and strategies without prior notice or stockholder approval.
Our Board has the authority, except as otherwise provided in the 1940 Act, to modify or waive certain of our operating policies and strategies without
prior notice and without stockholder approval. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or
withdraw our election as, a BDC. Under Delaware law, we also cannot be dissolved without prior stockholder approval except by judicial action. We cannot
predict the effect any changes to our current operating policies and strategies would have on our business, operating results and the price value of our
common stock. Nevertheless, any such changes could adversely affect our business and impair our ability to make distributions.
Efforts to comply with the Sarbanes-Oxley Act involve significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act
may adversely affect us and the market price of our securities.
Under current SEC rules, we are required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act
and related rules and regulations of the SEC. We are required to review our internal control over financial reporting on an annual basis, and evaluate and
disclose changes in our internal control over financial reporting on a quarterly and annual basis.
As a result, we expect to continue to incur additional expenses that may negatively impact our financial performance and our ability to make
distributions. This process also results in a diversion of management’s time and attention. In the event that we are unable to maintain compliance with
Section 404 of the Sarbanes-Oxley Act and related rules, we and the market price of our securities may be adversely affected.
Risks Related to OFS Advisor and its Affiliates
We have potential conflicts of interest related to obligations that OFS Advisor or its affiliates may have to other clients.
OFS Advisor and its affiliates manage other assets, including those of other BDCs, registered investment companies, separately managed accounts,
accounts for which OFS Advisor or its affiliates may serve as a subadvisor and CLOs, and may manage other entities in the future, and these other funds
and entities may have similar or overlapping investment strategies. Our executive officers, directors and members of the Advisor Investment Committees
serve as officers, directors or principals
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of entities that operate in the same or a related line of business as we do, or of investment funds or other investment vehicles managed by OFS Advisor or
its affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in our or our stockholders’ best
interests or may require them to devote time to services for other entities, which could interfere with the time available to provide services to us. For
example, OFS Advisor currently serves as the investment adviser to HPCI, a non-traded BDC, that invests in senior secured loans of middle-market
companies in the United States, similar to those we target for investment, including first-lien, second-lien and unitranche loans as well as subordinated
loans and, to a lesser extent, warrants and other equity securities. OFS Advisor also serves as the investment adviser to OCCI, a closed-end management
investment company that primarily invests in CLO debt and subordinated securities.Therefore, many investment opportunities will satisfy the investment
criteria for both HPCI and us and, in certain instances, investment opportunities may be appropriate for OCCI and us. HPCI operates as a distinct and
separate entity and any investment in our common stock will not be an investment in HPCI. In addition, our executive officers and certain of our
independent directors serve in substantially similar capacities for HPCI and OCCI. Similarly, OFS Advisor and/or its affiliates may have other clients with,
similar, different or competing investment objectives. In serving in these multiple capacities, our executive officers and directors, OFS Advisor and/or its
affiliates, and members of the Advisor Investment Committees may have obligations to other clients or investors in those entities, the fulfillment of which
may not be in the best interests of us or our stockholders.
OFS Advisor and OFSAM have procedures and policies in place designed to manage the potential conflicts of interest between OFS Advisor’s fiduciary
obligations to us and its fiduciary obligations to other clients. For example, such policies and procedures are designed to ensure that investment
opportunities are allocated in a fair and equitable manner among us and other clients of OFS Advisor. An investment opportunity that is suitable for clients
of OFS Advisor may not be capable of being shared among some or all of such clients due to the limited scale of the opportunity or other factors, including
regulatory restrictions imposed by the 1940 Act.
There can be no assurance that we will be able to participate in all investment opportunities that are suitable to us. OFS Advisor will seek to allocate
investment opportunities among eligible accounts in a manner that is fair and equitable over time and consistent with its allocation policy.
We have potential conflicts of interest related to the purchases and sales that OFS Advisor makes on our behalf and/or on behalf of Affiliated
Accounts.
Conflicts may arise when we make an investment in conjunction with an investment being made by Affiliated Accounts, or in a transaction where
another Affiliated Account has already made an investment. Investment opportunities are, from time to time, appropriate for more than one Affiliated
Account in the same, different or overlapping securities of a portfolio company’s capital structure. Conflicts arise in determining the terms of investments,
particularly where these Affiliated Accounts may invest in different types of securities in a single portfolio company. Questions arise as to whether payment
obligations and covenants should be enforced, modified or waived, or whether debt should be restructured, modified or refinanced.
We may invest in debt and other securities of companies in which other Affiliated Accounts hold those same securities or different securities,
including equity securities. In the event that such investments are made by us, our interests will at times conflict with the interests of such other Affiliated
Accounts, particularly in circumstances where the underlying company is facing financial distress. Decisions about what action should be taken,
particularly in troubled situations, raises conflicts of interest, including, among other things, whether or not to enforce claims, whether or not to advocate or
initiate a restructuring or liquidation inside or outside of bankruptcy, and the terms of any work-out or restructuring. The involvement of multiple Affiliated
Accounts at both the equity and debt levels could inhibit strategic information exchanges among fellow creditors, including among us and other Affiliated
Accounts. In certain circumstances, we or other Affiliated Accounts may be prohibited from exercising voting or other rights and may be subject to claims
by other creditors with respect to the subordination of their interest.
For example, in the event that one Affiliated Account has a controlling or significantly influential position in a portfolio company, that Affiliated
Account may have the ability to elect some or all of the board of directors of such a portfolio company, thereby controlling the policies and operations,
including the appointment of management, future issuances of securities, payment of dividends, incurrence of debt and entering into extraordinary
transactions. In addition, a controlling Affiliated Account is likely to have the ability to determine, or influence, the outcome of operational matters and to
cause, or prevent, a change in control of such a portfolio company. Such management and operational decisions may, at times, be in direct conflict with us
or other Affiliated Accounts that have invested in the same portfolio company that do not have the same level of control or influence over the portfolio
company.
If additional capital is necessary as a result of financial or other difficulties, or to finance growth or other opportunities, we or other Affiliated
Accounts may or may not provide such additional capital, and if provided each Affiliated Account will supply such additional capital in such amounts, if
any, as determined by OFS Advisor and/or OFS Advisor’s affiliates. Investments by more than one Affiliated Account in a portfolio company also raises
the risk of using assets of an Affiliated
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Account of OFS Advisor to support positions taken by other Affiliated Accounts, or that a client may remain passive in a situation in which it is entitled to
vote. In addition, there may be differences in timing of entry into, or exit from, a portfolio company for reasons such as differences in strategy, existing
portfolio or liquidity needs, different Affiliated Account mandates or fund differences, or different securities being held. These variations in timing may be
detrimental to us.
The application of our investment mandate as compared to investment mandates of other Affiliated Accounts and the policies and procedures of OFS
Advisor and OFS Advisor's affiliates are expected to vary based on the particular facts and circumstances surrounding each investment by two or more
Affiliated Accounts, in particular when those Affiliated Accounts are in different classes of an issuer’s capital structure (as well as across multiple issuers
or borrowers within the same overall capital structure) and, as such, there may be a degree of variation and potential inconsistencies, in the manner in
which potential or actual conflicts are addressed.
Our independent directors may face conflicts of interest related to their obligations to the affiliated funds for which they also serve as independent
directors.
Two of the independent directors of our Board also comprise the independent directors of the board of directors of HPCI, an affiliated BDC that is also
managed by OFS Advisor. Additionally, one of our independent directors also serves as an independent director on the board of directors of OCCI. In their
capacities as directors for an affiliated fund board, the independent directors have a duty to make decisions on behalf of that affiliated fund that are in the
best interests of that affiliated fund and its stockholders. Accordingly, our independent directors may face conflicts of interest when making a decision on
behalf of one affiliated fund that may not be in the best interest of the other affiliated fund(s). For example, the SEC has granted exemptive relief to us,
OFS Advisor, HPCI, OCCI, and certain other of our affiliates to co-invest in certain transactions that would otherwise be prohibited by the 1940 Act. In
accordance with that relief, the independent directors must make certain findings on behalf of each affiliated fund with respect to initial co-investment
transactions, including that the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the affiliated fund and its
stockholders and do not involve overreaching in respect of the affiliated fund or its stockholders on the part of any of the other participants in the proposed
transaction. Under such circumstances, the independent directors may face conflicts of interest when making these determinations on behalf of us, HPCI
and OCCI.
Members of the Advisor Investment Committees, OFS Advisor or its affiliates may, from time to time, possess material non-public information,
limiting our investment discretion.
OFS senior professionals and members of the Advisor Investment Committees may serve as directors of, or in a similar capacity with, companies in
which we invest, the securities of which are purchased or sold on our behalf. In the event that material nonpublic information is obtained with respect to
such companies, or we become subject to trading restrictions under the internal trading policies of those companies or as a result of applicable law or
regulations, we could be prohibited for a period of time from purchasing or selling the securities of such companies, and this prohibition may have an
adverse effect on us and our stockholders.
The valuation process for certain of our portfolio holdings may create a conflict of interest.
Many of our portfolio investments are made in the form of securities that are not publicly traded. As a result, our Board will determine the fair value of
these securities in good faith, and, as a result, there may be uncertainty as to the value of our portfolio investments. In connection with that determination,
investment professionals from OFS Advisor may provide our Board with portfolio company valuations based upon the most recent portfolio company
financial statements available and projected financial results of each portfolio company. In addition, the members of our Board who are not independent
directors have a substantial indirect pecuniary interest in OFS Advisor. The participation of the OFS Advisor’s investment professionals in our valuation
process, and the indirect pecuniary interest in OFS Advisor by those members of our Board, could result in a conflict of interest since OFS Advisor’s
management fee is based, in part, on our total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and
including assets owned by any consolidated entity).
We may have additional conflicts related to other arrangements with OFS Advisor or its affiliates.
We have entered into a license agreement with OFSAM under which OFSAM has granted us a non-exclusive, royalty-free license to use the name
“OFS.” See “Item 1. Business—License Agreement.” In addition, we rent office space from a subsidiary of OFSAM and pay to that subsidiary our
allocable portion of overhead and other expenses incurred in performing its obligations under the Administration Agreement, such as rent and our allocable
portion of the cost of our officers, including our chief executive officer, chief financial officer, chief compliance officer and chief accounting officer. This
will create conflicts of interest that our Board must monitor.
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The Investment Advisory Agreement with OFS Advisor and the Administration Agreement with OFS Services were not negotiated on an arm’s
length basis and may not be as favorable to us as if they had been negotiated with an unaffiliated third party.
The Investment Advisory Agreement and the Administration Agreement were negotiated between related parties. Consequently, their terms, including
fees payable to OFS Advisor, may not be as favorable to us as if they had been negotiated with an unaffiliated third party. In addition, we could choose not
to enforce, or to enforce less vigorously, our rights and remedies under these agreements because of our desire to maintain our ongoing relationship with
OFS Advisor, OFS Services and their respective affiliates. Any such decision, however, would breach our fiduciary obligations to our stockholders.
Our ability to enter into transactions with our affiliates is restricted, which may limit the scope of investments available to us.
BDCs generally are prohibited under the 1940 Act from knowingly participating in certain transactions with their affiliates without the prior approval of
their independent directors and, in some cases, of the SEC. Those transactions include purchases and sales, and so-called “joint” transactions, in which a
BDC and one or more of its affiliates engage in certain types of profit-making activities. Any person that owns, directly or indirectly, five percent or more
of a BDC’s outstanding voting securities will be considered an affiliate of the BDC for purposes of the 1940 Act, and a BDC generally is prohibited from
engaging in purchases or sales of assets or joint transactions with such affiliates, absent the prior approval of the BDC’s independent directors.
Additionally, without the approval of the SEC, a BDC is prohibited from engaging in purchases or sales of assets or joint transactions with the BDC’s
officers, directors, and employees, and advisor (and its affiliates).
BDCs may, however, invest alongside certain related parties or their respective other clients in certain circumstances where doing so is consistent with
current law and SEC staff interpretations. For example, a BDC may invest alongside such accounts consistent with guidance promulgated by the SEC staff
permitting us and such other accounts to purchase interests in a single class of privately placed securities so long as certain conditions are met, including
that the BDC’s advisor, acting on the BDC’s behalf and on behalf of other clients, negotiates no term other than price. Co-investment with such other
accounts is not permitted or appropriate under this guidance when there is an opportunity to invest in different securities of the same issuer or where the
different investments could be expected to result in a conflict between the BDC’s interests and those of other accounts.
The 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting
the BDC to do so. On August 4, 2020, we received exemptive relief from the SEC to permit us to co-invest in portfolio companies with Affiliated Funds
subject to compliance with the Order. The Order superseded a previous order we received on October 12, 2016 and provides us with greater flexibility to
enter into co-investment transactions with Affiliated Funds. Pursuant to the Order, we are generally permitted to co-invest with Affiliated Funds if a
“required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment
transaction, including that (1) the terms of the transactions, including the consideration to be paid, are reasonable and fair to us and our stockholders and do
not involve overreaching in respect of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of
our stockholders and is consistent with our investment objective and strategies.
In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs, through December 31, 2020, we were
permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates, even if such other funds
had not previously invested in such existing portfolio company. Without this order, affiliated funds would not be able to participate in such co-investments
with us unless the affiliated funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the
conditional exemptive order expired on December 31, 2020, the SEC’s Division of Investment Management has indicated that until March 31, 2022, it will
not recommend enforcement action, to the extent that any BDC with an existing co-investment order continues to engage in certain transactions described
in the conditional exemptive order, pursuant to the same terms and conditions described therein.
When we invest alongside clients of OFSAM and its affiliates or their respective other clients, OFS Advisor will, to the extent consistent with
applicable law, regulatory guidance, or the Order, allocate investment opportunities in accordance with its allocation policy. Under this allocation policy, if
two or more investment vehicles with similar or overlapping investment strategies are in their investment periods, an available opportunity will be allocated
based on the provisions governing allocations of such investment opportunities in the relevant organizational, offering or similar documents, if any, for
such investment vehicles. In the absence of any such provisions, OFS Advisor will consider the following factors and the weight that should be given with
respect to each of these factors:
•
investment guidelines and/or restrictions, if any, set forth in the applicable organizational, offering or similar documents for the investment
vehicles;
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the status of tax restrictions and tests and other regulatory restrictions and tests;
risk and return profile of the investment vehicles;
suitability/priority of a particular investment for the investment vehicles;
if applicable, the targeted position size of the investment for the investment vehicles
level of available cash for investment with respect to the investment vehicles;
total amount of funds committed to the investment vehicles; and
the age of the investment vehicles and the remaining term of their respective investment periods, if any.
When not relying on the Order, priority as to opportunities will generally be given to clients that are in their “ramp-up” period, or the period during
which the account has yet to reach sufficient scale such that its investment income covers its operating expenses, over the accounts that are outside their
ramp-up period but still within their investment or re-investment periods. However, application of one or more of the factors listed above, or other factors
determined to be relevant or appropriate, may result in the allocation of an investment opportunity to a fund no longer in its ramp-up period over a fund that
is still within its ramp-up period.
In situations where co-investment with other accounts is not permitted or appropriate, OFS Advisor will need to decide which account will proceed with
the investment. The decision by OFS Advisor to allocate an opportunity to another entity could cause us to forego an investment opportunity that we
otherwise would have made. These restrictions, and similar restrictions that limit our ability to transact business with our officers or directors or their
affiliates, may limit the scope of investment opportunities that would otherwise be available to us.
Our base management fee may induce OFS Advisor to cause us to incur leverage.
Our base management fee is payable based upon our total assets, other than cash and cash equivalents but including assets purchased with borrowed
amounts and including assets owned by any consolidated entity. This fee structure may encourage OFS Advisor to cause us to borrow money to finance
additional investments. Under certain circumstances, the use of borrowed money may increase the likelihood of default, which would disfavor holders of
our common stock. Given the subjective nature of the investment decisions made by OFS Advisor on our behalf, our Board may not be able to monitor this
potential conflict of interest effectively.
Our incentive fee may induce OFS Advisor to make certain investments, including speculative investments.
The incentive fee payable by us to OFS Advisor may create an incentive for OFS Advisor to make investments on our behalf that are riskier or more
speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to OFS Advisor is
determined may encourage OFS Advisor to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may
increase the likelihood of default, which would disfavor our stockholders.
OFS Advisor receives an incentive fee based, in part, upon net capital gains realized on our investments. Unlike that portion of the incentive fee based on
income, there is no hurdle rate applicable to the portion of the incentive fee based on net capital gains. As a result, OFS Advisor may have a tendency to
invest more capital in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our
investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic
downturns.
We may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds, and, to the extent
we so invest, will bear our ratable share of any such investment company’s expenses, including management and performance fees. We remain obligated to
pay management and incentive fees to OFS Advisor with respect to the assets invested in the securities and instruments of other investment companies.
With respect to each of these investments, each of our stockholders will bear his or her share of the management and incentive fee of OFS Advisor as well
as indirectly bearing the management and performance fees and other expenses of any investment companies in which we invest.
Our Board is charged with protecting our interests by monitoring how OFS Advisor addresses these and other conflicts of interests associated with its
management services and compensation. While our Board is not expected to review or approve each borrowing or incurrence of leverage, our independent
directors will periodically review OFS Advisor’s services and fees. In connection with these reviews, our independent directors will consider whether our
fees and expenses (including those related to leverage) remain appropriate.
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Our incentive fee structure may create incentives for OFS Advisor that are not fully aligned with the interests of our stockholders.
In the course of our investing activities, we will pay management and incentive fees to OFS Advisor. The base management fee is based on our total
assets (other than cash and cash equivalents and the intangible assets resulting from the SBIC Acquisition, but including assets purchased with borrowed
amounts and including assets owned by any consolidated entity). As a result, investors in our common stock will invest on a “gross” basis and receive
distributions on a “net” basis after expenses, resulting in a lower rate of return than one might achieve through direct investments. Because these fees are
based on our total assets, other than cash and cash equivalents but including assets purchased with borrowed amounts and including any assets owned by
any consolidated entity, OFS Advisor will benefit when we incur debt or use leverage. Our Board is charged with protecting our interests by monitoring
how OFS Advisor addresses these and other conflicts of interests associated with its management services and compensation. While our Board is not
expected to review or approve each borrowing or incurrence of leverage, our independent directors will periodically review OFS Advisor’s services and
fees as well as its portfolio management decisions and portfolio performance. In connection with these reviews, our independent directors will consider
whether our fees and expenses (including those related to leverage) remain appropriate. As a result of this arrangement, OFS Advisor or its affiliates may
from time to time have interests that differ from those of our stockholders, giving rise to a conflict.
We may pay an incentive fee on income we do not receive in cash.
The part of the incentive fee payable to OFS Advisor that relates to our pre-incentive fee net investment income is computed and paid on income that
may include interest income that has been accrued but not yet received in cash. This fee structure may be considered to involve a conflict of interest for
OFS Advisor to the extent that it may encourage OFS Advisor to favor debt financings that provide for deferred interest, rather than current cash payments
of interest. OFS Advisor may have an incentive to invest in deferred interest securities in circumstances where it would not have done so but for the
opportunity to continue to earn the incentive fee even when the issuers of the deferred interest securities would not be able to make actual cash payments to
us on such securities. This risk could be increased because OFS Advisor is not obligated to reimburse us for any incentive fees received even if we
subsequently incur losses or never receive in cash the deferred income that was previously accrued.
OFS Advisor’s liability is limited under the Investment Advisory Agreement, and we have agreed to indemnify OFS Advisor against certain
liabilities, which may lead OFS Advisor to act in a riskier manner on our behalf than it would when acting for its own account.
Under the Investment Advisory Agreement, OFS Advisor will not assume any responsibility to us other than to render the services called for under that
agreement, and it will not be responsible for any action of our Board in following or declining to follow OFS Advisor’s advice or recommendations. Under
the terms of the Investment Advisory Agreement, OFS Advisor and its affiliates’ respective officers, directors, members, managers, stockholders and
employees will not be liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions
performed in accordance with and pursuant to the Investment Advisory Agreement, except those resulting from acts constituting gross negligence, willful
misconduct, bad faith or reckless disregard of such person’s duties under the Investment Advisory Agreement. In addition, we have agreed to indemnify
OFS Advisor and its affiliates’ respective officers, directors, members, managers, stockholders and employees from and against any claims or liabilities,
including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken
or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement, except where attributable to gross negligence, willful
misconduct, bad faith or reckless disregard of such person’s duties under the Investment Advisory Agreement. These protections may lead OFS Advisor to
act in a riskier manner when acting on our behalf than it would when acting for its own account.
OFS Advisor can resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our
operations that could adversely affect our financial condition, business and results of operations.
OFS Advisor has the right, under the Investment Advisory Agreement, to resign at any time upon not less than 60 days’ written notice, whether we have
found a replacement or not. If OFS Advisor resigns, we may not be able to find a new investment advisor or hire internal management with similar
expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our
operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are
likely to be adversely affected and the value of our shares may decline. In addition, the coordination of our internal management and investment activities
is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by the
OFS Advisor and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and
their lack of familiarity with our investment objectives
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may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations.
OFS Services can resign from its role as our Administrator under the Administration Agreement, and we may not be able to find a suitable
replacement, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.
OFS Services has the right to resign under the Administration Agreement, whether we have found a replacement or not. If OFS Services resigns, we may
not be able to find a new administrator or hire internal management with similar expertise and ability to provide the same or equivalent services on
acceptable terms, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and
results of operations as well as our ability to pay distributions are likely to be adversely affected and the value of our shares may decline. In addition, the
coordination of our internal management and administrative activities is likely to suffer if we are unable to identify and reach an agreement with a service
provider or individuals with the expertise possessed by OFS Services. Even if we are able to retain a comparable service provider or individuals to perform
such services, whether internal or external, their integration into our business and lack of familiarity with our investment objectives may result in additional
costs and time delays that may adversely affect our financial condition, business and results of operations.
Risks Related to BDCs
Regulations governing our operation as a BDC affect our ability to and the way in which we raise additional capital. As a BDC, we will need to
raise additional capital, which will expose us to risks, including the typical risks associated with leverage.
We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as “senior
securities,” up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, as modified by the SBCAA, we are permitted as a
BDC to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 150% of gross assets less all
liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets decline, we may be unable
to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of
our indebtedness at a time when such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for
distributions to our common stockholders. If we issue senior securities, we will be exposed to typical risks associated with leverage, including an increased
risk of loss.
On May 3, 2018, the Board, including a "required majority" (as such item is determined in section 57(o) of the 1940 Act) of the Board, approved
the application of a reduced 150% asset coverage ratio to us and, as a result, the reduced asset coverage ratio applicable to us was decreased from 200% to
150% effective May 3, 2019. See "Item 1A. Risk Factors--Risks Related to our Business and Structure--Because we have received the approval of our
Board, we are subject to 150% Asset Coverage beginning on May 3, 2019."
As of December 31, 2020, we had $315.2 million of debt outstanding. Our ability to incur additional debt and remain in compliance with the asset
coverage test will be limited. We may seek an additional credit facility to finance investments or for working capital requirements. There can be no
assurance that we will be able to obtain such financing on favorable terms or at all. We have received an exemptive order from the SEC to permit us to
exclude the debt of SBIC I LP guaranteed by the SBA from our definition of senior securities in our statutory asset coverage ratio under the 1940 Act.
If we issue preferred stock, the preferred stock would rank “senior” to common stock in our capital structure, preferred stockholders would have separate
voting rights on certain matters and might have other rights, preferences or privileges more favorable than those of our common stockholders, and the
issuance of preferred stock could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium
price for holders of our common stock or otherwise be in our stockholders’ best interest. Holders of our common stock will directly or indirectly bear all of
the costs associated with offering and servicing any preferred stock that we issue. In addition, any interests of preferred stockholders may not necessarily
align with the interests of holders of our common stock and the rights of holders of shares of preferred stock to receive dividends would be senior to those
of holders of shares of our common stock. We are not generally able to issue and sell our common stock at a price below net asset value per share. We may,
however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value per share of
our common stock if our Board determines that such sale is in the best interests of us and our stockholders, and if our stockholders approve any such sale.
In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board, closely
approximates the market value of such securities (less any distributing commission or discount). On June 23, 2020, our stockholders approved a proposal
that authorizes us to issue shares of our common stock at a price below our current net asset value, subject to certain limitations, for up to 12 months from
such approval. If we raise additional funds by issuing common stock or senior securities convertible into, or exchangeable for, our
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common stock, then the percentage ownership of our stockholders at that time will decrease, and our stockholders might experience dilution.
Our ability to invest in public companies may be limited in certain circumstances.
To maintain our status as a BDC, we are not permitted to 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 assets, as defined by the 1940 Act, are qualifying assets (with certain limited exceptions). Subject to certain
exceptions for follow-on investments and distressed companies, an investment in an issuer that has outstanding securities listed on a national securities
exchange may be treated as a qualifying asset only if such issuer has a common equity market capitalization that is less than $250 million at the time of
such investment and meets the other specified requirements.
If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to continue to qualify as a BDC or be precluded from
investing according to our current business strategy.
As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of
our assets, as defined by the 1940 Act, are qualifying assets.
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 are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If a sufficient portion of
our assets are not 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) or could require us to dispose of investments at inappropriate times in order to come into compliance with the 1940 Act. If we need to dispose of
such investments quickly, it could be difficult to dispose of such investments on favorable terms. We may not be able to find a buyer for such investments
and, even if we do find a buyer, we may have to sell the investments at a substantial loss. Any such outcomes would have a material adverse effect on our
business, financial condition and results of operations.
If we do not maintain our status as a BDC, we would be subject to regulation as a registered closed-end investment company under the 1940 Act. As a
registered closed-end fund, we would be subject to substantially more regulatory restrictions under the 1940 Act which would significantly decrease our
operating flexibility.
Risks Related to Our Investments
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
Many of our portfolio companies are susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods.
Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic
conditions may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions
could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our
funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from
increasing our investments and harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially,
termination of its loans and foreclosure on its assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio company’s
ability to meet its obligations under the debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to
negotiate new terms with a defaulting portfolio company. In addition, lenders in certain cases can be subject to lender liability claims for actions taken by
them when they become too involved in the borrower’s business or exercise control over a borrower. It is possible that we could become subject to a lender
liability claim, including as a result of actions taken if we render significant managerial assistance to the borrower. Furthermore, if one of our portfolio
companies were to file for bankruptcy protection, even though we may have structured our investment as senior secured debt, depending on the facts and
circumstances, including the extent to which we provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our
debt holding and subordinate all or a portion of our claim to claims of other creditors.
Our investments in the debt instruments of leveraged portfolio companies may be risky and, due to the significant volatility of such companies, we
could lose all or part of our investment in bankruptcy proceedings or otherwise.
Investment in leveraged companies involves a number of significant risks. Leveraged companies in which we invest may have limited financial
resources and may be unable to meet their obligations under their debt securities that we hold due to the significant volatility of such companies. Negative
developments may be accompanied by deterioration of the value of any collateral and a reduction in the likelihood of our realizing any guarantees that we
may have obtained in connection with our
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investment. Such developments may ultimately result in the leveraged companies in which we invest entering into bankruptcy proceedings, which have a
number of inherent risks. Many events in a bankruptcy proceeding are the product of contested matters and adversary proceedings and are beyond the
control of the creditors. A bankruptcy filing by an issuer may adversely and permanently affect the issuer. If the proceeding is converted to a liquidation,
the value of the issuer may not equal the liquidation value that was believed to exist at the time of the investment. The duration of a bankruptcy proceeding
is also difficult to predict, and a creditor’s return on investment can be adversely affected by delays until the plan of reorganization or liquidation ultimately
becomes effective. The administrative costs in connection with a bankruptcy proceeding are frequently high and would be paid out of the debtor’s estate
prior to any return to creditors. Because the standards for classification of claims under bankruptcy law are vague, our influence with respect to the class of
securities or other obligations we own may be lost by increases in the number and amount of claims in the same class or by different classification and
treatment. In the early stages of the bankruptcy process, it is often difficult to estimate the extent of, or even to identify, any contingent claims that might be
made. In addition, certain claims that have priority by law (for example, claims for taxes) may be substantial. In addition, since our mezzanine loans are
generally subordinated to senior loans and are generally unsecured, other creditors may rank senior to us in the event of a bankruptcy proceeding.
Our investments in debt instruments may include “covenant-lite” loans. Covenants are contractual restrictions that lenders place on companies to
limit the corporate actions a company may pursue. Generally, the loans in which we expect to invest will have financial maintenance covenants, which are
used to proactively address materially adverse changes in a portfolio company’s financial performance. However, to a lesser extent, we may invest in
“covenant-lite” loans. We use the term “covenant-lite” to refer generally to loans that do not have a complete set of financial maintenance covenants.
Generally, “covenant-lite” loans provide borrower companies more freedom to negatively impact lenders because their covenants are incurrence-based,
which means they are only tested and can only be breached following an affirmative action of the borrower, rather than by a deterioration in the borrower’s
financial condition. Accordingly, to the extent we invest in “covenant-lite” loans, we may have fewer rights against a borrower and may have a greater risk
of loss on such investments as compared to investments in or exposure to loans with financial maintenance covenants.
The documents governing the loans underlying our CLO investments may allow for "priming transactions".
The documents governing the loans underlying our CLO investments may allow for "priming transactions," where majority lenders or debtors can
amend the documents to the detriment of other lenders, amend the documents in order to move collateral, or amend the documents in order to facilitate
capital outflow to other parties/subsidiaries in a capital structure, any of which may adversely affect the rights and security priority with respect to such
loans.
Our investments in private and middle-market portfolio companies are generally considered lower credit quality obligations, are risky, and we
could lose all or part of our investment.
Investment in private and middle-market companies involves a number of significant risks. Generally, little public information exists about these
companies, and we rely on the ability of OFS Advisor’s investment professionals to obtain adequate information to evaluate the potential returns from
investing in these companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment
decision, and we may lose money on our investments. Middle-market companies may have limited financial resources and may be unable to meet their
obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the
likelihood of our realizing any guarantees we may have obtained in connection with our investment. Such companies typically have shorter operating
histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and
market conditions, as well as general economic downturns.
Middle-market companies are more likely to be considered lower grade investments, commonly called “junk bonds,” which are either rated below
investment grade by one or more nationally-recognized statistical rating agencies at the time of investment, or may be unrated but determined by the OFS
Advisor to be of comparable quality. Lower grade securities or comparable unrated securities are considered predominantly speculative regarding the
issuer’s ability to pay interest and principal, and are susceptible to default or decline in market value due to adverse economic and business developments.
The market values for lower grade debt tend to be very volatile and are less liquid than investment grade securities. For these reasons, an investment in our
company is subject to the following specific risks: increased price sensitivity to a deteriorating economic environment; greater risk of loss due to default or
declining credit quality; adverse company specific events are more likely to render the issuer unable to make interest and/or principal payments; and if a
negative perception of the lower grade debt market develops, the price and liquidity of lower grade securities may be depressed. This negative perception
could last for a significant period of time.
Additionally, middle-market companies are more likely to depend on the management talents and efforts of a small group of persons. Therefore, the
death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on
us. Middle-market companies also may be parties to
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litigation and may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence. In addition, our executive officers,
directors and OFS Advisor may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio
companies.
Investments in equity securities involve a substantial degree of risk.
We have purchased, and may purchase in the future, common stock and other equity securities, including warrants, in various portfolio companies.
Although equity securities historically have generated higher average total returns than debt securities over the long term, equity securities may experience
more volatility in those returns than debt securities. The equity securities we acquire may fail to appreciate, decline in value or lose all value, and our
ability to recover our investment will depend on our portfolio company's success. Investments in equity securities involve a number of significant risks,
including the risk of further dilution in the event the portfolio company issues additional securities. Investments in preferred securities involve special risks,
such as the risk of deferred distributions, illiquidity and limited voting rights.
Our equity ownership in a portfolio company may represent a control investment. Our ability to exit a control investment in a timely manner could
result in a realized loss on the investment.
If we obtain a control investment in a portfolio company, our ability to divest ourselves from a debt or equity investment could be restricted due to
illiquidity in a private stock, limited trading volume on a public company’s stock, inside information on a company’s performance, insider blackout periods,
or other factors that could prohibit us from disposing of the investment as we would if it were not a control investment. Additionally, we may choose not to
take certain actions to protect a debt investment in a control investment portfolio company. As a result, we could experience a decrease in the value of our
portfolio company holdings and potentially incur a realized loss on the investment.
Our investments in Structured Finance Notes carry additional risks to the risks associated with investing in private debt.
In addition to the general risks associated with debt securities and structured products discussed herein, CLOs carry additional risks, including, but not
limited to (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the
collateral may decline in value or default; (iii) the possibility that the investments in CLOs are subordinate to other classes or tranches thereof, (iv) the
potential of spread compression in the underlying loans of the CLO, which could reduce credit enhancement in the CLOs and (v) the complex structure of
the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results. CLO equity
securities that we may acquire are subordinated to more senior tranches of CLO debt. CLO equity securities are subject to increased risks of default relative
to the holders of superior priority interests in the same securities. In addition, at the time of issuance, CLO equity securities are under-collateralized in that
the liabilities of a CLO at inception exceed its total assets. When we invest in CLOs, we may be in a first loss or subordinated position with respect to
realized losses on the assets of the CLOs in which it is invested. We may recognize phantom taxable income from our investments in the subordinated
tranches of CLOs.
Between the closing date and the effective date of a CLO, the CLO collateral manager will generally expect to purchase additional collateral obligations
for the CLO. During this period, the price and availability of these collateral obligations may be adversely affected by a number of market factors,
including price volatility and availability of investments suitable for the CLO, which could hamper the ability of the collateral manager to acquire a
portfolio of collateral obligations that will satisfy specified concentration limitations and allow the CLO to reach the initial par amount of collateral prior to
the effective date. An inability or delay in reaching the target initial par amount of collateral may adversely affect the timing and amount of interest or
principal payments received by the holders of the CLO debt securities and distributions of the CLO on equity securities and could result in early
redemptions which may cause CLO debt and equity investors to receive less than the face value of their investment.
In addition, the portfolios of certain CLOs in which we may invest may contain “covenant-lite” loans. Accordingly, to the extent we are exposed to
“covenant-lite” loans, we may have a greater risk of loss on such investments as compared to investments in or exposure to loans with financial
maintenance covenants.The failure by a CLO in which we invest to satisfy financial covenants, including with respect to adequate collateralization and/or
interest coverage tests, could lead to a reduction in the payments we receive from the CLO. In the event that a CLO fails certain tests, holders of CLO
senior debt may be entitled to additional payments that would, in turn, reduce the payments we would otherwise be entitled to receive. Separately, we may
incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial
covenants, with a defaulting CLO or any other investment we may make. If any of these occur, it could adversely affect our operating results and cash
flows.
Our CLO investments will be exposed to leveraged credit risk. If a CLO does not meet certain minimum collateral value ratios and/or interest coverage
ratios, primarily due to senior secured loan defaults, then cash flow that otherwise would have been available to pay us distributions may instead be used to
redeem any senior notes or to purchase additional senior secured loans, until the ratios again exceed the minimum required levels or any senior notes are
repaid in full.
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We may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient.
We will at times take a security interest in the available assets of our portfolio companies, including the equity interests of their subsidiaries and, in some
cases, the equity interests of our portfolio companies held by their stockholders. In the event of a default by a portfolio company on a secured loan, we will
only have recourse to the assets collateralizing the loan. There is a risk that the collateral securing our loans may decrease in value over time, may be
difficult to sell in a timely manner, may be difficult to appraise, and may fluctuate in value based upon the success or deterioration of the business and
market conditions, including as a result of the inability of a portfolio company to raise additional capital. Additionally, in the case of certain of our
investments, we do not have a first lien position on the collateral and may not receive the full value of the collateral upon liquidation. If the underlying
collateral value is less than the loan amount, we will suffer a loss.
In the event of bankruptcy of a portfolio company, we may not have full recourse to its assets in order to satisfy our loan, or our loan may be
subject to equitable subordination. In addition, certain of our loans are subordinate to other debt of the portfolio company. If a portfolio company defaults
on our loan or on debt senior to our loan, or in the event of a portfolio company bankruptcy, our loan will be satisfied only after the senior debt receives
payment. Where debt senior to our loan exists, the presence of inter-creditor arrangements may limit our ability to amend our loan documents, assign our
loans, accept prepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings relating to the
portfolio company. Bankruptcy and portfolio company litigation can significantly increase collection losses and the time needed for us to acquire the
underlying collateral in the event of a default, during which time the collateral may decline in value, causing us to suffer losses.
Borrowers of Broadly Syndicated Loans may be permitted to designate unrestricted subsidiaries under the terms of their financing agreements, which
would exclude such unrestricted subsidiaries from restrictive covenants under the financing agreement with the borrower. Without restriction under the
financing agreement, the borrower could take various actions with respect to the unrestricted subsidiary including, among other things, incur debt, grant
security on its assets, sell assets, pay dividends or distribute shares of the unrestricted subsidiary to the borrower’s shareholders. Any of these actions could
increase the amount of leverage that the borrower is able to incur and increase the risk involved in our investments in Broadly Syndicated Loans
accordingly.
If the value of collateral underlying our loan declines or interest rates increase during the term of our loan, a portfolio company may not be able to obtain
the necessary funds to repay our loan at maturity through refinancing. Decreasing collateral value and/or increasing interest rates may hinder a portfolio
company’s ability to refinance our loan because the underlying collateral cannot satisfy the debt service coverage requirements necessary to obtain new
financing. If a borrower is unable to repay our loan at maturity, we could suffer a loss which may adversely impact our financial performance.
The lack of liquidity in our investments may adversely affect our business.
All of our assets are presently invested in illiquid securities, and a substantial portion of our investments in leveraged companies is subject to legal and
other restrictions on resale or is otherwise less liquid than more broadly traded public securities. The illiquidity of these investments may make it difficult
for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize
significantly less than the value at which we have previously recorded these investments. We may also face other restrictions on our ability to liquidate an
investment in a portfolio company to the extent that we, OFS Advisor, OFSAM or any of its other affiliates have material nonpublic information regarding
such portfolio company.
Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of our portfolio investments, reducing our net asset
value through increased net unrealized depreciation.
As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by
our Board. As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our
investments:
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a comparison of the portfolio company’s securities to publicly traded securities;
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
changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the
future and other relevant factors.
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When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we will use the pricing indicated by the external
event to corroborate our valuation. We will record decreases in the market values or fair values of our investments as unrealized depreciation. Declines in
prices and liquidity in the corporate debt markets may result in significant net unrealized depreciation in our portfolio. The effect of all of these factors on
our portfolio may reduce our net asset value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur
substantial realized losses and may suffer additional unrealized losses in future periods, which could have a material adverse effect on our business,
financial condition and results of operations.
We are a non-diversified management investment company within the meaning of the 1940 Act, and therefore we are not limited by the 1940 Act
with respect to the proportion of our assets that may be invested in securities of a single issuer.
We are classified as a non-diversified management investment company within the meaning of the 1940 Act, which means that we are not limited by the
1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. To the extent that we assume large positions in the
securities of a small number of issuers, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of
changes in the financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory
occurrence than a diversified investment company. Beyond our asset diversification requirements as a RIC under the Code, we do not have fixed guidelines
for diversification, and our investments could be concentrated in relatively few portfolio companies.
Our portfolio may be concentrated in a limited number of portfolio companies and industries, which will subject us to a risk of significant loss if
any of these companies defaults on its obligations under any of its debt instruments or if there is a downturn in a particular industry.
Although we believe our portfolio is well-diversified across companies and industries, our portfolio is, and may in the future be, concentrated in a limited
number of portfolio companies and industries. Beyond the asset diversification requirements associated with our qualification as a RIC under the Code, we
do not have fixed guidelines for diversification. As a result, the aggregate returns we realize may be significantly adversely affected if a small number of
investments perform poorly or if we need to write down the value of any one investment. Additionally, while we are not targeting any specific industries,
our investments may be concentrated in relatively few industries. As a result, a downturn in any particular industry in which we are invested could also
significantly impact the aggregate returns we realize.
Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.
Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in
seeking to:
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increase or maintain in whole or in part our position as a creditor or equity ownership percentage in a portfolio company;
exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or
preserve or enhance the value of our investment.
We have discretion to make follow-on investments, subject to the availability of capital resources. Failure on our part to make follow-on
investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed
opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may
elect not to make a follow-on investment because we may not want to increase our level of risk, because we prefer other opportunities or because we are
inhibited by compliance with BDC requirements or the desire to maintain our RIC status. Our ability to make follow-on investments may also be limited by
OFS Advisor’s allocation policy.
Because we generally do not hold controlling equity interests in our portfolio companies, we may not be able to exercise control over our portfolio
companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments.
We generally do not hold controlling equity positions in our portfolio companies. For portfolio companies in which we do not hold a controlling equity
interest, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and that the management and/or
stockholders of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity of the debt and
equity investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the
actions of a portfolio company and may therefore suffer a decrease in the value of our investments.
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Defaults by our portfolio companies will harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially,
termination of its loans and foreclosure on its assets. This could trigger cross-defaults under other agreements and jeopardize such portfolio company’s
ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default
or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company.
Our investments in Structured Finance Notes are more likely to suffer a loss of all or a portion of their value in the event of a default.
From time to time, we invest in Structured Finance Notes that comprise the equity tranche of CLOs, which are junior in priority of payment and
are subject to certain payment restrictions generally set forth in an indenture governing such investments. In addition, Structured Finance Notes generally
do not benefit from any creditors’ rights or ability to exercise remedies under the indenture governing such investments. Structured Finance Notes are not
guaranteed by another party and are subject to greater risk than the secured notes issued by the CLO. CLOs are typically highly levered, utilizing up to
approximately 9-13 times leverage, and therefore Structured Finance Notes are subject to a risk of total loss. There can be no assurance that distributions on
the assets held by the CLO will be sufficient to make any distributions or that the yield on the Structured Finance Notes will meet our expectations.
CLOs generally may make payments on Structured Finance Notes only to the extent permitted by the payment priority provisions of an indenture
governing the notes issued by the CLO. CLO indentures generally provide that principal payments on Structured Finance Notes may not be made on any
payment date unless all amounts owing under secured notes are paid in full. In addition, if a CLO does not meet the asset coverage tests or the interest
coverage test set forth in the indenture governing the Structured Finance Notes issued by the CLO, cash would be diverted from the Structured Finance
Notes to first pay the secured notes in amounts sufficient to cause such tests to be satisfied.
We will have no influence on management of underlying investments managed by non-affiliated third-party CLO collateral managers.
We are not responsible for, and have no influence over, the asset management of the portfolios underlying the Structured Finance Notes we hold as
those portfolios are managed by non-affiliated third-party CLO collateral managers. Similarly, we are not responsible for and have no influence over the
day-to-day management, administration or any other aspect of the issuers of the CLOs. As a result, the values of the portfolios underlying our Structured
Finance Notes could decrease as a result of decisions made by third-party CLO collateral managers.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
We have invested a substantial portion of our capital in senior secured, unitranche, second-lien and mezzanine loans issued by our portfolio companies.
The portfolio companies may be permitted to incur, other debt that ranks equally with, or senior to, the debt securities in which we invest. By their terms,
such debt instruments may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to
receive payments in respect of the debt securities in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy
of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive
payment in full before we receive any distribution in respect of our investment. After repaying senior creditors, the portfolio company may not have any
remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt securities in which we invest, we would have to share
any distributions on an equal and ratable basis with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization
or bankruptcy of the relevant portfolio company.
Additionally, certain loans that we make to portfolio companies may be secured on a second-priority basis by the same collateral securing first-priority
debt of such companies. The senior-secured liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and
may secure certain other future debt that may be permitted to be incurred by the portfolio company under the agreements governing the loans. The holders
of obligations secured by first-priority liens on the collateral will generally control the liquidation of, and be entitled to receive proceeds from, any
realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on
market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of all of the
collateral would be sufficient to satisfy the loan obligations secured by the second-priority liens after payment in full of all obligations secured by the first-
priority liens on the collateral. If such proceeds were not sufficient to repay amounts outstanding under the loan obligations secured by the second-priority
liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, would only have an unsecured claim against the portfolio company’s
remaining assets, if any.
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The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with more senior debt outstanding may also
be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of such senior debt. Under a typical
intercreditor agreement, at any time that obligations that have the benefit of the first-priority liens are outstanding, any of the following actions that may be
taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first-priority liens:
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the ability to cause the commencement of enforcement proceedings against the collateral;
the ability to control the conduct of such proceedings;
the approval of amendments to collateral documents;
releases of liens on the collateral; and
• waivers of past defaults under collateral documents.
We may not have the ability to control or direct such actions, even if our rights are adversely affected.
We may also make unsecured loans to portfolio companies, meaning that such loans will not benefit from any interest in collateral of such companies.
Liens on such portfolio companies’ collateral, if any, will secure the portfolio company’s obligations under its outstanding secured debt and may secure
certain future debt that is permitted to be incurred by the portfolio company under its secured loan agreements. The holders of obligations secured by such
liens will generally control the liquidation of, and be entitled to receive proceeds from, any realization of such collateral to repay their obligations in full
before us. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and
other factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy our unsecured loan obligations
after payment in full of all secured loan obligations. If such proceeds were not sufficient to repay the outstanding secured loan obligations, then our
unsecured claims would rank equally with the unpaid portion of such secured creditors’ claims against the portfolio company’s remaining assets, if any.
If we make subordinated investments, the obligors or the portfolio companies may not generate sufficient cash flow to service their debt obligations
to us.
We make subordinated investments that rank below other obligations of the obligor in right of payment. Subordinated investments are subject to greater
risk of default than senior obligations as a result of adverse changes in the financial condition of the obligor or in general economic conditions. If we make
a subordinated investment in a portfolio company, the portfolio company may be highly leveraged, and its relatively high debt-to-equity ratio may create
increased risks that its operations might not generate sufficient cash flow to service all of its debt obligations.
The disposition of our investments may result in contingent liabilities.
A significant portion of our investments involve private securities. In connection with the disposition of an investment in private securities, we may be
required to make representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of a
business. We may also be required to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate, or
with respect to potential liabilities. These arrangements may result in contingent liabilities that ultimately result in funding obligations that we must satisfy
through our return of distributions previously made to us.
We may be subject to additional risks if we engage in hedging transactions and/or invest in foreign securities.
The 1940 Act generally requires that 70% of our investments be in issuers each of whom is organized under the laws of, and has its principal place of
business in, any state of the United States, the District of Columbia, Puerto Rico, the Virgin Islands or any other possession of the United States. Our
investment strategy does not presently contemplate investments in securities of non-U.S. companies. We expect that these investments would focus on the
same debt investments that we make in U.S. middle-market companies and accordingly would be complementary to our overall strategy and enhance the
diversity of our holdings. Investing in securities of emerging market issuers involves many risks, including economic, social, political, financial, tax and
security conditions in the emerging market, potential inflationary economic environments, regulation by foreign governments, different accounting
standards and political uncertainties. Economic, social, political, financial, tax and security conditions also could negatively affect the value of emerging
market companies. These factors could include changes in the emerging market government’s economic and fiscal policies, the possible imposition of, or
changes in, currency exchange laws or other laws or restrictions applicable to the emerging market companies or investments in their securities and the
possibility of fluctuations in the rate of exchange between currencies.
Engaging in either hedging transactions or investing in foreign securities would entail additional risks to our stockholders. We could, for example, use
instruments such as interest rate swaps, caps, collars and floors and, if we were to invest in foreign securities, we could use instruments such as forward
contracts or currency options and borrow under a credit
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facility in currencies selected to minimize our foreign currency exposure. In each such case, we generally would seek to hedge against fluctuations of the
relative values of our portfolio positions from changes in market interest rates or currency exchange rates. Hedging against a decline in the values of our
portfolio positions would not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of the positions declined.
However, such hedging could establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such
portfolio positions. Such hedging transactions could also limit the opportunity for gain if the values of the underlying portfolio positions increased.
Moreover, it might not be possible to hedge against an exchange rate or interest rate fluctuation that was so generally anticipated that we would not be able
to enter into a hedging transaction at an acceptable price.
While we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange
rates or interest rates could result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the
degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged
could vary. Moreover, for a variety of reasons, we might not seek to establish a perfect correlation between the hedging instruments and the portfolio
holdings being hedged. Any such imperfect correlation could prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it
might not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because
the value of those securities would likely fluctuate as a result of factors not related to currency fluctuations.
We may not realize gains from our equity investments.
When we invest in senior secured, unitranche, second-lien and mezzanine loans, we may acquire warrants or other equity securities of portfolio
companies as well. We may also invest in equity securities directly. To the extent we hold equity investments, except as described below, we will attempt to
dispose of them and realize gains upon our disposition of them. However, the equity interests we receive may not appreciate in value and may decline in
value. As a result, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests
may not be sufficient to offset any other losses we experience. In the case of SBIC I LP, our wholly owned subsidiary, we will not receive direct benefits
from the sale of assets in its portfolio. Rather, our return on our investment in such assets will depend on the ability of SBIC I LP’s portfolio to generate
cash flow in excess of payments required, as appropriate, to be made to other parties under the terms of the SBA debentures, and distribution, subject to
SBA regulation, of the excess to us.
Uncertainty relating to the LIBOR calculation process may adversely affect the value of any portfolio of LIBOR-indexed, floating-rate debt
securities.
Uncertainty relating to the LIBOR calculation process may adversely affect the value of any portfolio of LIBOR-indexed, floating-rate debt securities.
Concerns have been publicized that some of the member banks surveyed by the British Bankers' Association (“BBA”) in connection with the calculation of
LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them
in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may
have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks have entered into
settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and
governmental authorities in various jurisdictions are ongoing. Actions by the BBA, regulators or law enforcement agencies may result in changes to the
manner in which LIBOR is determined. Uncertainty as to the nature of such potential changes may adversely affect the market for LIBOR-based securities,
including our potential portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or
supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for
LIBOR-based securities or the value of our potential portfolio of LIBOR indexed, floating-rate debt securities.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it intends to phase out LIBOR
by the end of 2021. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next several
years. As a result of this transition, interest rates on financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those
financial instruments, may be adversely affected. Further, any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate
could adversely affect the value of our financial instruments tied to LIBOR rates. The U.S. Federal Reserve, in conjunction with the Alternative Reference
Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index
calculated by short term repurchase agreements, backed by Treasury securities, called the Secured Overnight Financing Rate (“SOFR”). The first
publication of SOFR was released in April 2018.
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Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain.
Additionally, on July 12, 2019 the Staff of the SEC’s Division of Corporate Finance, Division of Investment Management, Division of Trading and
Markets, and Office of the Chief Accountant issued a statement about the potentially significant effects on financial markets and market participants when
LIBOR is discontinued in 2021 and no longer available as a reference benchmark rate. The Staff encouraged all market participants to identify contracts
that reference LIBOR and begin transitions to alternative rates. On December 30, 2019, the SEC’s Chairman, Division of Corporate Finance and Office of
the Chief Accountant issued a statement to encourage audit committees in particular to understand management’s plans to identify and address the risks
associated with the elimination of LIBOR, and, specifically, the impact on accounting and financial reporting and any related issues associated with
financial products and contracts that reference LIBOR, as the risks associated with the discontinuation of LIBOR and transition to an alternative reference
rate will be exacerbated if the work is not completed in a timely manner.
In addition, on March 25, 2020, the FCA stated that although the central assumption that firms cannot rely on LIBOR being published after the end of 2021
has not changed, the outbreak of COVID-19 has impacted the timing of many firms’ transition planning, and the FCA will continue to assess the impact of
the COVID-19 pandemic on transition timelines and update the marketplace as soon as possible. Furthermore, on November 30, 2020, Intercontinental
Exchange, Inc. (“ICE”) announced that the ICE Benchmark Administration Limited, a wholly-owned subsidiary of ICE and the administrator of LIBOR
will consult in early December 2020 to consider extending the LIBOR transition deadline to the end of June 2023. The consultation was published on
December 4, 2020, and is open for feedback until late January 2021. Despite this potential extension of the US LIBOR transition deadline, US regulators
continue to urge financial institutions to stop entering into new LIBOR transactions by the end of 2021. It is unclear if after 2021 LIBOR will cease to exist
or if new methods of calculating LIBOR will be established such that it continues to exist after 2021.
The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for
or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us, or on our overall financial
condition or results of operations. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio
companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established.
Risks Related to Our Securities
There is a risk that stockholders may not receive distributions or that our distributions may not grow over time and a portion of our distributions
may be a return of capital.
We have made distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure stockholders that we
will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. 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. Our ability to make distributions
may also be affected by our ability to receive distributions from SBIC I LP, which is governed by SBA regulations.
When we make distributions, we will be required to determine the extent to which such distributions are paid out of current or accumulated earnings and
profits. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of an
investor’s basis in our stock and, assuming that an investor holds our stock as a capital asset, thereafter as a capital gain. A return of capital is a return to
stockholders of a portion of their original investment in us rather than income or capital gains.
The market price of our common stock may fluctuate significantly.
As with any stock, the market price of our common stock will fluctuate with market conditions and other factors. Our common stock is intended for
long-term investors and should not be treated as a trading vehicle. Shares of BDCs frequently trade at a discount from their net asset value. The market
price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control
and may not be directly related to our operating performance. These factors include:
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significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which is not necessarily
related to the operating performance of these companies;
exclusion of our common stock from certain market indices, such as the Russell 2000 Financial Services Index, which could reduce the ability of
certain investment funds to own our common stock and put short-term selling pressure on our common stock;
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changes in regulatory policies or tax guidelines, particularly with respect to RICs, SBICs or BDCs;
loss of RIC or BDC status;
failure of SBIC I LP to maintain its status as an SBIC;
our origination activity, including the pace of, and competition for, new investment opportunities;
our ability to incur additional leverage pursuant to Section 61(a)(2) of the 1940 Act and the impact of such leverage on our net investment income
and results of operations;
changes or perceived changes in earnings or variations in operating results;
changes or perceived changes in the value of our portfolio of investments;
changes in accounting guidelines governing valuation of our investments;
any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
the inability to secure additional debt or equity capital;
potential future sales of common stock or debt securities convertible into or exchangeable or exercisable for our common stock or the conversion
of such securities;
departure of OFS Advisor’s, OFSC’s or any of their affiliates’ key personnel;
operating performance of companies comparable to us;
general economic trends and other external factors; and
loss of a major funding source.
Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.
The shares of our common stock beneficially owned by our principal stockholders, including OFSAM, are generally available for resale, subject to the
provisions of Rule 144 promulgated under the Securities Act unless registered for sale under the Securities Act. We have entered into a registration rights
agreement granting OFSAM the right to require us to register its shares for resale. Sales of substantial amounts of our common stock, or the availability of
such common stock for sale, could adversely affect the prevailing market prices for our common stock. If this occurs and continues, it could impair our
ability to raise additional capital through the sale of securities should we desire to do so.
Certain provisions of the Delaware General Corporation Law and our certificate of incorporation and bylaws could deter takeover attempts and
have an adverse impact on the price of our common stock.
The Delaware General Corporation Law, our certificate of incorporation and our bylaws contain provisions that may have the effect of discouraging a
third party from making an acquisition proposal for us. We have also adopted measures that may make it difficult for a third party to obtain control of us,
including provisions of our certificate of incorporation dividing our Board into three classes with the term of one class expiring at each annual meeting of
stockholders. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the
opportunity to realize a premium over the market price of our common stock.
Our common stock may trade below its net asset value per share, which limits our ability to raise additional equity capital.
If our common stock is trading below its net asset value per share, we will generally not be able to issue additional shares of our common stock at its
market price without first obtaining the approval for such issuance from our stockholders and our independent directors. Shares of BDCs, including shares
of our common stock, have traded at discounts to their net asset values. As of December 31, 2020, our net asset value per share was $11.85. The daily
average closing price of our shares on the Nasdaq Global Select Market for the year ended December 31, 2020 was $6.15. If our common stock trades
below net asset value, the higher the cost of equity capital may result in it being unattractive to raise new equity, which may limit our ability to grow. The
risk of trading below net asset value is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether shares
of our common stock will trade above, at or below our net asset value.
Our Unsecured Notes are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future and will rank
pari passu with, or equal to, all outstanding and future unsecured, unsubordinated indebtedness issued by us and our general liabilities.
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Our Unsecured Notes are not secured by any of our assets or any of the assets of any of our subsidiaries. As a result, the Unsecured Notes are
effectively subordinated to any secured indebtedness we or our subsidiaries have outstanding (including the PWB Credit Facility and the BNP Facility) or
that we or our subsidiaries may incur in the future (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest) 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 secured indebtedness or 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 Unsecured Notes.
The Unsecured Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
The Unsecured Notes are obligations exclusively of OFS Capital Corporation, and not of any of our subsidiaries. None of our subsidiaries are a
guarantor of the Unsecured Notes, and the Unsecured Notes will not be required to be guaranteed by any subsidiary we may acquire or create in the future.
Any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the Unsecured Notes. 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 Unsecured Notes) 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 Unsecured Notes will be
structurally subordinated to all indebtedness and other liabilities, including trade payables, of any of our existing or future subsidiaries, including SBIC I
LP and OFSCC-FS. Certain of these entities currently serve as guarantors under the PWB Credit Facility or the BNP Facility, and in the future our
subsidiaries may incur substantial additional indebtedness, all of which is and would be structurally senior to the Unsecured Notes.
The indenture under which the Unsecured Notes were issued contains limited protection for holders of the Unsecured Notes.
The indenture under which the Unsecured Notes were issued offers limited protection to holders of the Unsecured Notes. The terms of the
indenture and the Unsecured Notes 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 your investment in the Unsecured Notes. In particular, the terms of the
indenture and the Unsecured Notes will not place any restrictions on our or our subsidiaries’ ability to:
• issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be
equal in right of payment to the Unsecured Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively
senior in right of payment to the Unsecured Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is
guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Unsecured Notes and (4) securities, indebtedness
or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in those entities and therefore rank structurally
senior to the Unsecured Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other
obligation that would cause a violation of Section 18(a)(1)(A) as modified by such provisions of Section 61(a) of the 1940 Act as may be
applicable to us from time to time or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but
giving effect, in each case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from making
additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as
defined in the 1940 Act, equals at least 200% (or 150% on and after May 3, 2019) after such borrowings.
• pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to
the Unsecured Notes, including subordinated indebtedness, in each case other than dividends, purchases, redemptions or payments that would
cause our asset coverage to fall below the threshold specified in Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940
Act as may be applicable to us from time to time or any successor provisions, giving effect to (i) any exemptive relief granted to us by the SEC
and (ii) no-action relief granted by the SEC to another BDC (or to us if we determine to seek such similar no-action or other relief) permitting the
BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by such
provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time in order to maintain the BDC’s status as a RIC under
Subchapter M of the Code. These provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital
stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is below 200% (or 150% on and after May 3, 2019)
at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or
purchase;
55
• sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);
• enter into transactions with affiliates;
• create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;
• make investments; or
• create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
In addition, the indenture does not require us to make an offer to purchase the Unsecured Notes in connection with a change of control or any
other event.
Furthermore, the terms of the indenture and the Unsecured Notes do not protect holders of the Unsecured Notes 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 Unsecured Notes), and take a
number of other actions that are not limited by the terms of the Unsecured Notes may have important consequences for you as a holder of the Unsecured
Notes, including making it more difficult for us to satisfy our obligations with respect to the Unsecured Notes or negatively affecting the trading value of
the Unsecured Notes.
Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Unsecured Notes, 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 Unsecured Notes.
We may choose to redeem the Unsecured Notes when prevailing interest rates are relatively low.
On or after October 31, 2021 for the Unsecured Notes Due October 2026 or September 2021 for the Unsecured Notes Due September 2023, we
may choose to redeem the Unsecured Notes from time to time, especially if prevailing interest rates are lower than the rate borne by the Unsecured Notes.
If prevailing rates are lower at the time of redemption, and we redeem the Unsecured Notes, you likely would not be able to reinvest the redemption
proceeds in a comparable security at an effective interest rate as high as the interest rate on the Unsecured Notes being redeemed. Our redemption right also
may adversely impact your ability to sell the Unsecured Notes as the optional redemption date or period approaches.
56
General Risk Factors
Global capital markets could enter a period of severe disruption and instability. These conditions have historically affected and could again
materially and adversely affect debt and equity capital markets in the United States and around the world and our business.
The current worldwide financial market situation, as well as various social and political tensions in the United States and around the world, may
contribute to increased market volatility, may have long-term effects on the U.S. and worldwide financial markets and may cause economic uncertainties or
deterioration in the U.S. and worldwide. The impact of downgrades by rating agencies to the U.S. government’s sovereign credit rating or its perceived
creditworthiness as well as potential government shutdowns could adversely affect the U.S. and global financial markets and economic conditions. Since
2010, several European Union, or EU, countries have faced budget issues, some of which may have negative long-term effects for the economies of those
countries and other EU countries. There is continued concern about national-level support for the Euro and the accompanying coordination of fiscal and
wage policy among European Economic and Monetary Union member countries. In addition, the fiscal policy of foreign nations, such as Russia and China,
may have a severe impact on the worldwide and U.S. financial markets. The decision made in the United Kingdom referendum to leave the EU (commonly
known as “Brexit”) has led to volatility in global financial markets and may lead to weakening in consumer, corporate and financial confidence in the
United Kingdom and Europe. Under the terms of the withdrawal agreement negotiated and agreed to between the United Kingdom and the European
Union, the United Kingdom's departure from the European Union was followed by a transition period which ran until December 31, 2020 and during which
the United Kingdom continued to apply European Union law and was treated for all material purposes as if it were still a member of the European Union.
On December 24, 2020, the European Union and United Kingdom governments signed a trade deal that became provisionally effective on January 1, 2021
and that now governs the relationship between the United Kingdom and the European Union (the “Trade Agreement”). The Trade Agreement implements
significant regulation around trade, transport of goods and travel restrictions between the United Kingdom and the European Union. Notwithstanding the
foregoing, the longer term economic, legal, political, and social framework to be put in place between the United Kingdom and the European Union are
unclear at this stage and are likely to lead to ongoing political and economic uncertainty. Additionally, trade wars and volatility in the U.S. repo market, the
U.S. high yield bond markets, the Chinese stock markets and global markets for commodities may affect other financial markets worldwide. While recent
government stimulus measures worldwide have reduced volatility in the financial markets, volatility may return as such measures are phased out, and the
long-term impacts of such stimulus on fiscal policy and inflation remain unknown. We monitor developments in economic, political and market conditions
and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be
successful in doing so.
Events outside of our control, including public health crises, could negatively affect our portfolio companies, our investment adviser and the
results of our operations.
Periods of market volatility could continue to occur in response to pandemics or other events outside of our control. We, OFS Advisor and the
portfolio companies in which we invest could be affected by force majeure events (i.e., events beyond the control of the party claiming that the event has
occurred, such as acts of God, fire, flood, earthquakes, outbreaks of an infectious disease, pandemic or any other serious public health concern, war,
terrorism, labor strikes, major plant breakdowns, pipeline or electricity line ruptures, failure of technology, defective design and construction, accidents,
demographic changes, government macroeconomic policies, social instability, etc.). Some force majeure events could adversely affect the ability of a party
(including us, OFS Advisor, a portfolio company or a counterparty to us, OFS Advisor, or a portfolio company) to perform its obligations until it is able to
remedy the force majeure event. In addition, force majeure events, such as the cessation of the operation of equipment for repair or upgrade, could similarly
lead to the unavailability of essential equipment and technologies. These risks could, among other effects, adversely impact the cash flows available from a
portfolio company, cause personal injury or loss of life, including to a senior manager of OFS Advisor or its affiliates, damage property, or instigate
disruptions of service. In addition, the cost to a portfolio company or us of repairing or replacing damaged assets resulting from such force majeure event
could be considerable. It will not be possible to insure against all such events, and insurance proceeds received, if any, could be inadequate to completely or
even partially cover any loss of revenues or investments, any increases in operating and maintenance expenses, or any replacements or rehabilitation of
property. Certain events causing catastrophic loss could be either uninsurable, or insurable at such high rates as to adversely impact us, OFS Advisor, or
portfolio companies, as applicable.
Force majeure events that are incapable of or are too costly to cure could have permanent adverse effects. Certain force majeure events (such as
war or an outbreak of an infectious disease) could have a broader negative impact on the world economy and international business activity generally, or in
any of the countries in which we invest or our portfolio companies operate specifically. Such force majeure events could result in or coincide with:
increased volatility in the global securities, derivatives and currency markets; a decrease in the reliability of market prices and difficulty in valuing assets;
greater fluctuations in currency exchange rates; increased risk of default (by both government and private issuers); further social, economic, and political
instability; nationalization of private enterprise; greater governmental involvement in the economy or in social factors that impact the economy; less
governmental regulation and supervision of the securities markets and market participants and decreased monitoring of the markets by governments or self-
regulatory organizations and reduced enforcement of regulations; limited, or limitations on, the activities of investors in such markets; controls or
restrictions on foreign
57
investment, capital controls and limitations on repatriation of invested capital; inability to purchase and sell investments or otherwise settle security or
derivative transactions (i.e., a market freeze); unavailability of currency hedging techniques; substantial, and in some periods extremely high, rates of
inflation, which can last many years and have substantial negative effects on credit and securities markets as well as the economy as a whole; recessions;
and difficulties in obtaining and/or enforcing legal judgments. Additionally, a major governmental intervention into industry, including the nationalization
of an industry or the assertion of control over one or more portfolio companies or its assets, could result in a loss to us, including if the investment in such
portfolio companies is canceled, unwound or acquired (which could result in inadequate compensation). Any of the foregoing could therefore adversely
affect the performance of us and our investments.
The failure in 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.
The occurrence of a disaster such as a cyberattack, a natural catastrophe, an industrial accident, events unanticipated in our disaster recovery systems, or
a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial
condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a
significant number of our managers were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely
compromised.
We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our
computer systems could be subject to cyberattacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. Like
other companies, we may experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures
and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and
stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could
result in damage to our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss.
Third parties with whom we do business may also be sources of cybersecurity or other technological risks. We outsource certain functions and these
relationships allow for the storage and processing of our information, as well as customer, counterparty, employee and borrower information. While we
engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of
data, or other cybersecurity incidents, with increased costs and other consequences, including those described above.
We may experience fluctuations in our quarterly operating results.
We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the debt securities
we acquire, the default rate on such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or
losses, distributions from our subsidiaries and portfolio companies, the degree to which we encounter competition in our markets and general economic
conditions. In light of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
We incur significant costs as a result of being a publicly traded company.
As a publicly traded company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements
applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance requirements, including
requirements under the Sarbanes-Oxley Act and other rules implemented by the SEC.
Capital markets may experience periods of disruption and instability and we cannot predict when these conditions will occur. Such market
conditions could materially and adversely affect debt and equity capital markets in the United States and abroad, which could have a negative impact
on our business, financial condition and results of operations.
The global capital markets have experienced a period of disruption as evidenced by a lack of liquidity in the debt capital markets, write-offs in the
financial services sector, the re-pricing of credit risk and the failure of certain major financial institutions. While the capital markets have improved, these
conditions could deteriorate again in the future. During such market disruptions, we may have difficulty raising debt or equity capital, especially as a result
of regulatory constraints.
Market conditions may in the future make it difficult to extend the maturity of or refinance our existing indebtedness and any failure to do so could have
a material adverse effect on our business. The illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we
may realize significantly less than the value at which we have recorded our investments. In addition, significant changes in the capital markets, including
the disruption and volatility, have had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity
events involving our investments. An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material
adverse impact on our business, financial condition and results of operations.
58
Various social and political tensions in the U.S. and around the world, including in the Middle East, Eastern Europe and Russia, may continue to
contribute to increased market volatility, may have long-term effects on the U.S. and worldwide financial markets, and may cause further economic
uncertainties or deterioration in the U.S. and worldwide. Several EU countries, including Greece, Ireland, Italy, Spain, and Portugal, continue to face
budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is also continued
concern about national-level support for the euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary
Union member countries. The recent U.S. and global economic downturn, or a return to the recessionary period in the U.S., could adversely impact our
investments. We cannot predict the duration of the effects related to these or similar events in the future on the U.S. economy and securities markets or on
our investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there
can be no assurance that we will be successful in doing so.
We are subject to risks related to corporate social responsibility.
Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our brand and
reputation if we fail to act responsibly in a number of areas, such as environmental stewardship, corporate governance and transparency and considering
ESG factors in our investment processes. Adverse incidents with respect to ESG activities could impact the value of our brand, the cost of our operations
and relationships with investors, all of which could adversely affect our business and results of operations. Additionally, new regulatory initiatives related
to ESG could adversely affect our business.
Cybersecurity risks and cyber incidents may adversely affect our business or the business of our portfolio companies by causing a disruption to our
operations or the operations of our portfolio companies, a compromise or corruption of our confidential information or the confidential information of
our portfolio companies and/or damage to our business relationships or the business relationships of our portfolio companies, all of which could
negatively impact the business, financial condition and operating results of us or our portfolio companies.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of the information resources of us or our
portfolio companies. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our
information systems or those of our portfolio companies for purposes of misappropriating assets, stealing confidential information, corrupting data or
causing operational disruption. We and OFS Advisor’s employees have been and expect to continue to be the target of fraudulent calls, emails and other
forms of activities. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or
information, increased cybersecurity protection and insurance costs, litigation damage to business relationships and damage to our competitiveness, stock
price, and long-term stockholder value. The costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other
means. As our and our portfolio companies’ reliance on technology has increased, so have the risks posed to our information systems, both internal and
those provided by OFS Services and third-party service providers, and the information systems of our portfolio companies. OFS Advisor has implemented
processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness
of the nature and extent of a risk of a cyber incident, do not guarantee that a cyber incident will not occur and/or that our financial results, operations or
confidential information will not be negatively impacted by such an incident. In addition, cybersecurity has become a top priority for regulators around the
world, and some jurisdictions have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal
data. If we fail to comply with the relevant laws and regulations, we could suffer financial losses, a disruption of our businesses, liability to investors,
regulatory intervention or reputational damage.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We do not own or lease any real estate or other physical properties material to our operation. Our headquarters are located at 10 S. Wacker Drive,
Suite 2500, Chicago, IL, 60606, and are provided by OFS Services pursuant to the Administration Agreement. Additional operations are conducted from
offices in New York, New York and Los Angeles, California, which are also provided by OFS Services pursuant to the Administration Agreement. We
believe that our office facilities are suitable and adequate for our business as we contemplate continuing to conduct it.
Item 3. Legal Proceedings
We, OFS Advisor and OFS Services, are not currently subject to any material pending legal proceedings threatened against us as of December 31,
2020. From time to time, we may be a party to certain legal proceedings incidental to the normal course of our business including the enforcement of our
rights under contracts with our portfolio companies. Furthermore, third
59
parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of these legal proceedings
cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition, results of
operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
60
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
COMMON STOCK AND HOLDERS
Our common stock is traded on the Nasdaq Global Select Market under the symbol "OFS". The last reported sale price for our common stock on
the Nasdaq Global Select Market on March 1, 2021 was $7.92 per share. As of March 1, 2021, there were two holders of record of the common stock, one
of which was OFSAM. The other holder of record does not identify stockholders for whom shares are held beneficially in “nominee” or “street name.”
The following table lists the high and low closing sale price for our common stock, net asset value per share, and the cash distributions per share that we
have declared on our common stock for each fiscal quarter during the last two most recently completed fiscal years and the current fiscal year through
March 1, 2021. The stock quotations are inter-dealer quotations and do not include markups, markdowns or commissions.
(3)
Period
Fiscal 2021
First Quarter
Fiscal 2020
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal 2019
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
NAV Per
(1)
Share
Price Range
High
Low
Premium (Discount) of
High Sales Price to NAV
Premium (Discount) of
Low Sales Price to NAV
Cash
Distribution per
Share
(2)
*
$
7.92 $
6.82
*
*
$
$
$
$
$
$
$
$
$
11.85 $
11.18 $
10.10 $
9.71 $
12.46 $
12.74 $
12.95 $
13.04 $
7.58 $
5.08 $
5.70 $
11.97 $
12.01 $
12.27 $
12.80 $
12.52 $
3.97
4.04
3.52
3.70
10.99
10.98
11.85
10.77
-36.0 %
-54.6 %
-43.6 %
23.3 %
-3.6 %
-3.7 %
-1.2 %
-4.0 %
-66.5 % $
-63.9 % $
-65.1 % $
-61.9 % $
-11.8 % $
-13.8 % $
-8.5 % $
-17.4 % $
0.20
0.18
0.17
0.17
0.34
0.34
0.34
0.34
0.34
(1) Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date
of the high and low sales prices. The net asset values shown are based on outstanding shares at the end of each period.
(2) The return of capital portion of these distributions for the years ended December 31, 2020 and 2019 were $-0- and $-0-, respectively.
(3) Period from January 1, 2021 through March 1, 2021.
* Not determinable at the time of filing.
Issuer Purchases of Equity Securities
On May 22, 2018, the Board authorized the Stock Repurchase Program under which we could acquire up to $10.0 million of our outstanding
common stock through the two-year period ending May 22, 2020. On May 4, 2020, the Board extended the Stock Repurchase Program for an additional
two-year period. Under the extended Stock Repurchase Program, we are authorized to repurchase shares in open-market transactions, including through
block purchases, depending on prevailing market conditions and other factors. We expect the Stock Repurchase Program to be in place through May 22,
2022, or until the approved dollar amount has been used to repurchase shares. The Stock Repurchase Program does not obligate us to acquire any specific
number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and
volume of stock repurchases. The Stock Repurchase Program may be extended, modified or discontinued at any time for any reason. We have provided our
stockholders with notice of our intention to repurchase shares of our common stock in accordance with 1940 Act requirements. We retire all shares of
common stock that we purchased in connection with the Stock Repurchase Program.
61
The following table summarizes the shares of common stock that we repurchased under the Stock Repurchase Program during the years ended
December 31, 2020, 2019 and 2018 (amount in thousands except shares).
Total Number of
Shares
Purchased
Average
Price Paid
Per Share
10.29
—
—
10.29
300 $
—
—
300 $
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) That May Yet be
Purchased Under the
Plans or Programs
300 $
—
—
300 $
9,997
—
—
9,997
Period
May 22, 2018 through December 31, 2018
January 1, 2019 through December 31, 2019
January 1, 2020 through December 31, 2020
Total
Sales of Unregistered Securities
There was $0.2 million of distributions reinvested during the year ended December 31, 2020 under the DRIP.
62
Stock Performance Graph
This graph compares the return on our common stock with that of the Standard & Poor’s 500 Stock Index, the Russell 1000 Index and the SNL
U.S. RICs Index, for the last five fiscal years. The graph assumes that, on December 31, 2015, a person invested $100 in our common stock, the
Standard & Poor’s 500 Stock Index, the Russell 1000 Index and the SNL U.S. RICs Index. The graph measures total stockholder return, which takes into
account changes in stock price and assumes reinvestment of all dividends and distributions prior to any tax effect.
OFS Capital Corporation
S&P 500
SNL U.S. RICs
Russell 1000
December 31,
2016
December 31,
2017
December 31,
2018
December 31,
2019
December 31,
2020
133.2
112.0
123.7
112.1
127.3
136.4
137.1
136.4
131.1
130.4
131.5
129.8
154.8
171.5
161.9
170.6
118.3
203.0
135.1
206.4
The graph and other information under the heading "Stock Performance Graph" in Part II Item 5 of this Annual Report on Form 10-K is "furnished" and
shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the
Exchange Act and shall not be deemed incorporated by reference in any filing under the Exchange Act. The stock price performance included in the above
graph is not necessarily indicative of future stock price performance.
63
Fees and Expenses
The following table is intended to assist you in understanding the costs and expenses that you will bear directly or indirectly. We caution you that
the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this Annual Report
on Form 10-K contains a reference to fees or expenses paid by “us,” “the Company” or “OFS Capital,” or that “we” will pay fees or expenses, you
will indirectly bear such fees or expenses as an investor in OFS Capital.
Stockholder transaction expenses:
Sales load borne by us (as a percentage of offering price)
Offering expenses borne by us (as a percentage of offering price)
Dividend reinvestment plan fees (per sales transaction fee)
Total Stockholder transaction expenses (as a percentage of offering price)
Annual expenses (as a percentage of net assets attributable to common stock)
Base management fees payable under the Investment Advisory Agreement
Incentive fees payable under the Investment Advisory Agreement
Interest payments on borrowed funds
Other expenses
Total annual expenses
Base management fee reduction
Total annual expenses, net of fee waiver
(9)
:
— %
— %
$15.00
— %
5.96 %
1.74 %
9.94 %
2.74 %
20.38 %
(1.32)%
19.06 %
(1)
(1)
(2)
(1)
(3)
(4)
(5)
(6)
(8)
(7)
(1) The amounts set forth in this table do not reflect the impact of any sales load, sales commission or other offering expenses borne by the Company and
its stockholders. If applicable, the prospectus or prospectus supplement relating to an offering of our common stock will disclose the offering price and
the estimated offering expenses and total stockholder transaction expenses borne by the Company and its common stockholders as a percentage of the
offering price. In the event that shares of our common stock are sold to or through underwriters, the applicable prospectus or prospectus supplement
will also disclose the applicable sales load.
(2) The expenses of the dividend reinvestment plan are included in “other expenses.” The plan administrator’s fees will be paid by us. There will be no
brokerage charges or other charges to stockholders who participate in the plan except that, if a participant elects by written notice to the plan
administrator to have the plan administrator sell part or all of the shares held by the plan administrator in the participant’s account and remit the
proceeds to the participant, the plan administrator is authorized to deduct a $15.00 transaction fee plus a $0.10 per share brokerage commission from
the proceeds.
(3) Our base management fee is 1.75% of the average value of our total assets (other than cash and cash equivalents, and the intangible assets resulting
from the SBIC Acquisitions; but including assets purchased with borrowed amounts, and including assets owned by any consolidated entity). This item
represents projected base management fees for the the next twelve month assuming no additional leverage is incurred. We increased our leverage to a
level below a 200% asset coverage ratio, as permitted under Section 61(a)(2) of the 1940 Act. As discussed in footnote (8), below, OFS Advisor agreed
to reduce a portion of its base management fee on certain assets associated with the increase in leverage; the base management fees of 5.96% presented
in the table above does not reflect the effect of the base management fee reduction on certain assets. See “Management and Other Agreements —
Investment Advisory Agreement”.
(4) The Part One incentive fee was estimated based on our projected results of operations for the next twelve months including the anticipated
impact of additional assets purchased with the added leverage discussed in footnote (5) and assumed yields thereon, and the effects of the
expected base management fee waiver discussed in footnote (3). The Part Two incentive fee will be accrued, but not necessarily become payable,
if, on a cumulative basis, the sum of net realized capital gains and losses plus net unrealized appreciation and depreciation is positive. Net realized
gains and losses result from sales transactions and no such transactions are currently contemplated by OFS Advisor; and unrealized capital gains
or losses result from fluctuations in the fair value of our investments, which vary substantially from period to period and cannot be reasonably
predicted. Accordingly, the Part Two fee in the table above is -0-%.
The two parts of the incentive fee follows:
•
The first ("Part One"), payable quarterly in arrears, equals 20.0% of our pre-incentive fee net investment income initially calculated based on
values at the closing of this offering (including income that is accrued but not yet received in cash), subject to a 2.0% quarterly (8.0% annualized)
hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, OFS Advisor
receives no incentive fee until our
64
pre-incentive fee net investment income equals the hurdle rate of 2.0% but then receives, as a “catch-up,” 100% of our pre-incentive fee net
investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than
2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, OFS Advisor will
receive 20.0% of our pre-incentive fee net investment income as if a hurdle rate did not apply.
The hurdle rate is fixed at 2.0% quarterly (8% annualized), which means that, if interest rates rise, it will be easier for our pre-incentive fee net
investment income to surpass the hurdle rate, which could lead to the payment of fees to OFS Advisor in an amount greater than expected. There
is no accumulation of amounts on the hurdle rate from quarter to quarter and accordingly there is no clawback of amounts previously paid if
subsequent quarters are below the quarterly hurdle rate and there is no delay of payment if prior quarters are below the quarterly hurdle rate.
•
The second part ("Part Two"), payable annually in arrears, equals 20.0% of our realized capital gains on a cumulative basis, if any (or upon the
termination of the Investment Advisory Agreement, as of the termination date), computed net of all realized capital losses and unrealized capital
depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. The incentive fee is determined
on a consolidated basis. We accrue the Part Two incentive fee if, on a cumulative basis, the sum of net realized capital gains and losses plus net
unrealized appreciation and depreciation is positive. See “Management and Other Agreements — Investment Advisory Agreement.”
(5) The borrowing costs included in the table above are based on our proforma debt balances as of February 2021, see “Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations — Recent Developments”, (which could be subject to change) at a level equivalent to a
debt-to-equity ratio of up to 2.08x (equivalent to $2.08 of debt outstanding for each $1 of equity) which is also equivalent to having an asset coverage
ratio of 176% (which excludes the SBA debentures as a result of exemptive relief granted to us by the SEC) as permitted under Section 61(a)(2) of the
1940 Act, and assuming a weighted average interest rate for total outstanding debt of 5.10%.
We may borrow additional funds from time to time to make investments to the extent we determine that the economic situation is conducive to doing so.
We do not expect to issue any preferred stock during the next twelve months and, therefore, have not included the cost of issuing and servicing
preferred stock in the table. Availability under the PWB Credit Facility as of December 31, 2020, was $19.4 million based on the stated advance rate of
50% under the borrowing base, and the $0.6 million outstanding as of December 31, 2020. Our stockholders will bear directly or indirectly the costs of
borrowings under any debt instruments we may enter into.
(6) Includes our overhead expenses, including payments under the Administration Agreement based on our allocable portion of overhead and other
expenses incurred by OFS Services. See “Management and Other Agreements — Administration Agreement.”
(7) Our stockholders indirectly bear the expenses of underlying funds or other investment vehicles that would be investment companies under section
3(a) of the 1940 Act but for the exceptions to that definition provided for in sections 3(c)(1) and 3(c)(7) of the 1940 Act (“Acquired Funds”) in which
we invest. We do not currently invest in underlying funds or other investment companies and therefore do not expect to incur any acquired fund fees
and expenses. The indirect expenses that will be associated with our Structured Finance Note investments are not included in the fee table
presentation, but if such expenses were included in the fee table presentation then our total annual expenses would have been 20.56%.
(8) OFS Advisor agreed to reduce a portion of its base management fee by reducing the portion of such fee from 1.75% to 1.00% on the average total
assets at the end of the two most recently completed quarters on assets held by the Company through OFSCC-FS, LLC, an indirect wholly owned
subsidiary of the Company. The base management fee reduction will be renewable on an annual basis and the amount of the base management fee
reduction with respect to the OFSCC-FS Assets shall not be subject to recoupment by OFS Advisor.
(9) Estimated.
Example. The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to
a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed we would have no additional
leverage and that our annual operating expenses would remain at the levels set forth in the table above. The expense amounts assume an annual base
management fee 1.75% for each year. Transaction expenses are not included in the following example.
While the example assumes, as required by the applicable rules of the SEC, a 5.0% annual return, our performance will vary and may result
in a return greater or less than 5.0%. The incentive fee under the Investment Management Agreement, which, assuming a 5.0% annual return, would
either not be payable or would have an
65
insignificant impact on the expense amounts shown above, is not included in the above example. The above illustration assumes that we will not
realize any capital gains (computed net of all realized capital losses and unrealized capital depreciation) in any of the indicated time periods. If we
achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our
expenses and returns to our investors would be higher. For example, if we assumed that we received our 5.0% annual return completely in the form of
net realized capital gains on our investments, computed net of all cumulative unrealized depreciation on our investments, the projected dollar amount
of total cumulative expenses set forth in the above illustration would be as follows:
You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return
1 Year
$160
3 Years
$416
5 Years
$604
10 Years
$887
While the examples assume reinvestment of all distributions at net asset value, participants in our dividend reinvestment plan will receive a
number of shares of our common stock determined by dividing the total dollar amount of the distribution payable to a participant by the market price per
share of our common stock at the close of trading on the dividend payment date. The market price per share of our common stock may be at, above or
below net asset value.
The example should not be considered a representation of future expenses, and actual expenses may be greater or less than those shown.
66
SENIOR SECURITIES
Information about our senior securities (including preferred stock, debt securities and other indebtedness) is shown in the following tables for the
years ended December 31, 2020, 2019, 2018, 2017, 2016, 2015, 2014, 2013 and 2012. The senior securities table as of December 31, 2020 and 2019 was
audited by KPMG LLP and the senior securities table as of December 31, 2018, 2017, 2016, 2015, 2014, 2013, and 2012 were audited by our former
independent registered public accounting firms. The “ — ” indicates information that the SEC expressly does not require to be disclosed for certain types of
senior securities. The reports of our current and former independent registered public accounting firms on the senior securities table are attached as an
exhibit to this Annual Report.
(dollar amounts in thousands, except per unit data)
(8)
Class and Year
6.25% Notes due 2023
December 31, 2020
(9)
6.375% Notes due 2025
December 31, 2020
December 31, 2019
December 31, 2018
(9)
6.50% Notes due 2025
December 31, 2020
December 31, 2019
December 31, 2018
5.95% Notes due 2026
December 31, 2020
December 31, 2019
BNP Facility
December 31, 2020
December 31, 2019
PWB Credit Facility
December 31, 2020
December 31, 2019
December 31, 2018
December 31, 2017
December 31, 2016
December 31, 2015
(6)
WM Credit Facility
December 31, 2014
December 31, 2013
December 31, 2012
(5)
SBA debentures (SBIC I LP)
December 31, 2020
December 31, 2019
December 31, 2018
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Total Amount
(1)
Outstanding
Asset Coverage Per
Unit
(2)
Involuntary
Liquidating
Preference Per Unit
(3)
Average Market
(4)
Value Per Unit
25,000 $
14,754
—
$24.82
7,377
7,519
5,645
7,601
7,747
5,817
6,790
6,920
11,728
6,659
614,760
—
23,521
11,540
15,821
—
2,847
2,256
2,429
—
—
—
50,000 $
50,000 $
50,000 $
48,525 $
48,525 $
48,525 $
54,325 $
54,325 $
31,450 $
56,450 $
600 $
— $
12,000 $
17,600 $
9,500 $
— $
72,612 $
108,955 $
99,224 $
105,270 $
149,880 $
149,880 $
67
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$22.66
25.30
24.84
$22.80
25.29
24.43
$21.89
24.75
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(dollar amounts in thousands, except per unit data)
(8)
Class and Year
December 31, 2017
December 31, 2016
December 31, 2015
December 31, 2014
December 31, 2013
December 31, 2012
(7)
Total Senior Securities
December 31, 2020
December 31, 2019
December 31, 2018
December 31, 2017
December 31, 2016
December 31, 2015
December 31, 2014
December 31, 2013
December 31, 2012
Total Amount
(1)
Outstanding
Asset Coverage Per
Unit
(2)
Involuntary
Liquidating
Preference Per Unit
(3)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
149,880 $
149,880 $
149,880 $
127,295 $
26,000 $
— $
315,170 $
359,180 $
260,405 $
167,480 $
159,380 $
149,880 $
199,907 $
134,955 $
99,224 $
—
—
—
—
—
—
1,757
1,796
2,554
11,540
15,821
—
2,847
2,256
2,429
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Average Market
(4)
Value Per Unit
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) Total amount of each class of senior securities outstanding at the end of the period presented.
(2) The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and
indebtedness not represented by senior securities, divided by the class of senior securities representing indebtedness. This asset coverage ratio is
multiplied by $1,000 to determine the “Asset Coverage Per Unit.”
(3) The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior
to it. The “ — ” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.
(4) Average market value per unit for our unsecured notes represents the average of the daily closing prices as reported on the Nasdaq Market during the
period presented. Not applicable to our PWB Credit Facility, BNP Facility, WM Credit Facility or SBA debentures because these senior securities are
not registered for public trading.
(5) The SBA debentures are not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC.
(6) The secured revolving line of credit with Wells Fargo Bank, N.A., as lender and OFS Capital WM, LLC, a previous wholly owned investment
company subsidiary of the Company, as borrower (the "WM Credit Facility") was terminated on May 25, 2015.
(7) The Asset Coverage Per Unit does not include the SBA debentures as described in footnote 5 above.
(8) Does not include the Unsecured Notes Due February 2026. See Recent Developments for additional information.
(9) On February 10, 2021, a redemption notice was issued. See Recent Developments for additional information.
68
FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the each year in the ten-year period ended December 31, 2020. The financial highlights as of
December 31, 2020 and 2019 were audited by KPMG LLP and the financial highlights for each of the eight years in the period ended December 31, 2018
were audited by our former independent registered public accounting firms.
2020
2019
2018
Years Ended December 31,
2017
2016
2015
2014
2013
2012
Per share operating performance:
Net asset value per share at beginning of
year
$
Net investment income
Net realized gain (loss) on non-
(4)
control/non-affiliate investments
(4)
$
12.46
0.92
(0.75)
$
13.10
1.43
(0.29)
Net realized gain on affiliate
investments
(4)
Net realized loss on control investment
(4)
Realized gain from SBIC Acquisition
Net unrealized depreciation on non-
control/non-affiliate investments
(4)
(4)
Net unrealized appreciation (depreciation)
on affiliate investments
(4)
Net unrealized appreciation (depreciation)
on control investment
(4)
(4)
(4)
Loss on extinguishment of debt
Loss on impairment of goodwill
Total from operations
Distributions
Issuance of common stock
Other
Net asset value per share at end of year $
(5)
(6)
—
—
—
(0.82)
0.94
0.13
(0.06)
(0.08)
0.28
(0.86)
(0.03)
—
11.85
$
$
$
$
7.15
(24.0)%
13.6 %
13,409,559
13,394,005
148,175
158,956
12,295
(2)
Per share market value, end of period
(1)
Total return based on market value
Total return based on net asset value
Shares outstanding at end of period
Weighted average shares outstanding
Ratio/Supplemental Data (in thousands
except ratios)
Average net asset value
Net asset value at end of year
Net investment income
Ratio of total expenses, net to average net
(3)
assets
(8)
Ratio of total expenses, net and losses on
impairment of goodwill and
extinguishment of debt to average net
assets
(9)
(10)
Ratio of net investment income to
average net assets
Ratio of goodwill impairment loss to
average net assets
Ratio of loss on extinguishment of debt to
average net assets
Portfolio turnover
(7)
14.12
1.38
(0.37)
0.01
—
—
(0.19)
(0.06)
(0.06)
—
—
0.71
(1.73)
—
—
13.10
10.60
3.5 %
7.8 %
13,357,337
13,348,203
182,468
175,023
18,385
$
$
$
$
$
$
14.82
1.28
(0.26)
0.81
—
—
(0.78)
(0.41)
—
—
—
0.64
(1.36)
(0.03)
0.05
14.12
11.90
(4.7)%
5.0 %
13,340,217
12,403,706
171,631
188,336
15,877
$
$
14.76
1.46
0.25
—
—
—
(0.69)
0.33
0.07
—
—
1.42
(1.36)
—
—
14.82
13.76
32.3 %
10.9 %
9,700,297
9,693,801
142,818
143,778
14,145
$
$
$
$
$
$
$
$
$
$
14.24
1.39
(0.31)
0.14
—
—
0.53
0.13
—
—
—
1.88
(1.36)
—
—
14.76
11.48
9.0 %
16.0 %
9,691,170
9,670,153
140,002
143,012
13,411
$
$
14.58
0.95
14.80
0.59
0.02
—
(0.37)
—
0.05
0.19
0.18
—
—
1.02
(1.36)
—
—
14.24
11.78
2.4 %
7.5 %
9,650,834
9,634,471
138,131
137,471
9,135
$
$
$
$
$
$
$
$
$
$
0.01
—
—
0.29
0.04
0.05
(0.18)
—
—
0.80
(1.02)
—
—
14.58
12.83
1.3 %
7.7 %
9,629,797
9,619,723
141,058
140,378
5,718
N/A (11)
N/A (11)
N/A (11)
N/A (11)
N/A (11)
N/A (11)
N/A (11)
N/A (11)
N/A (11)
N/A (11)
N/A (11)
N/A (11)
N/A (11)
N/A (11)
N/A (11)
14.80
13.69
(7.6)%
N/M (12)
9,578,691
9,578,691
98,164
141,799
661
$
$
$
$
$
—
—
—
(0.72)
0.40
(0.10)
—
—
0.72
(1.36)
—
—
12.46
11.17
18.3 %
6.7 %
13,376,836
13,364,244
171,889
166,627
19,098
$
$
$
$
$
$
$
$
$
$
22.4 %
19.4 %
13.4 %
10.2 %
11.9 %
13.5 %
9.9 %
8.0 %
13.6% (13)
23.7 %
8.3 %
0.7 %
0.6 %
28.1 %
— %
11.1 %
— %
— %
21.2 %
— %
10.5 %
— %
— %
41.9 %
— %
8.4 %
— %
— %
50.4 %
— %
9.8 %
— %
— %
18.1 %
— %
9.6 %
— %
— %
44.6 %
— %
6.6 %
— %
— %
34.9 %
— %
— %
4.1 %
4.6% (13)
— %
— %
19.7 %
— %
— %
— %
(1) Calculated as ending market value less beginning market value, adjusted for distributions reinvested at prices based on the Company’s dividend
reinvestment plan for the respective distributions.
(2) Calculated as ending net asset value less beginning net asset value, adjusted for distributions reinvested at the Company’s dividend reinvestment plan
for the respective distributions.
69
(3) Based on the average of the net asset value at the beginning of the indicated period and the end of each calendar quarter within the period indicated.
(4) Calculated on the average share method.
(5) The issuance of common stock on a per share basis reflects the incremental net asset value change as a result of the Offering.
(6) Represents the impact of different share amounts used in calculating per share data as a result of calculating certain per share data based on a weighted
average shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.
(7) Portfolio turnover rate is calculated using the lesser of year-to-date sales, Structured Finance Note distributions and principal payments or year-to-date
purchases over the average of the invested assets at fair value at the beginning of the indicated period and the end of each calendar quarter within the
period indicated.
(8) Ratio of total expenses before incentive fee waiver to average net assets was 22.7% and 13.4% for the years ended December 31, 2020 and December
31, 2018, respectively.
(9) Ratio of total expenses before incentive fee waiver and losses on impairment of goodwill and extinguishment of debt to average net assets was 24.0%
for the year ended December 31, 2020.
(10)Ratio of net investment income before incentive fee waiver to average net assets was 8.0% and 10.5% for the years ended December 31, 2020 and
December 31, 2018, respectively.
(11)Per share data is not provided as the Company did not have shares of common stock outstanding prior to its IPO.
(12)Not meaningful.
(13)Annualized.
70
Item 6. Selected Consolidated Financial Data
The following selected financial and other data should be read in conjunction with our consolidated financial statements and notes thereto and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included in this Annual Report on Form 10-K
(amounts in thousands, except per share data and number of portfolio companies at period end):
Statement of Operations Data:
Investment income
Interest income
PIK interest income
Dividend income
Preferred equity PIK dividend income
Fee income
Total investment income
Expenses
Management fees
Incentive fees, net of waiver
Other expenses
Total expenses, net
Net investment income
Net realized gain (loss) on investments
Net unrealized appreciation (depreciation) on investments
Loss on extinguishment of debt
Loss on impairment of goodwill
Net increase in net assets resulting from operations
Per share data:
Net asset value
Net investment income
Net realized gain (loss) on investments
Net unrealized appreciation (depreciation) on investments
Net increase in net assets resulting from operations
Distributions declared
Total return based on market value
Balance sheet data at period end:
Investments, at fair value
Cash and cash equivalents
Other assets
Total assets
Debt
Total liabilities
Total net assets
Other data (unaudited):
Weighted average yield on performing debt and Structured Finance Note investments
Weighted average yield on total debt and Structured Finance Note investments
Weighted average yield on total investments
Number of portfolio companies at end of year
(4) (6)
(5) (6)
(1)
(7)
(3) (6)
$
$
$
$
$
$
2020
41,517
1,528
450
504
1,476
45,475
7,605
1,584
23,991
33,180
12,295
(10,021)
3,317
(820)
(1,077)
3,694
11.85
0.92
(0.75)
0.25
0.28
0.86
(24.0)%
442,323
37,708
3,782
483,813
309,185
324,857
158,956
10.27 %
9.15 %
8.56 %
62
For the Years Ended December 31,
2018
2017
2019
$
$
$
48,902
926
502
899
1,292
52,521
8,271
4,760
20,439
33,470
19,098
(3,900)
(5,645)
—
—
9,553
12.46
1.43
(0.29)
(0.42)
0.71
1.36
18.3 %
516,931
13,447
7,810
538,188
352,478
371,561
166,627
10.40 %
9.94 %
9.59 %
85
$
$
$
38,607
1,193
315
906
1,813
42,834
6,335
4,387
13,727
24,449
18,385
(4,779)
(4,034)
—
—
9,572
13.10
1.38
(0.36)
(0.30)
0.72
1.73
3.5 %
396,797
38,172
6,452
441,421
254,826
266,398
175,023
11.50 %
11.12 %
10.49 %
50
$
$
$
28,124
1,508
482
1,399
1,913
33,426
4,999
2,962
9,588
17,549
15,877
6,833
(14,800)
—
—
7,910
14.12
1.28
0.55
(1.19)
0.64
1.36
(4.7)%
277,499
72,952
7,327
357,778
164,823
169,442
188,336
12.11 %
11.59 %
10.35 %
37
2016
26,400
1,194
475
1,433
1,592
31,094
4,516
3,333
9,100
16,949
14,145
2,404
(2,721)
—
—
13,828
14.82
1.46
0.25
(0.29)
1.43
1.36
32.3 %
281,627
17,659
5,744
305,030
156,343
161,252
143,778
12.08 %
11.72 %
10.88 %
41
(1) The return of capital portion of these distributions for the years ended December 31, 2020, 2019, 2018, 2017, 2016, and 2015, was $0, $0 $0, $0,
$0.09, and $0.23, respectively.
(2) On January 1, 2016, we adopted ASU 2015-03 which requires that debt issuance costs related to a recognized debt liability to be presented on the
balance sheet as a direct deduction from the carrying amount of the debt liability rather than as an asset. Adoption of ASU 2015-03 requires the
changes to be applied retrospectively.
71
(3) The weighted average yield on our performing debt and Structured Finance Note investments is computed as (a) the sum of (i) the annual stated
accruing interest on our debt investments plus the annualized accretion of Net Loan Fees; and (ii) the annual effective yield on Structured Finance
Notes divided by (b) amortized cost of our debt and Structured Finance Note investments, excluding debt investments in non-accrual status as of the
balance sheet date.
(4) The weighted average yield on our total debt and Structured Finance Note investments is computed as (a) the sum of (i) the annual stated accruing
interest on our debt investments plus the annualized accretion of Net Loan Fees and (ii) plus the annual effective yield on Structured Finance Notes
divided by (b) amortized cost of our debt and Structured Finance Note investments, including debt investments in non-accrual status as of the balance
sheet date.
(5) The weighted average yield on total investments is computed as (a) the sum of (i) the annual stated accruing interest on our debt investments plus the
annualized accretion of Net Loan Fees, (ii) the effective yield on our performing preferred equity investments, and (iii) the annual effective yield on
Structured Finance Notes, divided by (b) amortized cost of our total investment portfolio, including debt investments in non-accrual status as of the
balance sheet date.
(6) The weighted average yield of our investments is not the same as a return on investment for our stockholders but, rather, the gross investment income
from our investment portfolio before the payment of all of our fees and expenses. There can be no assurance that the weighted average yield will
remain at its current level.
(7) Calculation is ending market value less beginning market value, adjusting for distributions reinvested at prices based on the Company’s dividend
reinvestment plan for the respective distributions.
72
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking
statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective portfolio
investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,”
“would,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify 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 our control and
difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including
without limitation:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability and experience operating a BDC or an SBIC, or maintaining our tax treatment as a RIC under Subchapter M of the Code;
our dependence on key personnel;
our ability to maintain or develop referral relationships;
our ability to replicate historical results;
the ability of OFS Advisor to identify, invest in and monitor companies that meet our investment criteria;
the belief that the carrying amounts of our financial instruments, such as cash, receivables and payables approximate the fair value of such
items due to the short maturity of such instruments and that such financial instruments are held with high credit quality institutions to mitigate
the risk of loss due to credit risk;
actual and potential conflicts of interest with OFS Advisor and other affiliates of OFSAM;
constraint on investment due to access to material nonpublic information;
restrictions on our ability to enter into transactions with our affiliates;
our ability to comply with SBA regulations and requirements;
the use of borrowed money to finance a portion of our investments;
the belief that our financing facilities will enable us to be competitive in our markets;
our ability to incur additional leverage pursuant to Section 61(a)(2) of the 1940 Act and the impact of such leverage on our net investment
income and results of operations;
competition for investment opportunities;
our plans to focus on lower-yielding, first lien senior secured loans to larger borrowers and the impact on our risk profile, including our belief
that the seniority of such loans in a borrower's capital structure may provide greater downside protection against the impact of the coronavirus
("COVID-19") pandemic;
the percentage of investments that will bear interest on a floating rate or fixed rate basis;
interest rate volatility, including the decommissioning of LIBOR;
the ability of SBIC I LP to make distributions enabling us to meet RIC requirements;
plans by SBIC I LP to repay its outstanding SBA debentures;
our ability to raise debt or equity capital as a BDC;
the timing, form and amount of any distributions from our portfolio companies;
the impact of a protracted decline in the liquidity of credit markets on our business;
changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets,
including with respect to changes from the impact of the COVID-19 pandemic; the length and duration of the COVID-19 pandemic in the
United States as well as worldwide and the magnitude of the economic impact of the outbreak; the effect of the COVID-19 pandemic on our
business, financial condition, results of operations and cash flows and those of our portfolio companies (including the expectation that a shift
from cash interest to PIK interest will result from concessions granted to borrowers due to the COVID-19 pandemic), including our and their
ability to achieve our respective objectives; the effect of the disruptions caused by the COVID-19 pandemic on our ability to continue to
effectively manage our business (including our belief
that new loan activity in the market in which we operate has slowed) and on the availability of equity and debt capital and our use of
borrowed money to finance a portion of our investments;
the general economy and its impact on the industries in which we invest;
the belief that we have sufficient levels of liquidity to support our existing portfolio companies and deploy capital in new investment
opportunities;
uncertain valuations of our portfolio investments, including our belief that reverting back to an equal weighting of the Reunderwriting
Analysis method and Synthetic Rating Analysis method more accurately captures certain data related to the observed return of market
liquidity and the historic correlative relationship between these markets;
the belief that one or more of our investments can be restored to accrual status in the near term, or otherwise; and
the effect of new or modified laws or regulations governing our operations.
•
•
•
•
•
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to
be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties,
the inclusion of a projection or forward-looking statement in this Annual Report on Form 10-K should not be regarded as a representation by us that our
plans and objectives will be achieved. These risks and uncertainties include, among others, those described or identified in “Item 1A. Risk Factors” in this
Annual Report on Form 10-K. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual
Report on Form 10-K.
We have based the forward-looking statements on information available to us on the date of this Annual Report on Form 10-K. Except as required by the
federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may
file with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The forward-looking
statements and projections contained in this annual report on Form 10-K are excluded from the safe harbor protection provided by Section 21E of the
Securities Exchange Act.
The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and
the related notes thereto contained elsewhere in this Annual Report on Form 10-K.
Overview
Key performance metrics are presented below:
Net asset value per common share
Net investment income per common share
Net increase in net assets resulting from operations per common share
Distributions paid per common share
December 31,
2020
December 31,
2019
$
11.85 $
12.46
Year Ended December 31,
2019
2020
2018
$
0.92 $
0.28
0.86
1.43 $
0.71
1.36
1.38
0.72
1.73
Net investment income per share during the year ended December 31, 2020 declined $0.51 from the prior year primarily due to an approximate
$0.76 decline in net interest margin—total interest income less interest expense—per share. Weighted average yield on debt and Structured Finance Notes
as of December 31, 2020, declined to 9.15% from 9.94% as of December 31, 2019, due to the Company's continuing shift to lower-yielding, first lien
senior secured loans of larger borrowers, as well as the placement of our loans to Online Tech Stores, LLC and 3rd Rock Gaming Holding, LLC, with an
aggregate cost of $35.7 million, on non-accrual status. The decline in net interest margin was partially offset by declines in management and incentive fees
of $0.25 per share. For the year ended December 31, 2020, our weighted-average interest costs increased to 5.32% from 4.99% in the year ended December
31, 2019, principally due to a full year’s interest on the Unsecured Notes Due October 2026 and the issuance in September 2020 of the Unsecured Notes
Due September 2023. As of December 31, 2020, approximately 90% of our debt was fixed rate.
During the year ended December 31, 2020, our portfolio experienced net losses of $6.7 million, or $0.50 per share, principally due to net losses of
$6.8 million on our directly originated debt and equity investments, partially offset by net gains
74
of $0.1 million in our Structured Finance Notes and broadly syndicated loan investments. The net loss in our directly originated investments was primarily
due to our debt investments in 3rd Rock Gaming Holdings, LLC and Online Tech Stores, LLC, which combined for unrealized losses of $21.4 million. The
unrealized losses were offset by unrealized gains in our common equity investment in Pfanstiehl Holdings, Inc., a pharmaceutical ingredients manufacturer,
which appreciated $24.2 million due to performance improvements and expansion of the valuation multiple.
Additionally, during the year ending December 31, 2020, our net asset value decreased $1.1 million, or $0.08 per share, due to the impairment of
goodwill, and $0.8 million, or $0.06 per share, due to the loss on extinguishment of debt related to the prepayment of $44.6 million of SBA debentures that
were contractually due in 2023 and 2024, as well the commitment reduction on the PWB Credit Facility from $100.0 million to $20.0 million.
Since OFS Advisor implemented its business continuity plan in mid-March 2020, the entire team effectively transitioned to remote work and
maintained our normal functionality and we remain capable of completing our operational requirements.
We have actively monitored our portfolio companies throughout this period of economic uncertainty, which has included assessments of our
portfolio companies' operational and liquidity outlook. During the year ended December 31, 2020, we extended the maturity date of loans, rescheduled due
dates of interest payments, and converted cash interest to PIK interest in order to support our portfolio companies through the COVID-19 pandemic. As of
December 31, 2020, we have unfunded commitments of $5.8 million to four portfolio companies. For details on our portfolio activity for the year ended
December 31, 2020, see “Portfolio Composition and Investment Activity — Investment Activity”.
We will continue to monitor the rapidly evolving situation relating to the COVID-19 pandemic and guidance from U.S. and international
authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. In these
circumstances, there may be developments outside our control requiring us to adjust our plan of operation.
We cannot predict the full impact of the COVID-19 pandemic, including its duration in the United States and worldwide, and the magnitude of the
economic impact of the outbreak, including the impact of travel restrictions, business closures and other quarantine measures imposed on service providers
and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, we are unable to
predict the duration of any business and supply-chain disruptions, the extent to which the COVID-19 pandemic will further negatively affect our portfolio
companies’ operating results, or the impact that such disruptions may have on our results of operations and financial condition. Depending on the duration
and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies will continue to experience financial
distress and possibly default on their financial obligations to us and their other capital providers. We also expect that some of our portfolio companies may
significantly curtail business operations, furlough or lay-off employees and terminate service providers, and defer capital expenditures if subjected to
prolonged and severe financial distress, which would likely impair their business on a permanent basis. These developments would likely result in a
decrease in the value of our investment in any such portfolio company, as well as adversely affect our result of operations and cash flow, and such impacts
could be material. See “Item 1A. Risk Factors — Risks Related to the COVID-19 Pandemic” for additional information.
We are also subject to financial risks, including changes in market interest rates. As of December 31, 2020, approximately $309 million (principal
amount) of our debt investments bore interest at variable rates, which are generally LIBOR-based, and many of which are subject to reference-rate floors.
In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has
decreased, primarily in the second quarter of 2020. A prolonged reduction in interest rates will reduce our gross investment income and could result in a
decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the credit spread over LIBOR that we earn
on our portfolio investments, or a decrease in our operating expenses, including our incentive fee and the interest costs on our liabilities indexed to LIBOR.
As of December 31, 2020, the majority of our variable rate debt investments are subject to the base rate floor, partially mitigating the impact of the recent
decrease in LIBOR on our gross investment income. See “Item 1A. Risk Factors — Risks Related to our Business and Structure” for additional
information.
At December 31, 2020, our asset coverage ratio of 176% was within minimum asset coverage requirements under the 1940 Act, and we remained
in compliance with all applicable financial covenants under our revolving credit facilities and outstanding debt. During the year ended December 31, 2020,
we amended the PWB Credit Facility to provide greater flexibility with financial covenants and reduced the total commitment from $50.0 million to $20.0
million. As of December 31, 2020, we had an unused commitment of $19.4 million under our PWB Credit Facility, as well as an unused commitment of
$118.6 million under our BNP Facility, both subject to a borrowing base and other covenants. Based on fair values and net asset value at December 31,
2020, we could access these available lines of credit for a total of $111 million and remain in compliance with our asset coverage requirements. We
continue to believe that we have sufficient levels of liquidity to support our existing portfolio companies and will continue to selectively deploy capital in
new investment opportunities.
75
On March 2, 2021, the Board declared a distribution of $0.20 per share for the first quarter of 2021, payable on March 31, 2021, to stockholders of
record as of March 24, 2021.
Critical Accounting Policies and Significant Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the periods reported. Actual results could materially differ from those estimates. Critical accounting policies are those that
require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may change in subsequent
periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact on our current and future
financial condition and results of operations.
Our critical accounting policies and estimates are those relating to revenue recognition and fair value estimates. Management has discussed the
development and selection of each critical accounting policy and estimate with the Audit Committee of the Board. For a descriptions of our revenue
recognition and fair value policies, see Note 2 to the consolidated financial statements included in "Item 8.–Financial Statements" of this report.
Revenue recognition. Our direct lending activities frequently involve the acquisition of multiple financial instruments or rights either in an initial
transaction, or in subsequent or "follow-on" transactions, including amendments to existing securities. These financial instruments can include loans,
preferred and common stock, warrants, or membership interests in limited liability companies. Acquired rights can include fixed or variable fees that can be
either guaranteed or contingent upon operating performance of the underlying portfolio companies. Moreover, these fees may be payable in cash or
additional securities.
The revenue recognized on these instruments is a function of the fee or other consideration allocated to them, including amounts allocated to loan
syndication fees at the time of acquisition. Additionally, subsequent amendments to these instruments can involve both:
•
a determination as to whether the amendment is
◦
◦
of such significance to deem it the consummation of the initial investment transaction and the acquisition of new instruments (i.e., a
"significant modification"), or
a modification of those instruments to be recognized over their remaining lives, and
•
an additional allocation of consideration among newly acquired Instruments.
These allocations are generally based on the relative fair value of the instruments at the time of the transaction, a process involving fair value
estimates which is also a critical accounting policy and significant estimate. Moreover, these allocations and determinations can differ between GAAP and
federal income tax bases. Once determined, these allocations directly affect the discount/premium and yield on debt securities, the cost and net gains/losses
on equity securities, and capital structuring fees recognized in the statements of operations; and ICTI. These allocations require an understanding of the
terms and conditions of the underlying agreements and requires significant management judgment.
PIK Income. Our recognition of PIK interest and dividends include assessments of collectibility, and may result in recognition of the PIK income
that corresponds to the fair value of the associated investment. If the in-kind securities received is non-accretive to overall value of the Company’s
investment position (i.e., the recognition of PIK income merely results in the recognition of offsetting unrealized depreciation on the position, and no
increase in the Company’s net assets), the PIK income for the in-kind securities received will be adjusted downwards, in some instances to zero.
Furthermore, the recognition of PIK interest at zero does not necessarily correspond to the placement of a loan on non-accrual status, which can result in
the non-recognition of cash interest as well.
Structured Finance Notes. Recognition of interest income on our Structured Finance Notes requires development of numerous assumptions
regarding the performance and behavior of the underlying loans and portfolio companies, as well as assumption regarding the actions expected by the
collateral managers of the CLOs. Income recognized under ASC Sub-topic 325-40, Beneficial Interests in Securitized Financial Assets, the authoritative
accounting literature for income recognition on our Structured Finance Notes, is the constant yield-to-redemption that equates the expected cash flows from
the instrument to
76
its cost or amortized cost. The estimated cash flows from a subordinated note structured finance instrument are estimated, on a period-by-period basis, as
•
•
the expected cash flows from the underlying portfolio of the CLO vehicle, derived by adjusting the contractual amounts due on the portfolio
investments for, among other things
◦
◦
◦
expected losses on defaults,
expected prepayments, and
the impact to cash flows (positive or negative) from the assumed reinvestment of recoveries on defaults and amounts collected on
prepayments, less
the amounts contractually due on tranches senior to the subordinated notes, which generally requires use of forward reference rate curves and the
stated spread over such rates specified in the CLO indentures,
through the expected redemption of the subordinated notes, which is generally assumed to occur upon the exercise of an optional redemption by the
collateral manager of the underlying CLO sometime after the reinvestment period specified in the CLO indenture. Following the reinvestment period
specified in the indenture, CLO instruments enter their amortization period during which the principle balances of the CLO senior debt tranches are
reduced through amortization payment. As the senior CLO debt tranches amortize, the management of the CLO becomes less economically viable to its
collateral manager, prompting the manager to exercise options to liquidate the underlying portfolio, distribute cash to remaining tranches in order of
seniority, and wind-up the CLO vehicle. Depending on where the CLO vehicle is in its reinvestment period, the period over which these cash flows are
forecast can be several years from the valuation date and cross several business cycles. Such estimates involve significant judgement by management.
When the amortized cost of an CLO instrument exceeds the undiscounted expected cash flows from the instrument as of the estimation date, the yield on
that instrument is set to zero percent (-0-%).
The cash flow assumptions utilized in our Structured Finance Notes revenue recognition determination (our “Revenue Assumptions” generally
involve the same economic considerations as the cash flow assumptions utilized in our period-end fair value estimates for these instruments (our “Fair
Value Assumptions”), though on an factor-by-factor basis the assumptions will not be identical as the assumptions are developed by independent parties. To
ensure that our Revenue Assumptions and our Fair Value Assumptions are consistent, management performs period tests involving with-and-without type
considerations to ensure the collection of assumptions for each purpose produce consistent cash flows in all material respects.
Fair value estimates. As of December 31, 2020, total investments representing approximately 91% of our total assets were carried on the
consolidated balance sheet at fair value. As discussed more fully in “Item 8.–Financial Statements–Note 2” GAAP requires us to categorize fair value
measurements according to a three-level valuation hierarchy. The hierarchy gives the highest priority to quoted, active market prices for identical assets and
liabilities (Level 1) and the lowest priority to valuation techniques that require significant management judgment because one or more of the significant
inputs are unobservable in the market place (Level 3). All of our investments carried at fair value are classified as Level 2 and Level 3, with a significant
portion of our investments classified as Level 3. We typically do not hold equity securities or other instruments that are actively traded on an exchange.
Rule 2a-5 under the 1940 Act was recently adopted by the SEC and establishes requirements for determining fair value in good faith for purposes
of the 1940 Act. We are evaluating the impact of adopting Rule 2a-5 on the consolidated financial statements and intend to comply with the new rule’s
requirements on or before the compliance date in September 2022.
As described in “Item 8.–Financial Statements–Note 5”, we follow a process, under the supervision and review of the Board, to determine these
unobservable inputs used in the fair value estimates of our investments. The most significant unobservable inputs in the Level 3 fair value measurements
are the discount rates and EBITDA multiples. Investments classified as Level 2 are measured on the basis of Indicative Prices provided by pricing services.
Our discounted cash flow valuations involve a determination of discount rate commensurate with the risk inherent in each investment.
Management uses two primary methods to estimate discount rates: a method based upon a hypothetical recapitalization of the entity given its current
operating performance and current market conditions; and a synthetic debt rating method, which assigns a surrogate debt rating to the entity based on
known industry standards for assigning such ratings and then estimates the discount rate based on observed market yields for actual rated debt.
Management may also use a relative value method to estimate yields, which involves estimating the discount rate of non-traded subject debt investments
based on an expected or assumed relationship between Indicative Prices or observed prices on traded debt and the subject debt for a portfolio company. All
methods for estimating the discount rate generally involve calibration of unobservable inputs utilized in estimating the discount rate on the subject
investment to its internal rate of return at close or purchase date. These methods generally produce a range of discount rates, and we generally select the
midpoint of the range for use in fair value measures, subject to limitations on the basis of the borrowers' ability to prepay the debt without penalty.
77
Our market approach valuations, generally applied to equity investments and investments in non-performing debt, involve a determination of an
enterprise value multiple to a financial performance metric of the portfolio company, generally EBITDA. These determinations are based on identification
of a comparable set of publicly traded companies and determination of a public-to-private liquidity adjustment factor, generally through calibration to
transaction prices in the subject investment instrument. This method generally produces a range of multiplier values and management, under the
supervision of the Board, generally select the midpoint of the range for fair value measures.
We adjusted our approach to fair value estimates throughout 2020 in response to the economic uncertainty associated with the spread of the
COVID-19 pandemic. Our use of Indicative Prices includes assessments of whether a sufficient number of market quotations are available and whether the
depth of the markets from which those Indicative Prices were received is sufficient to transact in amounts approximating our positions in such assets
without impacting such prices. Moreover, these assessments are generally based on 90-day moving averages of our depth and liquidity metrics. The 90-day
moving average generally counters the effects of intermittent quoting activity observed at month- and quarter-ends, irregular quoting activity that tends to
artificially inflate our market depth and liquidity metrics. We observed significant declines in market liquidity beginning in the middle of March 2020 and
concluded the 90-day moving average was not representative of market conditions given the significant market dislocation during that period. Accordingly,
we adjusted our depth and liquidity assessment to one based on a 5-day moving average of the metrics in our liquidity assessments as of March 31, 2020,
and partially reverted, utilizing 30-day and 60-day moving average, in our June 30, 2020, and September 30, 2020, assessments respectively, as liquidity
continued to return to the loan market. We fully reverted to use of the 90-day moving average in our December 31, 2020, assessments. One measure of
liquidity in the broadly syndicated loan market is the average bid-ask spread on the Refinitiv Market Overall (North America) Loan Index which narrowed
to 1.98 points at June 30, 2020, and 1.53 points at September 30, 2020, from 3.41 points at March 31, 2020, and has not yet returned to its long-term
historic average of 1.0, but narrowed to 1.24 at December 31, 2020. These changes to our depth and liquidity metrics, as well as changes in the level of the
metrics themselves, led to securities with a fair value of $12.7 million and $2.9 million to transfer from Indicative Prices to models and Level 3 inputs at
March 31, 2020 and June 30, 2020, respectively; however, as of December 31, 2020, only one instrument with an aggregate amortized cost of $0.6 million
remained at Level 3 within the fair value hierarchy.
We also adjusted the relative weighting of our Level 3 fair value models throughout this period of heightened economic uncertainty. Our processes
included assessments of the impact of the COVID-19 pandemic on the financial condition, results of operations or cash flows of our portfolio companies.
Initially, such forward-looking assessments were fragmentary; however as such forward-looking estimates became more reliable, such information was
directly incorporated into our fair value models. In circumstances in which reliable forward-looking information was unavailable, we considered the market
impact on performance-metric multiples and related impact on enterprise values. Additionally, management observed a decrease in the historic correlation
between market spreads used in our synthetic debt rating method and those used in our reunderwriting analysis. These market spreads, though highly
correlated before the on set of COVID-19, relate to different segments of the lending market primarily on the basis of borrower size. The synthetic debt
rating method is based on market spreads for larger borrowers with rated debt, while the reunderwring analysis market spreads are generally used for what
are considered middle-market borrowers. Management concluded, given the break-down in this relationship, the relative weight given to each of these
methods required adjustment to correspond to the market most closely associated with the subject investment. Accordingly, we decreased the weighting for
the synthetic debt rating method and increased the weighting for the reunderwriting analysis in the current period year, from a weighting of 50/50 to a
weighting of 10/90, at March 31, 2020, and partially reverted to generally 25/75 at June 30, 2020. We believed the overweighting to the Reunderwriting
Analysis during this period more accurately captured the market in which these instruments are exchanged. By September 30, 2020, we had fully reverted
to an equal weighting of these models as we have observed a return, in all significant respects, of the historic correlative relationship between these
markets.
78
The following table illustrates the impact of our fair value measures if we selected the low or high end of the range for all investments at
December 31, 2020, (in thousands):
Investment Type
Debt investments:
Senior Secured
Senior Secured (valued at Transaction Price)
Subordinated
Structured Finance Notes:
Subordinated notes
Mezzanine bonds
Equity investments:
Preferred equity
Common equity and warrants
Related Party Transactions
Fair Value at December 31,
2020
Range of Fair Value
Low-end
High-end
$
$
300,193 $
6,111
15,067
294,686 $
6,111
12,872
54,724
1,701
52,941
1,657
11,543
52,984
442,323 $
10,317
48,719
427,303 $
305,480
6,111
17,073
56,505
1,746
13,577
56,902
457,394
We have entered into a number of business relationships with affiliated or related parties, including the following:
•
•
The Investment Advisory Agreement with OFS Advisor to manage our operating and investment activities. Under the Investment Advisory
Agreement we have agreed to pay OFS Advisor an annual base management fee based on the average value of our total assets (other than cash and
cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) as well as an
incentive fee based on our investment performance. See “Item 1—Management and Other Agreements” and “Item 8–Financial Statements and
Supplementary Data–Note 3.”
The Administration Agreement with OFS Services, an affiliate of OFS Advisor, to provide us with the office facilities and administrative services
necessary to conduct our operations. See “Item 1–Management and Other Agreements” and “Item 8–Financial Statements and Supplementary
Data–Note 3.”
• A license agreement with OFSAM, the parent company of OFS Advisor, under which OFSAM has agreed to grant us a non-exclusive, royalty-free
license to use the name “OFS.” Under this agreement, we have a right to use the “OFS” name for so long as OFS Advisor or one of its affiliates
remains our investment adviser. Other than with respect to this limited license, we have no legal right to the “OFS” name. This license agreement
will remain in effect for so long as the Investment Advisory Agreement with OFS Advisor is in effect.
On June 11, 2019, OFS Advisor agreed to reduce a portion of its base management fee by reducing the portion of such fee from 0.4375% per quarter
(1.75% annualized) to 0.25% per quarter (1.00% annualized) of the OFSCC-FS Assets at the end of the two most recently completed calendar quarters to
the extent that such portion of the OFSCC-FS Assets are financed using leverage (also calculated on an average basis) that causes the Company’s statutory
asset coverage ratio to fall below 200%. When calculating its statutory asset coverage ratio, the Company excludes its SBA guaranteed debentures from its
total outstanding senior securities as permitted pursuant to exemptive relief granted by the SEC dated November 26, 2013. Effective as of January 1, 2020
and January 1, 2021, OFS Advisor agreed to further reduce the base management fee to 0.25% per quarter (1.00% annualized) of the average value of the
portion of total assets held by the Company through OFSCC-FS at the end of the two most recently completed calendar quarters without regard to the
statutory asset coverage ratio. The base management fee reduction by OFS Advisor is renewable on an annual basis and the amount of the base
management fee reduction with respect to the OFSCC-FS Assets shall not be subject to recoupment by OFS Advisor. This agreement was renewed for the
2021 calendar year on February 16, 2021.
OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to us and OFS Advisor is free to furnish similar services to other
entities, including other BDCs managed by OFS Advisor, so long as its services to us are not impaired. OFS Advisor also serves as the investment adviser
or collateral manager to CLOs and other assets, including HPCI and OCCI. Additionally, OFS Advisor provides sub-advisory services to CMFT Securities
Investments, LLC, a wholly owned subsidiary of CIM Real Estate Finance Trust, Inc., a corporation that qualifies as a real estate investment trust, and to
CIM Real
79
Assets & Credit Fund, an externally managed registered investment company that operates as an interval fund that invests primarily in a combination of
real estate, credit and related investments.
BDCs generally are prohibited under the 1940 Act from knowingly participating in certain transactions with their affiliates without the prior approval of
their independent directors and, in some cases, of the SEC. Those transactions include purchases and sales, and so-called “joint” transactions, in which a
BDC and one or more of its affiliates engage in certain types of profit-making activities. Any person that owns, directly or indirectly, five percent or more
of a BDC’s outstanding voting securities will be considered an affiliate of the BDC for purposes of the 1940 Act, and a BDC generally is prohibited from
engaging in purchases from, sales of assets to, or joint transactions with, such affiliates, absent the prior approval of the BDC’s independent directors.
Additionally, without the approval of the SEC, a BDC is prohibited from engaging in purchases from, sales of assets to, or joint transactions with, the
BDC’s officers, directors, and employees, and advisor (and its control affiliates).
BDCs may, however, invest alongside certain related parties or their respective other clients in certain circumstances where doing so is consistent with
current law and SEC staff interpretations. For example, a BDC may invest alongside such accounts consistent with guidance promulgated by the SEC staff
permitting the BDC and such other accounts to purchase interests in a single class of privately placed securities so long as certain conditions are met,
including that the BDC’s advisor, acting on the BDC’s behalf and on behalf of other clients, negotiates no term other than price. Co-investment with such
other accounts is not permitted or appropriate under this guidance when there is an opportunity to invest in different securities of the same issuer or where
the different investments could be expected to result in a conflict between the BDC’s interests and those of other accounts.
The 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting
the BDC to do so. On August 4, 2020, we received exemptive relief from the SEC to permit us to co-invest in portfolio companies with certain Affiliated
Funds in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other
pertinent factors, subject to compliance with certain conditions. The Order superseded a previous order we received on October 12, 2016 and provides us
with greater flexibility to enter into co-investment transactions with Affiliated Funds. We are generally permitted to co-invest with Affiliated Funds if under
the terms of the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in
connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to
us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned and (2) the transaction is
consistent with the interests of our stockholders and is consistent with our investment objective and strategies.
In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs, through December 31, 2020, we were
permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates even if such other funds
had not previously invested in such existing portfolio company. Without this order, affiliated funds would not be able to participate in such co-investments
with us unless the affiliated funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the
conditional exemptive order has expired, the SEC’s Division of Investment Management has indicated that until March 31, 2022, it will not recommend
enforcement action, to the extent that any BDC with an existing co-investment order continues to engage in certain transactions described in the conditional
exemptive order, pursuant to the same terms and conditions described therein.
Conflicts may arise when we make an investment in conjunction with an investment being made by an Affiliated Account, or in a transaction
where an Affiliated Account has already made an investment. Investment opportunities are, from time to time, appropriate for more than one account in the
same, different or overlapping securities of a portfolio company’s capital structure. Conflicts arise in determining the terms of investments, particularly
where these accounts may invest in different types of securities in a single portfolio company. Questions arise as to whether payment obligations and
covenants should be enforced, modified or waived, or whether debt should be restructured, modified or refinanced. See "Item 1A. Business — Conflicts of
Interest", "Item 1A. Risk Factors — Risks Related to OFS Advisor and its Affiliates —We have potential conflicts of interest related to the purchases and
sales that OFS Advisor makes on our behalf and/or on behalf of Affiliated Accounts" and ""Item 1A. Risk Factors — Regulations — Conflicts of Interest -
Conflicts Related to Portfolio Investments."
Portfolio Composition and Investment Activity
Our portfolio consists of Portfolio Company Investments, as well as indirect investments in such securities through investment in other investment
companies including Structured Finance Notes.
Portfolio Composition. As of December 31, 2020, the fair value of our debt investment portfolio totaled $321.4 million in 49 portfolio companies,
of which 95% and 5% were senior secured loans and subordinated loans, respectively, and $64.5 million in equity investments in 10 portfolio companies in
which we also held debt investments and 13 portfolio companies in which we solely held an equity investment. We had unfunded commitments of $5.8
million to four portfolio
80
companies at December 31, 2020. We also have 12 investments in Structured Finance Notes with a fair value of $56.4 million. Set forth in the tables and
charts below is selected information with respect to our portfolio as of December 31, 2020 and 2019.
The following table presents our investment portfolio by each wholly owned legal entity within the consolidated group as of December 31, 2020
and 2019 (in thousands):
OFS Capital Corporation (Parent)
SBIC I LP
OFSCC-FS
OFSCC-MB
Total investments
December 31, 2020
December 31, 2019
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
$
190,627 $
191,192
67,781
11,423
461,023 $
172,249 $
190,573
68,037
11,464
442,323 $
181,980 $
256,858
88,458
11,375
538,671 $
169,230
246,371
88,936
12,394
516,931
Portfolio Yields: The weighted average yield on total investments was 8.56% and 9.59% at December 31, 2020 and 2019, respectively. The
1
following table displays the composition of our debt investment and Structured Finance Note portfolio by yield range and its weighted average yields as of
December 31, 2020 and 2019:
December 31,
Senior
Secured
Debt
29.5 %
52.0
13.5
3.4
1.6
100.0 %
2020
Subordinated
Debt
— %
—
—
53.6
46.4
100.0 %
Structured
Finance Notes
1.4 %
1.4
—
12.5
84.7
100.0 %
Total
24.0 %
42.2
10.9
7.0
15.9
100.0 %
Senior
Secured
Debt
20.1 %
21.5
48.8
8.4
1.2
100.0 %
2019
Subordinated
Debt
— %
—
8.6
38.3
53.1
100.0 %
Structured
Finance Notes
— %
—
—
25.1
74.9
100.0 %
Total
17.3 %
18.5
42.7
12.0
9.5
100.0 %
8.92 %
14.88 %
16.56 %
10.27 %
9.80 %
13.52 %
15.13 %
10.40 %
8.38 %
5.53 %
16.56 %
9.15 %
9.57 %
10.57 %
15.13 %
9.94 %
Yield Range
Less than 8%
8% – 10%
10% – 12%
12% – 14%
Greater than 14%
Total
Weighted average
yield –
performing debt
and Structured
Finance Note
(2)
investments
Weighted average
yield – total debt
and Structured
Finance Note
(3)
investments
(1) Weighted average yield on total investments is computed as (a) the sum of (i) the annual stated accruing interest on our debt investments at the balance
sheet date, plus the annualized accretion of Net Loan Fees, (ii) the annual effective yield on Structured Finance Notes, (iii) the effective yield on our
performing preferred equity investments, divided by (b) the amortized cost of our total investment portfolio, including assets in non-accrual status as of
the balance sheet date.
(2) The weighted average yield on our performing debt and Structured Finance Note investments is computed as (a) the sum of (i) the annual stated
accruing interest on debt investments plus the annualized accretion of Net Loan Fees; and (ii) the annual effective yield on Structured Finance Notes
divided by (b) the sum of the amortized cost of our debt and Structured Finance Note investments, in each case, excluding debt investments in non-
accrual status as of the balance sheet date.
(3) The weighted average yield on our total debt and Structured Finance Note investments is computed as (a) the sum of (i) the annual stated accruing
interest on debt investments plus the annualized accretion of Net Loan Fees and (ii) the annual effective yield on Structured Finance Notes divided by
(b) the sum of the amortized cost of our debt and Structured Finance Note investments, in each case, including debt investments in non-accrual status
as of the balance sheet date.
81
The weighted average yield of our investments is not the same as a return on investment for our stockholders but, rather, the gross investment income
from our investment portfolio before the payment of all of our fees and expenses. There can be no assurance that the weighted average yield will remain at
its current level.
The weighted average yield on our performing debt and Structured Finance Notes decreased from 10.40% at December 31, 2019 to 10.27% at
December 31, 2020, primarily due to the decrease in LIBOR and deployment of approximately $70.6 million in new debt investments with a weighted
average yield of 8.2%, partially offset by the deployment of approximately $33.5 million in new Structured Finance Notes with a weighted average yield of
16.7% and LIBOR floors on the majority of the debt portfolio.
As of December 31, 2020 and 2019, floating rate loans at fair value were 96% and 93% of our debt investment portfolio, respectively, and fixed
rate loans at fair value were 4% and 7% of our debt investment portfolio, respectively.
Portfolio Company Investments. The following table summarizes the composition of our Portfolio Company Investments as of December 31, 2020
and 2019 (dollar amounts in thousands):
Senior secured debt investments
Subordinated debt investments
Preferred equity
Common equity and warrants
(1)
Total
Number of portfolio companies
December 31, 2020
December 31, 2019
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
$
325,647 $
45,409
18,648
15,459
405,163 $
306,304 $
15,067
11,543
52,984
385,898 $
421,970 $
56,731
21,925
14,919
515,545 $
62
62
85
408,724
43,091
17,729
25,777
495,321
85
(1) Includes debt investments in which we have entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, we have
agreed to receive our principal payments after the repayment of certain co-lenders pursuant to a payment waterfall. The aggregate amortized cost and
fair value of these investments was $55,776 and $56,217 at December 31, 2020, respectively, and $65,300 and $65,337, at December 31, 2019,
respectively.
Approximately 79% of our Portfolio Company Investments at fair value are senior securities of the borrower, rather than in the subordinated
securities, preferred equity or common equity. We believe the seniority of our debt investments in the borrowers' capital structures may provide greater
downside protection against the impact of the COVID-19 pandemic.
As of December 31, 2020, the three largest industries of our Portfolio Company Investments by fair value, were (1) Manufacturing (24.9%), (2)
Professional, Scientific, and Technical Services (19.2%), and (3) Health Care and Social Assistance (14.9%), totaling approximately 59.0% of the
investment portfolio. For a full summary of our investment portfolio by industry, see "Note 4, Investments" to the consolidated financial statements
included in "Part II, Item 8. Financial Statements and Supplementary Data" of this report.
The following table presents our debt investment portfolio by investment size as of December 31, 2020 and 2019, (dollar amounts in thousands):
Amortized Cost
Fair Value
Up to $4,000
$4,001 to $7,000
$7,001 to $10,000
$10,001 to $13,000
Greater than $13,000
Total
$
$
8.2 % $
December 31, 2020
30,427
72,030
51,874
21,013
195,711
371,055
19.4
14.0
5.7
52.7
100.0 % $
December 31, 2019
77,809
71,558
95,567
54,273
179,494
478,701
16.3 % $
14.9
20.0
11.3
37.5
100.0 % $
December 31, 2020
33,149
68,939
43,735
33,470
142,078
321,371
10.3 % $
21.5
13.6
10.4
44.2
100.0 % $
December 31, 2019
75,033
68,806
77,978
53,903
176,095
451,815
16.6 %
15.2
17.3
11.9
39.0
100.0 %
82
Structured Finance Notes. The following table summarizes our Structured Finance Notes as of December 31, 2020 and December 31, 2019, (dollar
amounts in thousands):
Subordinated notes
Mezzanine bonds
Total Structured Finance Notes
Number of Structured Finance Notes
December 31, 2020
December 31, 2019
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
$
54,280 $
1,580
55,860 $
12
54,724 $
1,701
56,425 $
12
23,127 $
—
23,127 $
4
21,610
—
21,610
4
The weighted average yield on Structured Finance Notes increased to 16.6% at December 31, 2020, from 15.13% at December 31, 2019 partially
due to investments of $33.5 million in Structured Finance Notes with a weighted average annual effective yield of 16.7%.
Notable investments in new Structured Finance Notes during the year ended December 31, 2020, include Apex Credit CLO 2020 ($9.3 million
subordinated note) and Madison Park Funding XXIII, Ltd. ($7.5 million subordinated note).
We focused on investing in subordinated note securities with longer reinvestment periods in order to take advantage of market volatility and
maximize cash flows, and all current subordinated note investments have reinvestment periods ending in 2022 or beyond. We believe longer reinvestment
periods provide collateral managers with more flexibility to maximize cash flows by reinvesting loan repayments into new loans, potentially at discounted
levels with higher yields and to reposition the portfolio to adapt to changing market conditions.
Investment Activity. The following is a summary of our Portfolio Company Investment cash investment activity for the years ended December 31,
2020 and 2019, (dollar amounts in millions):
Year Ended December 31, 2020
Year Ended December 31, 2019
Debt
Investments
Equity
Investments
Debt
Investments
Equity
Investments
Investments in new portfolio companies
Investments in existing portfolio companies:
$
Follow-on investments
Restructured investments
Delayed draw and revolver funding
Total investments in existing portfolio companies
Total investments in new and existing portfolio companies $
Number of new portfolio company investments
Number of existing portfolio company investments
Proceeds/distributions from principal payments/equity
investments
Proceeds from investments sold or redeemed
Total proceeds from principal payments, equity distributions
and investments sold
$
$
49.0 $
41.0
0.9
5.7
47.6
96.6 $
14
25
129.6 $
66.9
196.5 $
— $
0.3
—
—
0.3
0.3 $
—
3
— $
3.9
3.9 $
141.6 $
42.0
—
9.6
51.6
193.2 $
45
29
60.9 $
34.8
95.7 $
5.6
—
—
—
—
5.6
3
—
—
0.2
0.2
Notable investments in new portfolio companies during the year ended December 31, 2020 include A&A Transfer Buyer, Inc. ($25.2 million senior
secured loan), SourceHOV Tax, Inc. ($19.7 million senior secured loan), as well as $5.2 million senior secured loans in I&I Sales Group, LLC,
respectively.
During the year ended December 31, 2020, the weighted-average yield of Portfolio Company Investments in new portfolio companies was 8.2%.
During the year ended December 31, 2020, we also invested $33.5 million in Structured Finance Notes with a weighted average annual effective
yield of 16.7%.
83
Non-cash Investment Activity. On March 27, 2020, our debt investment in Constellis Holdings, LLC was restructured to converted our non-
accrual debt investment into 20,628 common shares of equity. The cost and fair value of the 20,628 common shares of equity received was $0.7 million and
$0.7 million, respectively, which we recognized as the investment's cost.
On January 31, 2019, Maverick Healthcare Equity, LLC was acquired by a third party in a purchase transaction. Proceeds from this transaction were
insufficient to redeem the class of equity held by the Company. Accordingly, we received $-0- proceeds and recognized a net loss of $0.1 million,
comprised of $0.9 million realized loss net of $(0.8) million unrealized loss reversal, for the year ended December 31, 2019.
Our level of investment activity may vary substantially from period to period depending on various factors, including, but not limited to, the
amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment
and the competitive environment for the types of investments we make.
PIK and Cash Dividend Accruals
Payment-in-kind dividends on preferred equity securities are recognized at fair value when earned. However, at December 31, 2020, we owned
five preferred equity securities (Contract Datascan Holdings, Inc., Master Cutlery, LLC, Stancor, L.P., My Alarm Center, LLC and TRS Services, LLC),
with an aggregate amortized cost and fair value of $12.4 million and $4.9 million, respectively, for which, notwithstanding the fair value of the preferred
equity securities, the fair value of those securities most-recent PIK dividend as of December 31, 2020, was recognized at $-0-. At December 31, 2019, we
owned four preferred equity securities (Master Cutlery, LLC, Stancor, L.P., My Alarm Center, LLC and TRS Services, LLC), with an aggregate amortized
cost and fair value of $9.9 million and $5.7 million, respectively, for which, notwithstanding the fair value of the preferred equity securities, the fair value
of those securities most-recent PIK dividend as of December 31, 2019, was recognized at $-0-.
Risk Monitoring
We categorize debt investments into seven risk categories based on relevant information about the ability of borrowers to service their debt. For
additional information regarding our risk categories, see “Item 1. Business—Portfolio Review/Risk Monitoring.” The following table shows the
classification of our debt investments portfolio by risk category as of December 31, 2020 and 2019 (dollar amounts in thousands):
Risk Category
1 (Low Risk)
2 (Below Average Risk)
3 (Average)
4 (Special Mention)
5 (Substandard)
6 (Doubtful)
7 (Loss)
As of December 31,
2020
2019
Debt
Investments, at
Fair Value
% of Debt
Investments
Debt
Investments, at
Fair Value
% of Debt
Investments
$
$
—
—
263,934
45,302
11,684
451
—
321,371
— % $
—
82.2
14.1
3.6
0.1
—
100.0 % $
—
17,953
387,654
45,546
—
662
—
451,815
— %
4.0
85.8
10.1
—
0.1
—
100.0 %
During the year ended December 31, 2020, we had debt investments with risk downgrades from risk category 3 to risk category 4 with a fair value
of $15.9 million at December 31, 2020. We also had debt investments with risk downgrades from risk category 3 to risk category 5 with a fair value of
$11.7 million at December 31, 2020.
During the year ended December 31, 2019, we had a debt investment with a risk upgrade from risk category 3 to risk category 2 with a fair value of
$14.2 million at December 31, 2019. We also had a debt investment with a risk upgrade from risk category 4 to risk category 3 with a fair value of $14.6
million at December 31, 2019. We had debt investments with risk rating downgrades from risk category 3 to risk category 4 with an aggregate fair value of
$34.0 million at December 31, 2019. We also had a debt investment with risk rating downgrade from risk category 4 to risk category 6 with a fair value of
$0.4 million at December 31, 2019.
All other year-over-year changes in the fair value of our debt investments within each category, were a result of new debt investments, the receipt
of amortization payments on existing debt investments, repayment of certain debt investments in full, changes in the fair value of our existing debt
investments within the categories, and other investment activity.
84
Non-Accrual Loans
At December 31, 2020, we had four loans on non-accrual status (Community Intervention Services, Inc., Master Cutlery, LLC, 3rd Rock Gaming
Holdings, LLC, and Online Tech Stores, LLC) with respect to all interest and Net Loan Fee amortization, with an aggregate amortized cost and fair value
of $48.1 million and $12.1 million, respectively. The change to non-accrual status for our investments in Online Tech Stores and 3rd Rock Gaming
Holdings, LLC were effective January 1, 2020 and April 1, 2020, respectively.
At December 31, 2019, we had four loans on non-accrual status (Community Intervention Services, Inc., Master Cutlery, LLC, Southern Technical
Institute, LLC and Constellis Holdings, LLC) with respect to all interest and Net Loan Fee amortization, with an aggregate amortized cost and fair value of
$22.2 million and $0.7 million, respectively. The change to non-accrual status for our investment in Constellis Holdings, LLC was effective November 1,
2019.
On March 27, 2020, our debt investment in Constellis Holdings, LLC was restructured. We converted our non-accrual debt investment into 20,628
common shares of equity. The cost and fair value of the common shares received were $0.7 million and $0.7 million, respectively as of December 31, 2020.
We recognized a realized loss on the restructuring of $9.1 million for the year ended December 31, 2020, which was fully recognized as unrealized losses
as of December 31, 2019.
On September 30, 2020, our non-accrual debt investment in Southern Technical Institute, LLC was restructured, pursuant to which we received
proceeds of $0.5 million, in full satisfaction of contractually due interest of $0.2 million and principal of $1.7 million. The investment was carried at a cost
of $-0-. Accordingly, during the year ended December 31, 2020, we recognized a realized gain of $0.3 million. As of December 31, 2020, we hold equity
appreciation rights with a cost and fair value of $-0- and $4,295 respectively.
Results of Operations
Key Financial Measures. The following is a discussion of the key financial measures that management employs in reviewing the performance of
our operations.
Net Investment Income. Total investment income less total expenses (“NII”) is a key performance metric in obtaining part of our investment
objective of providing current income to stockholders. NII can be a general indicator of ICTI and the amount of distributions that will be required to made
due to RIC requirements. One of our main objectives is to increase NII, and in turn, increase distributions to stockholders.
Total Investment Income. We generate revenue primarily in the form of interest income on debt investments and Structured Finance Notes. Our
debt investments typically have a term of three to eight years and typically bear interest at floating rates. As of December 31, 2020, floating rate and fixed
rate loans comprised 96% and 4%, respectively, of our current debt investment portfolio at fair value. In some cases, our investments provide for PIK
interest, or PIK dividends (meaning interest or dividends paid in the form of additional principal amount of the loan or equity security instead of in cash).
Net Loan Fees are capitalized, and accreted or amortized over the life of the loan as interest income. When we receive principal payments on a loan in an
amount that exceeds its amortized cost, we recognize the excess principal payment as income in the period it is received. From time to time, our common
equity investments declare dividends, which are recognized when declared.
We also generate revenue in the form of other contractual fees, which are recognized as the related services are rendered. In the general course of business,
we receive certain non-recurring fees from portfolio companies, such as prepayment fees on loans that repaid prior to their scheduled due date, which are
recognized as earned when received. Syndication fees are received for capital structuring, loan syndication or advisory services from certain portfolio
companies, which are recognized as earned upon closing of the investment. Syndication fees are dependant on our pipeline and loan originations of middle-
market loans.
Expenses. Our primary operating expenses include interest expense due under our outstanding borrowings, the payment of fees to OFS Advisor
under the Investment Advisory Agreement and our allocable portion of overhead expenses under the Administration Agreement. We also incur professional
fees such as legal and accounting fees in connection with compliance oblgiations under the 1940 Act and other applicable U.S. federal and state securities
law. We also will incur standard operating costs common to BDCs such as transfer agent, custodial and board of director fees. Additionally, we will pay
interest expense on any outstanding debt under any new credit facility or other debt instrument we may enter into. We will bear all other out-of-pocket costs
and expenses of our operations and transactions, whether incurred by us directly, OFS Services or its affiliates, or on our behalf by a third party.
Net Gain (Loss) on Investments. Net gain (loss) on investments consists of the sum of: (a) realized gains and losses from the sale of debt or equity
securities, or the redemption of equity securities; and (b) net unrealized appreciation or depreciation on debt and equity investments, net of applicable taxes
to the extent the investments are held through taxable wholly owned subsidiaries. In the period in which a realized gain or loss is recognized, such gain or
loss will generally be offset by the reversal of previously recognized unrealized appreciation or depreciation, and the net gain recognized in that period will
85
generally be smaller. The unrealized appreciation or depreciation on debt securities is also reversed when those investments are redeemed or paid off prior
to maturity. In such instances, the reversal of accumulated unrealized appreciation or depreciation will be reported as a net loss or gain, respectively, and
may be partially offset by the acceleration of any premium or discount on the debt security, which is reported in interest income, and any prepayment fees
on the debt security, which is reported in fee income.
Net Asset Value: Total assets less total liabilities (“NAV”) is a key performance metric that is monitored to ensure part of our investment objective
of capital appreciation to stockholders is fulfilled. The net increase (decrease) in net assets resulting from operations can vary substantially from period to
period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, annual
comparisons of net increase in net assets resulting from operations may not be meaningful.
We do not believe that our historical operating performance is necessarily indicative of our future results of operations that we expect to report in
future periods. Our investment strategy is to maintain a leveraged credit investment portfolio, primarily focused on investments in middle-market
companies in the United States, including debt investments and, to a lesser extent, equity investments, including warrants and other minority equity
securities. Moreover, as a BDC and a RIC, we are also subject to certain constraints on our operations, including, but not limited to, limitations imposed by
the 1940 Act and the Code. In addition, SBIC I LP is subject to regulation and oversight by the SBA. For the reasons described above, the results of
operations described below may not necessarily be indicative of the results we expect to report in future periods.
Comparison of years ended December 31, 2020, 2019 and 2018. Consolidated operating results for the years ended December 31, 2020, 2019 and
2018 are as follows (in thousands):
Years Ended December 31,
2019
2020
2018
Investment income
Interest income:
Cash interest income
Net Loan Fee amortization
Accretion of interest income on Structured Finance Notes
Other interest income
Total interest income
PIK income:
PIK interest income
Preferred equity PIK dividends
Total PIK income
Dividend income:
Common equity dividends
Total dividend income
Fee income:
Management and syndication
Prepayment and other fees
Total fee income
Total investment income
Total expenses, net of incentive fee waivers
Net investment income
Net loss on investments
Loss on extinguishment of debt
Loss on impairment of goodwill
Net increase in net assets resulting from operations
86
$
$
33,987 $
1,584
5,877
69
41,517
44,649 $
1,245
2,861
147
48,902
1,527
505
2,032
450
450
745
731
1,476
45,475
33,180
12,295
(6,704)
(820)
(1,077)
3,694 $
927
898
1,825
502
502
773
519
1,292
52,521
33,423
19,098
(9,545)
—
—
9,553 $
36,068
2,288
—
251
38,607
1,193
906
2,099
315
315
922
891
1,813
42,834
24,449
18,385
(8,813)
—
—
9,572
Interest and PIK interest income by debt investment type for the years ended December 31, 2020, 2019 and 2018 are summarized below (in
thousands):
Interest and PIK interest income:
Senior secured debt investments
Subordinated debt investments
Structured Finance Notes
Total interest and PIK interest income
Years Ended December 31,
2019
2020
2018
$
$
33,186 $
3,903
5,955
43,044 $
41,300 $
5,667
2,861
49,828 $
32,127
7,673
—
39,800
Comparison of investment income for the years ended December 31, 2020 and 2019. Interest and PIK interest income decreased approximately
$6.8 million during the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a $1.8 million decrease in interest
income caused by a $16 million decrease in the average outstanding loan balance and a $5.0 million decrease in recurring interest income resulting from a
128 basis point decrease in the weighted average yield in our debt portfolio. Acceleration of Net Loan Fees from the repayment of loans prior to their
scheduled due dates of $0.2 million and $0.3 million were included in interest income for the years ended December 31, 2020 and 2019, respectively.
Due to the COVID-19 pandemic and the impact to certain portfolio companies during 2020, we experienced a partial shift from cash interest to
PIK interest resulting from concessions granted, such as increasing the PIK interest rate or converting cash interest to PIK interest granted, to support the
borrowers' liquidity. Total PIK income on debt securities increased to $1.5 million during the year ended December 31, 2020, but still remained under 5%
of total investment income. For the year ended December 31, 2020, cash and PIK interest of $1.2 million and $3.4 million, respectively, was not recognized
in income due to reasonable doubt whether it will be collected.
Prepayment fees and syndication fees generally result from periodic transactions rather than from holding portfolio investments and are considered
non-recurring. During the year ended December 31, 2020, we recognized prepayment fees of $0.6 million resulting from $38.4 million of unscheduled
principal payments, compared to $0.4 million from $56.8 million of unscheduled principal payments during the year ended December 31, 2019. We
recognized syndication fees of $0.7 million and $0.7 million for the years ended December 31, 2020 and 2019, respectively, resulting from approximately
$46.8 million and $91.5 million in loan originations which OFS Advisor sourced, structured, and arranged the lending group, and for which we were
additionally compensated.
Comparison of investment income for the years ended December 31, 2019 and 2018. Interest and PIK interest income increased approximately
$10.0 million during the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to a $12.7 million increase in
recurring interest income caused by a $103 million increase in the average outstanding loan balance and a decrease of $1.8 million in recurring interest
income resulting from a 43 basis point decrease in the weighted average yield in our debt portfolio. Acceleration of Net Loan Fees of $0.3 million and $1.1
million were included in interest income for the years ended December 31, 2019 and 2018, respectively, from the repayment of loans prior to their
scheduled due dates.
During the year ended December 31, 2019, we recognized prepayment fees of $0.4 million resulting from $56.8 million of unscheduled principal
payments, compared to $0.9 million from $50.0 million of unscheduled principal payments during the year ended December 31, 2018. We recognized
syndication fees of $0.7 million and $0.7 million for the years ended December 31, 2019 and 2018, respectively, resulting from approximately $91.5
million and $64.0 million in loan originations which OFS Advisor sourced, structured, and arranged the lending group, and for which we were additionally
compensated.
87
Expenses. Operating expenses for years ended December 31, 2020, 2019 and 2018, are presented below (in thousands):
Interest expense
Management fees
Incentive fee, net of waivers
Professional fees
Administration fee
General and administrative expenses
Total expenses, net of waivers
Years Ended December 31,
2019
2020
2018
$
$
18,808 $
7,605
1,584
1,993
1,855
1,335
33,180 $
15,829 $
8,271
4,760
1,814
1,747
1,002
33,423 $
9,232
6,335
4,387
1,245
1,601
1,649
24,449
Comparison of expenses for the years ended December 31, 2020 and 2019. Interest expense increased by $3.0 million during the year ended
December 31, 2020 compared to the year ended December 31, 2019 primarily due to an increase of $39.4 million in average outstanding borrowings,
primarily due to a full year’s interest on the Unsecured Notes Due October 2026 and the issuance in September 2020 of the Unsecured Notes Due
September 2023. See "Item 8.–Financial Statements–Note 7" for details.
Management fee expense decreased by $0.7 million due to a decrease in our average total assets, primarily due to the sale of debt investments in
response to the uncertainty surrounding the COVID-19 pandemic.
During the year ended December 31, 2020, Incentive fee expense decreased by $3.2 million, or $3.6 million prior to the Income Incentive Fee
waiver of $0.4 million, due to a decrease in net investment income. On May 4, 2020, OFS Advisor agreed to irrevocably waive $0.4 million in Income
Incentive Fees related to net investment income, that it would otherwise be entitled to receive for the three months ended March 31, 2020. As a result of the
voluntary fee waiver, we incurred Income Incentive Fee expense of $0.4 million for the three months ended March 31, 2020, which is equal to half the
Income Incentive Fee expense we would have incurred for such period.
During the year ended December 31, 2020, professional fees increased $0.2 million primarily due to an increase in external audit costs, and
general and administrative expenses increased $0.3 million primarily due to the write-off of deferred offering costs relating to our prior shelf registration.
Comparison of expenses for the years ended December 31, 2019 and 2018. Interest expense increased by $6.6 million during the year ended
December 31, 2019 compared to the year ended December 31, 2018 primarily due to an increase of $100.9 million in the average amount of outstanding
borrowings, primarily due to a full year’s interest on the Unsecured Notes Due October 2025, the establishment of the BNP Facility in June 2019, and the
issuance in October 2019 of the Unsecured Notes Due 2026. See "Item 8.–Financial Statements–Note 7" for details.
During the year ended December 31, 2019, management fee expense increased by $2.0 million due to an increase in our average total assets,
primarily due to an increase in net investment activity from employing leverage from the BNP Facility and Unsecured Notes Due 2026. Incentive fee
expense for 2019 also increased by $0.4 million primarily due to a $0.7 million increase in net investment income relating to the increase in our leverage
throughout the fiscal year.
During the year ended December 31, 2019, professional fees increased $0.6 million primarily due to the retention of third-party valuation services,
as well as an increase in internal and external audit costs.
During the year ended December 31, 2019, general and administrative expenses decreased $0.6 million primarily due to non-recurring legal and
other offering costs incurred during the first quarter of 2018 in connection with a foreign debt transaction that we elected not to pursue due to regulatory
changes and market conditions.
88
Net realized and unrealized gain (loss) on investments. Net realized and unrealized gain (loss) on investments for years ended December 31,
2020, 2019 and 2018, are presented below (in thousands):
Senior secured debt
Subordinated debt
Preferred equity
Common equity and warrants
Structured Finance Notes
Net loss on investments
Year ended December 31, 2020
Years Ended December 31,
2019
2018
2020
(15,859) $
(16,388)
(2,708)
26,170
2,081
(6,704) $
$
(9,809) $
(1,968)
(89)
3,837
(1,516)
(9,545) $
(9,020)
(3,308)
(1,993)
5,508
—
(8,813)
During the year ended December 31, 2020, we recognized net losses of $15.9 million on senior secured debt, primarily as a result of unrealized
losses of $9.2 million and $2.8 million on our senior secured debt investments in 3rd Rock Gaming Holding, LLC, and Envocore Holdings, LLC,
respectively.
During the year ended December 31, 2020, we recognized net losses of $16.4 million on subordinated debt, primarily as a result of unrealized
losses of $12.1 million and $4.7 million on our subordinated debt investments in Online Tech Stores, LLC and Eblens Holdings, Inc., respectively.
During the year ended December 31, 2020, we recognized net losses of $2.7 million on preferred equity investments, primarily as a result of
unrealized losses of $3.2 million and $2.0 million in Contract Datascan Holdings, Inc. and My Alarm Center, LLC, respectively, offset by an unrealized
gain of $1.7 million in TTG Healthcare, LLC.
During the year ended December 31, 2020, we recognized net gains of $26.2 million on common equity and warrant investments, primarily as a
result of unrealized gains of $24.2 million and $4.3 million on our common equity investment in Pfanstiehl Holdings, Inc. and our equity appreciation
rights in Southern Technical Institute, LLC, respectively, offset by a net unrealized loss of $1.2 million on our investment in Professional Pipe Holdings,
LLC.
Year ended December 31, 2019
During the year ended December 31, 2019, we recognized net losses of $9.8 million on senior secured debt, primarily as a result of an unrealized
loss of $9.0 million on our senior secured debt investment in Constellis Holdings, LLC, offset by unrealized gains of $2.2 million in our remaining senior
secured debt investments. During the year ended December 31, 2019, we also recognized a realized loss of $2.9 million on the sale of MAI Holdings, LLC.
During the year ended December 31, 2019, we recognized net losses of $2.0 million on subordinated debt, primarily as a result of unrealized
losses of $1.5 million and $0.6 million on our subordinated debt investments in Online Tech Stores, LLCand Master Cutlery, LLC, respectively, due to the
negative impact of performance factors.
During the year ended December 31, 2019, we recognized net losses of $0.1 million on preferred equity investments, primarily as a result of a
$2.3 million unrealized gain on TRS Services, LLC, offset by $2.3 million of unrealized losses on our remaining preferred equity investments. During the
year ended December 31, 2019, we also recognized a realized loss of $0.1 million on the sale of Maverick Healthcare Equity, LLC.
During the year ended December 31, 2019, we recognized net gains of $3.8 million on common equity and warrant investments, as a result of
unrealized gains of $3.6 million and $1.6 million on our common equity investments in Pfanstiehl Holdings, Inc. and Professional Pipe Holdings LLC,
respectively, offset by a net unrealized loss of $1.4 million on our remaining common equity and warrant investments due to net negative impact of
portfolio company-specific performance factors.
During the year ended December 31, 2019, we recognized net losses of $1.5 million on Structured Finance Notes primarily driven by a $0.9
million and $0.6 unrealized loss on Elevation CLO 2017-7, Ltd. and THL Credit Wind River 2019‐3 CLO Ltd., respectively.
Year ended December 31, 2018
89
During the year ended December 31, 2018, we recognized net losses of $9.0 million on senior secured debt, primarily as a result of a realized loss
of $3.5 million on our senior secured debt investment in Jobson recognized upon the sale in the second quarter of 2018, as well as by the negative net
impact of mark-to-market adjustments in the fourth quarter relating to our Broadly Syndicated Loan investments resulting in an unrealized loss of $5.5
million.
During the year ended December 31, 2018, we recognized net losses of $3.3 million on subordinated debt, primarily as a result of a realized loss
of $3.5 million on the restructuring of the Southern Technical Institute, LLC subordinated debt investment, of which $2.3 million was recognized as
unrealized losses in prior years, and net unrealized depreciation of $2.1 from the negative impact of specific performance factors, principally related to
Master Cutlery LLC.
During the year ended December 31, 2018, we recognized net losses of $2.0 million on preferred equity investments, primarily as a result of a
$1.4 million unrealized loss on TRS Services, LLC, and other negative net impact of portfolio company-specific performance factors on other investments
resulting in an additional unrealized loss of $0.6 million.
During the year ended December 31, 2018, we recognized net gains of $5.5 million on common equity and warrant investments, as a result of net
realized gains of $3.7 million, primarily driven by a $4.1 million realized gain on the sale of All Metal Holdings, LLC, and the positive impact of portfolio
company-specific performance factors resulting in unrealized appreciation of $1.8 million.
Loss on Impairment of Goodwill. On December 4, 2013, in connection with the acquisition of the remaining ownership interests in SBIC I LP
and SBIC I GP, LLC, making SBIC I LP a wholly owned subsidiary, we recorded goodwill of $1.1 million. The decline in the price of our common stock
and the level at which it continues to trade relative to the broader stock indices for the BDC industry, led us to conclude in the third quarter of 2020 that an
impairment in the value of our goodwill was more likely than not. Moreover, due to the discount at which our stock traded to its net asset value we
concluded it was appropriate that the impairment of goodwill equal the full amount of its carrying value of $1.1 million. The loss on impairment of
goodwill did not impact our management or incentive fees.
Losses on Extinguishment of Debt. During the year ended December 31, 2020, we prepaid $44.6 million of SBA debentures that were
contractually due September 1, 2023, March 1, 2024 and September 1, 2024. We recognized losses on extinguishment of debt of $0.7 million related to the
charge-off of deferred borrowing costs on the prepaid debentures.
During the year ended December 31, 2020, the BLA with Pacific Western Bank was amended to reduce the total commitment under the PWB
Credit Facility from $100.0 million to $20.0 million. We recognized a loss on extinguishment of debt of $0.1 million related to the charge-off of deferred
borrowing costs on the commitment reduction.
90
Comparison of the three months ended December 31, 2020 and September 30, 2020. Consolidated operating results for the three months ended
December 31, 2020 and September 30, 2020, are as follows (in thousands):
Three Months Ended
December 31, 2020
September 30, 2020
Investment income
Interest income:
Cash interest income
Net Loan Fee amortization
Accretion of interest income on Structured Finance Notes
Other interest income
Total interest income
PIK income:
PIK interest income
Preferred equity PIK dividends
Total PIK income
Dividend income:
Common equity dividends
Total dividend income
Fee income:
Management and syndication
Prepayment and other fees
Total fee income
Total investment income
Total expenses
Net investment income
Net gain on investments
Loss on extinguishment of debt
Loss on impairment of goodwill
Net increase in net assets resulting from operations
$
$
7,423 $
625
1,735
15
9,798
306
116
422
350
350
278
289
567
11,137
8,133
3,004
8,915
(484)
—
11,435 $
8,265
142
1,516
—
9,923
393
45
438
—
—
89
37
126
10,487
7,775
2,712
15,313
(187)
(1,077)
16,761
Interest and PIK interest income by debt investment type for the three months ended December 31, 2020 and September 30, 2020 are summarized
below (in thousands):
Interest and PIK interest income:
Senior secured debt investments
Subordinated debt investments
Structured Finance Notes
Total interest and PIK interest income
Three Months Ended
December 31, 2020
September 30, 2020
$
$
7,464 $
863
1,777
10,104 $
7,583
1,181
1,553
10,317
Total interest and PIK interest income decreased $0.2 million during the three months ended December 31, 2020, compared to the three months
ended September 30, 2020, primarily due to a $0.3 million decrease in subordinated debt interest related to $11.8 million in payoffs.
91
Expenses. Operating expenses for the three months ended December 31, 2020 and September 30, 2020 are presented below (in thousands):
Interest expense
Management fees
Incentive fees
Professional fees
Administration fees
General and administrative expenses
Total expenses
Three Months Ended
December 31, 2020
September 30, 2020
$
$
4,507 $
1,846
693
464
399
224
8,133 $
4,448
1,871
234
422
436
364
7,775
Total expenses increased $0.4 million during the three months ended December 31, 2020 compared to the three months ended September 30, 2020
primarily due to a $0.5 million increase in incentive fees.
Net realized and unrealized gain (loss) on investments. Net gain (loss) by investment type for the three months ended December 31, 2020 and
September 30, 2020 were as follows (in thousands):
Senior secured debt
Subordinated debt
Preferred equity
Common equity and warrants
Structured Finance Notes
Net gain on investments
Three Months Ended
December 31, 2020
September 30, 2020
148 $
(4,803)
(71)
9,347
4,294
8,915 $
7,066
(3,995)
(88)
10,837
1,495
15,315
$
Net gain on investments decreased $6.4 million during the three months ended December 31, 2020 compared to the three months ended
September 30, 2020 primarily due to a $6.9 million decrease in net gains on our senior secured debt.
Liquidity and Capital Resources
At December 31, 2020, we held cash and cash equivalents of $37.7 million, which includes cash and cash equivalents of $32.2 million held by
SBIC I LP, our wholly owned SBIC, and $3.3 million held by OFSCC-FS. Our use of cash held by SBIC I LP is restricted by SBA regulation, including
limitations on the amount of cash SBIC I LP can distribute to the Parent. Any such distributions to the Parent from SBIC I LP are generally restricted under
SBA regulations to a statutory measure of undistributed accumulated earnings or regulatory capital of SBIC I LP, and require the prior approval of the
SBA. During the year ended December 31, 2020, the Parent received cash distributions of $8.1 million from SBIC I LP. Distributions from OFSCC-FS to
the Parent are restricted by the terms and conditions of the BNP Facility. During the year ended December 31, 2020, the Parent received $1.7 million in
cash distributions from OFSCC-FS. At December 31, 2020, the Parent had $21.2 million of cash and cash equivalents available for general corporate
activities, including approximately $18.3 million and $0.6 million held by SBIC I LP and OFSCC-FS, respectively, that was available for distribution to the
Parent. The Parent may make unsecured loans to SBIC I LP, the aggregate of which cannot exceed $35 million at any given time, and no interest may be
charged on the unpaid principal balance. There were no intercompany loans between the Parent and SBIC I LP at December 31, 2020.
Additionally, at December 31, 2020, we had unused an unused commitment of $19.4 million under our PWB Credit Facility, as well as an unused
commitment of $118.6 million under the BNP Facility, both subject to borrowing base requirements and other covenants.
As of December 31, 2020, the aggregate amount outstanding of the senior securities issued by us was $209.9 million, for which our asset coverage
was 176%. The SBA debentures are not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC
effective November 26, 2013. The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total
assets, less all liabilities and indebtedness not represented by senior securities, divided by total senior securities representing indebtedness. Based on fair
values and equity
92
capital at December 31, 2020, we could access $111 million and under our credit facilities and remain in compliance with our asset coverage requirements.
As of March 1, 2021, we had cash on hand of approximately $131.5 million. We continue to believe that we have sufficient levels of liquidity to
support our existing portfolio companies and selectively deploy capital in new investment opportunities in this challenging environment.
Sources and Uses of Cash and Cash Equivalents. We generate cash through operations from net investment income and the net liquidation of
portfolio investments, and use cash in our operations in the net purchase of portfolio investments. Significant variations may exist between net investment
income and cash from net investment income, primarily due to the recognition of non-cash investment income, including Net Loan Fee amortization, PIK
interest, and PIK dividends, which generally will not be fully realized in cash until we exit the investment, as well as variation between the constant yield
recognized on our Structured Finance Notes and the cash distributions received thereon. As discussed in "Item 8. Financial Statements—Note 3", we pay
OFS Advisor a quarterly incentive fee with respect to our pre-incentive fee net investment income, which includes investment income that has not been
received in cash. In addition, we must distribute substantially all our taxable income, which approximates, but will not always equal, the cash we generate
from net investment income to maintain our RIC tax treatment. Historically, our distributions have been in excess of taxable income and we have limited
history of net taxable gains. We also obtain cash to fund investments or general corporate activities from the issuance of securities and our revolving lines
of credit. These principal sources and uses of cash and liquidity are presented below (in thousands):
Cash from net investment income
Net (purchases and originations) repayments of portfolio investments
Net cash provided by (used in) operating activities
Proceeds from issuance of the Unsecured Notes, net of discounts
Distributions paid to stockholders
Net borrowings (repayments) under revolving line of credits
Repayment of SBA debentures
Payment of debt issuance costs and other financing costs
Net cash provided (used) by financing activities
Net increase (decrease) in cash
Years Ended December 31,
2019
2020
2018
5,817 $
74,808
80,625
24,250
(11,365)
(24,400)
(44,610)
(239)
(56,364)
24,261 $
15,432 $
(117,068)
(101,636)
52,270
(17,949)
44,450
—
(1,860)
76,911
(24,725) $
18,782
(119,870)
(101,088)
95,446
(22,895)
(5,600)
—
(643)
66,308
(34,780)
$
Comparison of the years ended December 31, 2020 and 2019. At December 31, 2020, we held cash and cash equivalents of $37.7 million, an
increase of $24.3 million from December 31, 2019.
Cash from net investment income. Cash from net investment income decreased $9.6 million for the year ended December 31, 2020 compared to
the prior year. The decrease to cash from net investment income was principally due a $16.0 million decrease in the average outstanding loan balance as
well a 128 basis point decrease in the weighted average yield in our debt portfolio.
Net (purchases and originations) repayments of portfolio investments. During the year ended December 31, 2020, net purchases and repayments of
portfolio investments increased $191.9 million compared to the prior year, primarily due to an increase of $108.1 million of principal payments, sale
proceeds, and distributions from Structured Finance Notes, and a decrease of $83.8 million in purchases of portfolio companies.
Proceeds from issuance of the Unsecured Notes, net of expenses. During the year ended December 31, 2020, we issued $25.0 million in
Unsecured Notes, with net proceeds of $24.0 million after deducting underwriting discounts and offering costs, which was a decrease of $28.0 million in
Unsecured Note issuances compared to the prior year.
Cash distributions paid. Cash distributions decreased $6.6 million for the year ended December 31, 2020 compared to the prior year, due to the
decrease in distributions declared of $0.50 per share from the prior year.
Net borrowings (repayments) under revolving line of credits. During the year ended December 31, 2020, net borrowings under revolving lines of
credit decreased $68.9 million compared to the prior year, primarily due to the sale of debt investments response to the uncertainty surrounding the
COVID-19 pandemic.
Payment of debt issuance costs and other financing costs. Payment of debt issuance costs decreased $1.6 million for the year ended December 31,
2020 compared to the prior year, primarily due to $1.3 million of costs associated with the closing of the BNP Facility in 2019.
93
Comparison of the years ended December 31, 2019 and 2018. At December 31, 2019, we held cash and cash equivalents of $13.4 million, a
decrease of $24.7 million from December 31, 2018.
Cash from net investment income. Cash from net investment income decreased $3.3 million for the year ended December 31, 2019 compared to
the prior year. The decrease to cash from net investment income was principally due the decrease in net interest margin.
Net (purchases and originations) repayments of portfolio investments . During the year ended December 31, 2019, net purchases and repayments
of portfolio investments increased approximately $2.8 million compared to the prior year, primarily due to a decrease of $49.2 million of principal
payments, sale proceeds and distributions received from Structured Finance Notes, offset by a increase $51.9 million in purchases of portfolio companies.
Proceeds from issuance of the Unsecured Notes, net of expenses. During the year ended December 31, 2019, we issued $54.3 million in
Unsecured Notes, with net proceeds of $52.3 million after deducting underwriting discounts and offering costs, which was a decrease of $43.2 million in
Unsecured Note issuances compared to the prior year.
Cash distributions paid. Cash distributions decreased $4.9 million for the year ended December 31, 2019 compared to the prior year, due to the
$4.9 million special dividend paid in the first quarter of 2018 for an undistributed net long-term capital gains realized by the Company in 2017.
Net borrowings (repayments) under revolving line of credits. During the year ended December 31, 2019, net borrowings under revolving lines of
credit increased $50.1 million compared to the prior year, primarily due to the establishment of the BNP Facility to purchase additional first lien senior
secured loans. As of December 31, 2019, aggregate borrowings under the BNP Facility were $56.5 million.
Payment of debt issuance costs and other financing costs. Payment of debt issuance costs increased $1.2 million for the year ended December 31, 2019
compared to the prior year, primarily due to $1.3 million of costs associated with the closing of the BNP Facility.
Borrowings
SBA Debentures. SBIC I LP has a SBIC license that allowed it to obtain leverage by issuing SBA-guaranteed debentures. These debentures are
non-recourse to us, and bear interest payable semi-annually. The following table shows our outstanding SBA debentures payable as of December 31, 2020
and 2019 (in thousands):
SBA debentures outstanding
Pooling Date
September 19, 2012
September 25, 2013
March 26, 2014
September 24, 2014
September 24, 2014
March 25, 2015
September 23, 2015
SBA debentures outstanding
Unamortized debt issuance costs
Maturity Date
September 1, 2022
September 1, 2023
March 1, 2024
September 1, 2024
September 1, 2024
March 1, 2025
September 1, 2025
SBA debentures outstanding, net of unamortized debt issuance costs
Fixed Interest
Rate
3.049 % $
4.448
3.995
3.819
3.370
2.872
3.184
December 31, 2020 December 31, 2019
14,000
7,000
5,000
4,110
31,265
65,920
22,585
149,880
(1,904)
147,976
14,000 $
—
—
—
2,765
65,920
22,585
105,270
(1,088)
104,182 $
$
On a stand-alone basis, SBIC I LP held $223.8 million and $249.6 million in assets at December 31, 2020 and 2019, respectively, which
accounted for approximately 46% and 46% of the Company’s total consolidated assets, respectively.
As part of our plans to focus on lower-yielding, first lien senior secured loans to larger borrowers, which we believe will improve our overall risk profile,
SBIC I LP is repaying over time its outstanding SBA debentures prior to their scheduled maturity dates. We do not expect to make new investments
through SBIC I LP, other than follow-on investments. We believe that investing in more senior loans to larger borrowers is consistent with our view of the
private loan market and will reduce our overall leverage on a consolidated basis. During the year ended December 31, 2020, SBIC I LP prepaid $44,610 of
SBA debentures that were contractually due September 1, 2023, March 1, 2024 and September 1, 2024. We recognized losses on extinguishment of debt of
$678 related to the charge-off of deferred borrowing costs on the prepaid debentures.
94
The weighted-average fixed cash interest rate on the SBA debentures as of December 31, 2020 and 2019, was 2.98% and 3.18%, respectively.
SBIC I LP is periodically examined and audited by the SBA’s staff to determine its compliance with SBA regulations. If SBIC I LP fails to comply
with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit SBIC I LP’s use of debentures, declare
outstanding debentures immediately due and payable, and/or limit SBIC I LP from making new investments. In addition, SBIC I LP may also be limited in
its ability to make distributions to the Company if it does not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would in
turn, negatively affect the Company.
PWB Credit Facility. We are party to a BLA with Pacific Western Bank, as lender, to provide us with a senior secured revolving credit facility, or
PWB Credit Facility. The PWB Credit Facility is available for general corporate purposes including investment funding. The maximum availability of the
PWB Credit Facility is equal to 50% of the aggregate outstanding principal amount of eligible loans included in the borrowing base, which excludes
subordinated loan investments (as defined in the BLA) and as otherwise specified in the BLA. The PWB Credit Facility is guaranteed by OFSCC-MB and
secured by all of our current and future assets excluding assets held by SBIC I LP, OFSCC-FS, and the Company’s partnership interests in SBIC I LP and
SBIC I GP.
At December 31, 2020, the BLA contained customary terms and conditions, including, without limitation, affirmative and negative covenants such
as information reporting requirements, a minimum tangible net asset value, a minimum quarterly net investment income after incentive fees, and a
maximum debt/worth ratio. The BLA also contained customary events of default, including, without limitation, nonpayment, misrepresentation of
representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change in investment advisor, and
the occurrence of a material adverse change in our financial condition. As of December 31, 2020, we were in compliance with the applicable covenants.
As of December 31, 2020, the terms of the PWB Credit Facility were as follows (amounts in thousands):
PWB Credit Facility
$
20,000
5.25 %
Prime + 0.25%
0.50 %
February 28, 2021
Maximum
Availability
Floor Rate
Interest Rate
Unused Fee
Maturity Date
As of December 31, 2020, availability under the PWB Credit Facility was $19.4 million, based on the stated advance rate of 50% under the
borrowing base, and a $0.6 million outstanding balance.
On February 17, 2021, we executed an amendment (the “Secured Revolver Amendment”) to the BLA with Pacific Western Bank. The Secured
Revolver Amendment, among other things: (i) increases the maximum amount available under the PWB Credit Facility from $20.0 million to $25.0
million; (ii) decreases the interest rate floor from 5.25% per annum to 5.00% per annum; (iii) modify certain financial performance covenants; and (iv)
extends the maturity date from February 28, 2021 to February 28, 2023.
BNP Facility. On June 20, 2019, we entered into the a revolving credit and security agreement by and among OFSCC-FS, the lenders from time to
time parties thereto, BNP Paribas, as administrative agent, OFSCC-FS Holdings, LLC, a wholly owned subsidiary of the Company, as equityholder, the
Company, as servicer, Citibank, N.A., as collateral agent and Virtus Group, LP, as collateral administrator, which provides for borrowings in an aggregate
principal amount up to $150.0 million. Borrowings under the BNP Facility bear interest of LIBOR plus an applicable spread, which is determined on the
basis of industry-recognized portfolio company metrics at the time of funding. The BNP Facility will mature on the earlier of June 20, 2024 or upon certain
other events defined in the credit agreement which result in accelerated maturity. The BNP Facility also contains customary events of default, including,
without limitation, nonpayment, failure to maintain valid ownership interest in all of the collateral and bankruptcy. Borrowings under the BNP Facility are
secured by substantially all of the assets held by OFSCC-FS. OFSCC-FS incurred fees to the lenders as well as legal costs of approximately $1.3 million to
establish the BNP Facility, which are amortized over the life of the facility.
As of December 31, 2020, the BNP Facility had the following terms and balances (amounts in thousands):
BNP Facility
Principal
$
31,450
Unused Commitment
118,550
$
Effective Interest
Rate
5.53%
(1)
Maturity
June 20, 2024 $
2020 Interest
Expense
(2)
2,168
(1) The effective interest rate includes deferred debt issuance cost amortization and unused commitment fees.
(2) Interest expense includes deferred issuance costs amortization and unused commitment fees.
95
Unsecured Notes. In April 2018, we publicly offered the Unsecured Notes Due April 2025 with aggregate principal of $50.0 million. The total net
proceeds to us from the Unsecured Notes Due April 2025, after deducting underwriting discounts and offering costs of $1.8 million were $48.2 million. In
October and November 2018, we publicly offered the Unsecured Notes Due October 2025 with aggregate principal of $48.5 million. The total net proceeds
to us from the Unsecured Notes Due October 2025, after deducting underwriting discounts and offering expenses of $1.7 million, were $46.8 million. In
October and November 2019, we publicly offered the Unsecured Notes Due October 2026 with an aggregate principal of $54.3 million. The total net
proceeds to us from the Unsecured Notes Due October 2026, after deducting underwriting discounts and offering costs of $2.0 million were $52.3 million.
In September 2020, we publicly offered the Unsecured Notes Due September 2023 with an aggregate principal of $25.0 million. The total net proceeds to
us from the Unsecured Notes Due September 2023, after deducting underwriting discounts and offering costs of $1.0 million, were $24.0 million. The
Unsecured Notes totaled $177.9 million in aggregate principal debt, with net proceeds of $171.4 million to us.
The Unsecured Notes are direct unsecured obligations and rank equal in right of payment with all of our current and future unsecured indebtedness.
Because the Unsecured Notes are not secured by any of our assets, they are effectively subordinated to all existing and future secured unsubordinated
indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest), to the extent of the value of the assets
securing such indebtedness, including, without limitation, borrowings under the PWB Credit Facility and BNP Facility.
As of December 31, 2020, the Unsecured Notes had the following terms and balances (amounts in thousands):
Effective Interest
(2)
(1)
(6)
Stated Interest
Rate
Principal
Rate
Unsecured Notes
Unsecured Notes Due September 2023
Unsecured Notes Due April 2025
Unsecured Notes Due October 2025
Unsecured Notes Due October 2026
(5)
(5)
Total
25,000
50,000
48,525
54,325
177,850
$
6.25 %
6.375 %
6.50 %
5.95 %
(%)
7.56 %
6.88 %
7.01 %
6.49 %
Maturity
(3)
9/30/2023
4/30/2025
10/31/2025
10/31/2026
$
$
2020 Interest
Expense
(4)
550
3,444
3,410
3,548
10,952
(1) The weighted-average fixed cash interest rate on the Unsecured Notes as of December 31, 2020 was 6.26%.
(2) The effective interest rate on the Unsecured Notes includes deferred debt issuance cost amortization.
(3) The Unsecured Notes Due April 2025 may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after
April 30, 2020. The Unsecured Notes Due October 2025 may be redeemed in whole or in part at any time or from time to time at the Company’s
option on or after October 31, 2020. The Unsecured Notes Due October 2026 may be redeemed in whole or in part at any time or from time to time at
the Company’s option on or after October 31, 2021. The Unsecured Notes Due September 2023 may be redeemed in whole or in part at any time or
from time to time at the Company’s option on or after September 30, 2021.
(4) Interest expense includes deferred issuance costs amortization of $0.9 million for the year ended December 31, 2020.
(5) On February 10, 2021, we issued a redemption notice. See Recent Developments for additional information.
(6) On February 10, 2021, we issued the Unsecured Notes Due February 2026. See Recent Developments for additional information.
The average dollar borrowings and average interest rate for all debt the years ended December 31, 2020, 2019 and 2018, were as follows:
Year ended
December 31, 2020
December 31, 2019
December 31, 2018
Average Dollar
Borrowings
Weighted Average
Interest Rate
$
347,229
307,826
206,936
5.32 %
4.99
4.37
Other Liquidity Matters. We expect to fund the growth of our investment portfolio utilizing future equity offerings, and issuances of senior
securities or future borrowings to the extent permitted by the 1940 Act. We cannot assure stockholders that our plans to raise capital will be successful. In
addition, we intend to distribute to our stockholders substantially all of our taxable income 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 or make additional investments in our portfolio
companies. 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.
96
A BDC generally is not permitted to incur indebtedness unless immediately after such borrowing it has an asset coverage ratio for total borrowings
of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, Section 61(a)(2) of the 1940 Act provides that a BDC
may reduce its asset coverage ratio, provided that certain conditions are met. Specifically, Section 61(a)(2) provides that in order for a BDC whose common
stock is traded on a national securities exchange to be subject to 150% asset coverage, the BDC must either obtain: (i) approval of the required majority of
its non-interested directors who have no financial interest in the proposal, which would become effective one year after the date of such approval, or (ii)
obtain stockholder approval (of more than 50% of the votes cast for the proposal at a meeting in which quorum is present), which would become effective
on the first day after the date of such stockholder approval.
On May 3, 2018, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the
application of Section 61(a)(2) of the 1940 Act and, as a result, the asset coverage ratio test applicable to us was decreased from 200% to 150%, effective
May 3, 2019. See "Item 1A. Risk Factors — Risks Related to our Business and Structure — Because we have received the approval of our Board, we are
subject to 150% Asset Coverage effective May 3, 2019." Additionally, we received exemptive relief from the SEC effective November 26, 2013, which
allows us to exclude our SBA guaranteed debentures from the definition of senior securities in the statutory asset coverage ratio under the 1940 Act.
This requirement limits the amount that we may borrow. To fund growth in our investment portfolio in the future, we anticipate needing to raise
additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be
available on favorable terms, if at all.
Contractual Obligations and Off-Balance Sheet Arrangements
The following table shows our contractual obligations as of December 31, 2020 (in thousands):
(1)
(3)
Contractual Obligations
PWB Credit Facility
BNP Facility
SBA Debentures
Unsecured Notes
(4)
Total
Total
605 $
37,537
120,476
230,059
388,677 $
$
$
Principal and Interest Payments due by period
Less than 1
year
1-3 years
3-5 years
(2)
605 $
1,739
3,132
11,136
16,612 $
— $
3,478
19,065
46,882
69,425 $
— $
32,320
98,279
115,022
245,621 $
After
5 years
—
—
57,019
57,019
(1) Excludes commitments to extend credit to our portfolio companies.
(2) The PWB Credit Facility is scheduled to mature on February 28, 2021. On February 17, 2021, the maturity date of the PWB Credit Facility was
extended from February 28, 2021 to February 28, 2023. The BNP Facility is scheduled to mature on June 20, 2024. The SBA debentures are scheduled
to mature between September 2022 and 2025. The Unsecured Notes are scheduled to mature between September 2023 and October 2026.
(3) Contractual interest is based on LIBOR at December 31, 2020 and assumes no interim additional borrowings or repayments under the credit facilities
between December 31, 2020 and maturity.
(4) SBIC I LP is repaying over time its outstanding SBA debentures prior to the scheduled maturity date of its debentures. SBIC I LP does not expect to
make new investments, other than follow-on investments.
We have entered into contracts with affiliates under which we will incur material future commitments—the Investment Advisory Agreement,
pursuant to which OFS Advisor has agreed to serve as our investment adviser, and the Administration Agreement, pursuant to which OFS Services has
agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations.
We may become a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our
portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in
excess of the amount recognized in the balance sheet. We had $5.8 million of total unfunded commitments to four portfolio companies at December 31,
2020. See Note 6 for details.
Distributions
We are taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its stockholders from its income to determine
“taxable income.” Taxable income includes our taxable interest, dividend and fee income, and taxable net capital gains. Taxable income generally differs
from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally
excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized
for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains
97
using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in
escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued
and reinvested interest and dividends, which includes contractual PIK interest, and the amortization of discounts and fees. Cash collections of income
resulting from contractual PIK interest and dividends or the amortization of discounts and fees generally occur upon the repayment of the loans or debt
securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation, and amortization
expense.
Our Board maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount not less than 90-100%
of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, we may also pay an additional special
dividend, or fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was earned, while maintaining the
option to spill over our excess taxable income to a following year. Each year, a statement on Form 1099-DIV identifying the source of the distribution is
mailed to the Company’s stockholders. For the year ended December 31, 2020, approximately $0.86 per share, $0.00 per share, and $0.00 per share of the
Company’s distributions represented ordinary income, long-term capital gain, and a return of capital to its stockholders, respectively.
For a detailed description of our distributions paid for the years ended December 31, 2019, 2018, and 2017, see "Item 8.–Financial Statements–
Note 10."
Recent Developments
Prepayment of SBA Debentures. On January 5, 2021, SBIC I LP prepaid $9.8 million of SBA debentures that were contractually due September
1, 2022 and September 1, 2024.
Appointment of New Director. On January 8, 2021, the Board, upon the recommendation of the Nominating and Corporate Governance
Committee, voted to appoint Romita Shetty as a Class II director of the Board, chair of the Nominating and Corporate Governance Committee, a member
of the Audit Committee and a member of the Compensation Committee, to fill the vacancy created by the untimely death of Robert J. Cresci on December
22, 2020. Ms. Shetty was appointed to serve as a member of the Board until the 2023 annual meeting of stockholders, or until her successor is duly elected
and qualified. The Board and the Nominating and Corporate Governance Committee determined that Ms. Shetty is not an “interested person” (as defined in
Section 2(a)(19) of the 1940 Act) of the Company.
Issuance of Unsecured Notes Due February 2026 and Redemption of Notes due 2025. On February 10, 2021, we issued the Unsecured Notes
Due February 2026. The Unsecured Notes Due February 2026 will mature on February 10, 2026, and we may redeem the Unsecured Notes Due February
2026 in whole or in part at any time, or from time to time, at our option at par plus a “make-whole” premium, if applicable. The Unsecured Notes Due
February 2026 bear interest at a rate of 4.75% per year payable semi-annually in arrears on February 10 and August 10 of each year, commencing on
August 10, 2021.
The net proceeds we received from the sale of the Unsecured Notes Due February 2026 was approximately $96.6 million based on a public
offering price of of 98.906% of the aggregate principal amount of the Unsecured Notes Due February 2026, after deducting the underwriting discount and
commissions payable by us and estimated offering expenses payable by us.
In connection with, and using the proceeds from the issuance of the Unsecured Notes Due February 2026, on February 10, 2021, we caused
notices to be issued to the holders of the Unsecured Notes Due April 2025 and the holders of the Unsecured Notes Due October 2025 regarding our
exercise of our option to redeem all of the issued and outstanding Unsecured Notes Due April 2025 and Unsecured Notes Due October 2025. We will
redeem all $50.0 million in aggregate principal amount of the Unsecured Notes Due April 2025 and all $48.5 million in aggregate principal amount of the
Unsecured Notes Due October 2025 on March 12, 2021 (the "Redemption Date"). The Unsecured Notes Due April 2025 and the Unsecured Notes Due
October 2025 will be redeemed at 100% of their principal amount ($25 per Note), plus the accrued and unpaid interest thereon from January 31, 2021,
through, but excluding, the Redemption Date.
Amendment to PWB Credit Facility. On February 17, 2021 we executed the Secured Revolver Amendment to the BLA with Pacific Western
Bank. The Secured Revolver Amendment, among other things: (i) increases the maximum amount available under the PWB Credit Facility from $20.0
million to $25.0 million; (ii) decreases the interest rate floor from 5.25% per annum to 5.00% per annum; (iii) revises the covenant restricting net losses,
such that on each quarterly testing period, commencing on December 31, 2020, we shall not have incurred quarterly net losses (income after adjustments to
the investment portfolio for gains and losses, realized and unrealized, also shown as net increase (decrease) in net assets resulting from operations) in
excess of $1,000,000, in three of the trailing four quarters; and (iv) extends the maturity date from February 28, 2021 to February 28, 2023.
Declaration of a Distribution. On March 2, 2021, our Board declared a distribution of $0.20 per share for the first quarter of 2021, payable on
March 31, 2021 to stockholders of record as of March 24, 2021.
98
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The economic effects of the COVID-19 outbreak has introduced significant volatility in the financial markets. The U.S. Federal Reserve and other
central banks have reduced certain interest rates and LIBOR has decreased. In addition, in a prolonged low interest rate environment, including a reduction
of LIBOR to zero, our net interest margin will be compressed and adversely affect our operating results. For additional information concerning the COVID-
19 outbreak and its potential impact on our business and our operating results, see “Part I - 1A. Risk Factors”.
We are subject to financial market risks, including changes in interest rates. Changes in interest rates affect both our cost of funding and the
valuation of our investment portfolio. As of December 31, 2020, 96% of our debt investments bore interest at floating interest rates and 4% of our debt
investments bore fixed interest rates, at fair value. The interest rates on our debt investments bearing floating interest rates are usually based on a floating
LIBOR, and the debt investments typically contain interest rate re-set provisions that adjust applicable interest rates to current rates on a periodic basis. A
significant portion of our loans that are subject to the floating LIBOR rates are also subject to a minimum base rate, or floor, that we charge on our loans if
the current market rates are below the respective floors. As of December 31, 2020, a substantial amount of our floating rate loans were based on a floating
LIBOR, subject to a floor.
As of December 31, 2020, our outstanding SBA debentures and Unsecured Notes bore interest at a fixed rate. Our PWB Credit Facility and BNP
Facility had floating interest rate provisions based on the Prime Rate and LIBOR, with effective interest rates of 6.50% and 5.53%, respectively.
Assuming that the consolidated balance sheet as of December 31, 2020, were to remain constant and that we took no actions to alter our existing interest
rate sensitivity, the following tables show the annualized impact of hypothetical base rate changes in interest rates (in thousands):
Basis point increase
25
50
75
100
125
Basis point decrease
25
50
75
100
125
$
$
Interest income
Interest expense
Net change
96 $
206
342
828
1,417
(84) $
(163)
(243)
(323)
(402)
12
43
99
505
1,015
Interest income
Interest expense
(1)
Net change
(110) $
n/m (2)
n/m (2)
n/m (2)
n/m (2)
70 $
n/m (2)
n/m (2)
n/m (2)
n/m (2)
(40)
n/m (2)
n/m (2)
n/m (2)
n/m (2)
(1) At December 31, 2020, our PWB Credit Facility contained a 5.25% interest rate floor, and therefore a decline in the Prime Rate would not materially
impact interest expense. The BNP Facility does not contain an interest rate floor.
(2) Not meaningful.
Although we believe that the foregoing analysis is indicative of our sensitivity to interest rate changes as of December 31, 2020, it does not adjust
for potential changes in the credit market, credit quality, size and composition of the assets in our portfolio, and other business developments, including
borrowings under our credit facility, that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be
given that actual results would not differ materially from the statement above.
We are subject to financial market risks, including changes in interest rates. Changes in interest rates affect both our cost of funding and the
valuation of our investment portfolio. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate
policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and
programs. Our investment portfolio and investment income may be affected by changes in various interest rates, including LIBOR and the Prime Rate.
99
ITEM 8. Financial Statements
Reports of Independent Registered Public Accounting Firms
Index to Financial Statements
Consolidated Statements of Assets and Liabilities as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Changes in Net Assets for the Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018
Consolidated Schedules of Investments as of December 31, 2020 and 2019
Notes to Consolidated Financial Statements
100
101
104
105
106
107
108
132
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
OFS Capital Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of assets and liabilities of OFS Capital Corporation and subsidiaries (the Company), including
the consolidated schedules of investments, as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in net assets, and
cash flows for each of the years in the two‑year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020
and 2019, and the results of its operations, changes in its net assets and its cash flows for each of the years in the two‑year period ended December 31,
2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting as of December 31, 2020. As part of our audit, we
are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Such procedures also included confirmation of investments owned as of December 31, 2020 and 2019,
by correspondence with custodians, agents, or portfolio companies, or by other appropriate auditing procedures where replies were not received. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of the fair value of Portfolio Company Investments using unobservable inputs
As discussed in Notes 2 and 5 to the consolidated financial statements, the Company measures its investments at fair value. For those investments
where the valuation is based on less observable or unobservable inputs, the Company’s determination of fair value requires more judgment. The
majority of the Company’s investments are debt or equity investments in a portfolio company, excluding Structured Finance Notes, (collectively,
Portfolio Company Investments) valued using unobservable inputs which the Company measures using either the income approach or market
approach. As of December 31, 2020, the fair value of such investments was $363.7 million.
We identified the evaluation of the fair value of Portfolio Company Investments valued using unobservable inputs as a critical audit matter. In
particular, assessing the discount rates used in the discounted cash flows valuation technique and the earnings metric multiples used in the market
approach valuation technique required a high degree of auditor judgment and the involvement of valuation professionals.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of certain internal controls
related to the fair value of Portfolio Company Investments using unobservable inputs. This included controls related to the development of the
discount rates and earnings metric multiples used in the discounted cash flows and market approach valuation techniques, respectively. For a
selection of Portfolio Company Investments, we compared relevant data elements used by the Company to derive the discount rates and earnings
metric multiples to
101
underlying documentation. We involved valuation professionals with specialized skills and knowledge who assisted in evaluating a selection of
Portfolio Company Investments by developing:
- a market yield analysis that assessed publicly available market information such as observable market yields of comparable companies of similar
credit quality for selected Portfolio Company Investments fair valued by the Company using the income approach
- a set of guideline public companies that assessed market information from publicly available sources, including earnings metric multiples of
publicly traded comparable companies for selected Portfolio Company Investments fair valued by the Company using the market approach
- a fair value range for the selected Portfolio Company Investments, based upon the independent market research performed and compared the
results to the Company’s fair value estimates.
/s/ KPMG LLP
We have served as the Company’s auditor since 2019.
Chicago, Illinois
March 5, 2021
102
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
OFS Capital Corporation
Chicago, Illinois
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of operations, changes in net assets, and cash flows of OFS Capital Corporation (the
“Company”) for the year ended December 31, 2018, and the related notes, including the financial highlights for each of the three years in the period ended
December 31, 2018 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of the Company at December 31, 2018, and the results of its operations, the changes in its net assets, and its
cash flows for the year ended December 31, 2018, and the financial highlights for each of the three years in the period ended December 31, 2018 in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ BDO USA, LLP
We served as the Company’s auditor from 2014 to 2019.
Chicago, Illinois
March 15, 2019
103
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Assets and Liabilities
(Dollar amounts in thousands, except per share data)
Assets
Investments, at fair value
Non-control/non-affiliate investments (amortized cost of $363,628 and $396,201 respectively)
Affiliate investments (amortized cost of $86,484 and $131,950, respectively)
Control investment (amortized cost of $10,911 and $10,520, respectively)
Total investments at fair value (amortized cost of $461,023 and $538,671, respectively)
Cash and cash equivalents
Interest receivable
Prepaid expenses and other assets
Total assets
Liabilities
Revolving line of credits
SBA debentures (net of deferred debt issuance costs of $1,088 and $1,904, respectively)
Unsecured notes (net of discounts and deferred debt issuance costs of $4,897 and $4,798, respectively)
Interest payable
Payable to investment adviser and affiliates (Note 3)
Payable for investments purchased
Accrued professional fees
Other liabilities
Total liabilities
Commitments and contingencies (Note 6)
Net Assets
Preferred stock, par value of $0.01 per share, 2,000,000 shares authorized, 0 shares issued and outstanding as of December 31,
2020 and December 31, 2019, respectively
Common stock, par value of $0.01 per share, 100,000,000 shares authorized, 13,409,559 and 13,376,836 shares issued and
outstanding as of December 31, 2020 and December 31, 2019, respectively
Paid-in capital in excess of par
Total distributable earnings (accumulated losses)
Total net assets
Total liabilities and net assets
Number of shares outstanding
Net asset value per share
See Notes to Consolidated Financial Statements.
104
December 31,
2020
2019
328,665 $
102,846
10,812
442,323
37,708
1,298
2,484
483,813 $
32,050 $
104,182
172,953
3,176
3,252
8,411
495
338
324,857 $
372,535
135,679
8,717
516,931
13,447
3,349
4,461
538,188
56,450
147,976
148,052
3,505
4,106
10,264
621
587
371,561
— $
—
134
187,124
(28,302)
158,956 $
134
187,305
(20,812)
166,627
483,813 $
538,188
13,409,559
13,376,836
11.85 $
12.46
$
$
$
$
$
$
$
$
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollar amounts in thousands, except per share data)
Investment income
Interest income:
Non-control/non-affiliate investments
Affiliate investments
Control investment
Total interest income
Payment-in-kind interest and dividend income:
Non-control/non-affiliate investments
Affiliate investments
Control investment
Total payment-in-kind interest and dividend income:
Dividend income:
Affiliate investments
Control investment
Total dividend income
Fee income:
Non-control/non-affiliate investments
Affiliate investments
Control investment
Total fee income
Total investment income
Expenses
Interest and financing expense
Management fees
Incentive fees
Professional fees
Administration fees
Other expenses
Total expenses before incentive fee waivers
Incentive fee waivers (see Note 3)
Total expenses, net of incentive fee waivers
Net investment income
Net realized and unrealized gain (loss) on investments
Net realized loss on non-control/non-affiliate investments
Net realized gain on affiliate investments
Net unrealized depreciation on non-control/non-affiliate investments, net of deferred taxes
Net unrealized appreciation (depreciation) on affiliate investments
Net unrealized appreciation (depreciation) on control investment
Net loss on investments
Losses on extinguishment of debt
Loss on impairment of goodwill
Net increase in net assets resulting from operations
Net investment income per common share - basic and diluted
Net increase in net assets resulting from operations per common share - basic and diluted
Distributions declared per common share
Basic and diluted weighted average shares outstanding
See Notes to Consolidated Financial Statements.
105
2020
Years Ended December 31,
2019
2018
33,297 $
7,380
840
41,517
37,535 $
10,364
1,003
48,902
981
674
377
2,032
450
—
450
945
465
66
1,476
45,475
18,808
7,605
2,025
1,993
1,855
1,335
33,621
(441)
33,180
12,295
(10,021)
—
(11,020)
12,633
1,704
(6,704)
(820)
(1,077)
3,694 $
0.92 $
0.28 $
0.86 $
399
1,257
169
1,825
413
89
502
1,029
221
42
1,292
52,521
15,829
8,271
4,760
1,814
1,747
1,002
33,423
—
33,423
19,098
(3,900)
—
(9,610)
5,376
(1,411)
(9,545)
—
—
9,553 $
1.43 $
0.71 $
1.36 $
27,547
10,055
1,005
38,607
668
1,321
110
2,099
130
185
315
987
760
66
1,813
42,834
9,232
6,335
4,409
1,245
1,601
1,649
24,471
(22)
24,449
18,385
(4,966)
187
(2,484)
(803)
(747)
(8,813)
—
—
9,572
1.38
0.72
1.73
13,394,005
13,364,244
13,348,203
$
$
$
$
$
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets
(Dollar amounts in thousands, except per share data)
Preferred Stock
Common Stock
Balances at January 1, 2018
Net increase in net assets resulting from operations:
Net investment income
Net realized losses on investments
Unrealized depreciation on investments, net of deferred
taxes
Tax reclassifications of permanent differences
Distributions to stockholders:
Common stock issued from reinvestment of stockholder
distributions, net of repurchases
Repurchase of common stock
Dividends declared
Net increase (decrease) for the year ended December 31,
2018
Balances at December 31, 2018
Net increase in net assets resulting from operations:
Net investment income
Net realized losses on investments
Unrealized depreciation on investments, net of deferred
taxes
Tax reclassifications of permanent differences
Distributions to stockholders:
Common stock issued from reinvestment of stockholder
distributions
Dividends declared
Net increase (decrease) for the year ended December 31,
2019
Balances at December 31, 2019
Net increase in net assets resulting from operations:
Net investment income
Net realized losses on investments
Unrealized appreciation on investments, net of deferred
taxes
Loss on extinguishment of debt
Loss on impairment of goodwill
Tax reclassifications of permanent differences
Distributions to stockholders:
Common stock issued from reinvestment of stockholder
distributions
Dividends declared
Net increase (decrease) for the year ended December 31,
2020
Balances at December 31, 2020
See Notes to Consolidated Financial Statements.
Number of
shares
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Par value
—
$
Number of
shares
13,340,217 $
Par value
133
Paid-in
capital in
excess of par
$
187,398 $
Total
distributable
earnings
(accumulated
losses)
Total net
assets
805
$
188,336
—
—
—
—
17,420
(300)
—
—
—
—
—
1
—
—
—
—
—
(62)
204
—
—
18,385
(4,779)
(4,034)
62
—
—
(23,090)
18,385
(4,779)
(4,034)
—
205
—
(23,090)
17,120
13,357,337 $
1
134
$
142
187,540 $
(13,456)
(12,651)
$
(13,313)
175,023
—
—
—
—
19,499
—
—
—
—
—
—
—
—
—
—
(462)
227
—
19,098
(3,900)
(5,645)
462
19,098
(3,900)
(5,645)
—
—
(18,176)
227
(18,176)
19,499
13,376,836 $
—
134
$
(235)
187,305 $
(8,161)
(20,812)
$
(8,396)
166,627
—
—
—
—
—
—
32,723
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(331)
150
—
12,295
(10,022)
3,318
(820)
(1,077)
331
12,295
(10,022)
3,318
(820)
(1,077)
—
—
(11,515)
150
(11,515)
32,723
13,409,559 $
—
134
$
(181)
187,124 $
(7,490)
(28,302)
$
(7,671)
158,956
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
106
$
$
$
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
Cash flows from operating activities
Net increase in net assets resulting from operations
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by (used in) operating activities:
Years Ended December 31,
2019
2020
2018
$
3,694 $
9,553 $
9,572
Net realized loss on investments
Net change in unrealized (appreciation) depreciation on investments
Losses on extinguishment of debt
Loss on impairment of goodwill
Amortization of net loan fees
Amendment fees collected
Payment-in-kind interest and dividend income
Accretion of interest income on Structured Finance Notes
Amortization and write-off of debt issuance costs
Amortization of intangible asset
Purchase and origination of portfolio investments
Proceeds from principal payments on portfolio investments
Proceeds from sale or redemption of portfolio investments
Distributions received from Structured Finance Notes
Changes in operating assets and liabilities:
Interest receivable
Interest payable
Payable to investment adviser and affiliates
Payable for investments purchased
Other assets and liabilities
Net cash provided by (used in) operating activities
Cash flows from financing activities
Proceeds from unsecured notes offerings, net of discounts
Distributions paid to stockholders
Borrowings under revolving line of credit
Repayments under revolving line of credit
Repayment of SBA debentures
Payment of deferred financing costs and other financing costs
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents — beginning of year
Cash and cash equivalents — end of year
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest
Reinvestment of stockholder distributions
See Notes to Consolidated Financial Statements.
107
10,022
(3,318)
820
1,077
(1,640)
106
(1,971)
(5,877)
1,690
206
(130,399)
129,580
70,771
6,709
2,051
(523)
(854)
(1,853)
334
80,625
3,900
5,645
—
—
(1,424)
177
(1,825)
(2861)
1,332
195
(222,173)
60,883
35,033
3,076
(562)
714
406
6,113
182
(101,636)
24,250
(11,365)
86,200
(110,600)
(44,610)
(239)
(56,364)
24,261
13,447
37,708 $
52,270
(17,949)
151,975
(107,525)
—
(1,860)
76,911
(24,725)
38,172
13,447 $
17,641 $
150
13,754 $
227
$
$
4,779
4,034
—
—
(2,288)
161
(2,099)
—
781
195
(272,155)
100,699
47,435
—
(53)
1,195
1,237
4,151
1,268
(101,088)
95,446
(22,895)
96,500
(102,100)
—
(643)
66,308
(34,780)
72,952
38,172
7,256
195
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2020
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Non-control/Non-affiliate Investments
All Star Auto Lights, Inc. (4)
Senior Secured Loan
A&A Transfer, LLC
Senior Secured Loan (15)
Senior Secured Loan (Revolver) (5)
Motor Vehicle Parts (Used)
Merchant Wholesalers
Construction and Mining (except
Oil Well) Machinery and
Equipment Merchant
Wholesalers
Bass Pro Group, LLC (14) (15)
Senior Secured Loan
Sporting Goods Stores
BayMark Health Services, Inc.
Senior Secured Loan
Outpatient Mental Health and
Substance Abuse Centers
Community Intervention Services, Inc.
(4) (6) (11)
Outpatient Mental Health and
Substance Abuse Centers
Subordinated Loan
Confie Seguros Holdings II Co.
Senior Secured Loan
Insurance Agencies and
Brokerages
Connect U.S. Finco LLC (14) (15)
Senior Secured Loan
Taxi Service
Constellis Holdings, LLC (10)
Common Equity (20,628 common
shares)
Other Justice, Public Order, and
Safety Activities
Convergint Technologies Holdings, LLC
Senior Secured Loan
Security Systems Services
(except Locksmiths)
Industry
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net Assets
8.50%
(L +7.50%)
12/19/2019
8/20/2024
$ 14,293 $
14,167 $ 13,581
8.5 %
8.25%
n/m (18)
(L +6.50%)
(L +6.50%)
2/7/2020
2/7/2020
2/7/2025
2/7/2025
16,632
—
16,632
16,427
(35)
16,392
16,798
(21)
16,777
10.6
—
10.6
5.75%
(L +5.00%)
6/24/2019
9/25/2024
2,954
2,907
2,968
1.9
9.25%
(L +8.25%)
3/22/2018
3/1/2025
4,000
3,976
4,000
2.5
7.00% cash /
6.00% PIK
N/A
7/16/2015
1/16/2021
10,225
7,639
105
0.1
8.73%
(L +8.50%)
7/7/2015
11/1/2025
9,678
9,544
9,302
5.9
5.50%
(L +4.50%)
11/20/2019
12/11/2026
1,985
1,976
1,997
1.3
3/27/2020
703
676
0.4
7.50%
(L +6.75%)
9/28/2018
2/2/2026
3,481
3,437
3,390
2.1
108
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2020
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Custom Truck One Source (14) (15)
Senior Secured Loan
Industry
Construction, Mining, and
Forestry Machinery and
Equipment Rental and Leasing
Diamond Sports Group, LLC (14) (15)
Senior Secured Loan
Television Broadcasting
DuPage Medical Group (15)
Senior Secured Loan
Offices of Physicians, Mental
Health Specialists
Eblens Holdings, Inc. (20)
Shoe Store
Subordinated Loan (11)
Common Equity (71,250 Class A units)
(10)
Envocore Holding, LLC (F/K/A LRI
Holding, LLC) (4)
Electrical Contractors and Other
Wiring Installation Contractors
Senior Secured Loan
Preferred Equity (238,095 Series B
units) (10)
Preferred Equity (13,315 Series C units)
(10)
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net Assets
4.40%
(L +4.25%)
9/30/2020
4/18/2025
$
497 $
496 $
499
0.3 %
3.40%
(L +3.25%)
11/19/2019
8/24/2026
1,975
1,977
1,758
1.1
7.75%
(L +7.00%)
8/22/2017
8/15/2025
10,098
10,159
10,098
6.4
12.00% cash /
1.00% PIK
N/A
7/13/2017
1/13/2023
9,114
9,035
4,368
7/13/2017
9,114
713
9,748
—
4,368
7.50% cash /
3.50% PIK
(L +7.50%)
6/30/2017
6/30/2022
17,150
17,055
12,668
6/30/2017
8/13/2018
300
—
17,150
13
17,368
—
12,668
Excelin Home Health, LLC
Senior Secured Loan
Home Health Care Services
11.50%
(L +9.50%)
10/25/2018
4/25/2024
4,250
4,199
4,250
GGC Aerospace Topco L.P.
Senior Secured Loan
Common Equity (368,852 Class A units)
(10)
Common Equity (40,984 Class B units)
(10)
Inergex Holdings, LLC
Senior Secured Loan
Senior Secured Loan (Revolver) (5)
Other Aircraft Parts and
Auxiliary Equipment
Manufacturing
9.75%
(L +9.50%)
12/29/2017
9/8/2024
5,000
4,931
4,102
12/29/2017
12/29/2017
Other Computer Related Services
8.00%
n/m (18)
(L +7.00%)
(L +7.00%)
10/1/2018
10/1/2018
10/1/2024
10/1/2024
450
166
50
5,431
7
4,275
16,265
(18)
16,247
15,913
87
16,000
5,000
16,422
—
16,422
109
2.7
—
2.7
8.0
—
—
8.0
2.7
2.6
0.1
—
2.7
9.9
0.1
10.0
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2020
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Institutional Shareholder Services, Inc.
Senior Secured Loan
Intouch Midco Inc. (15)
Senior Secured Loan
I&I Sales Group, LLC
Senior Secured Loan (15)
Senior Secured Loan (Revolver) (5)
Milrose Consultants, LLC (4) (8)
Senior Secured Loan
My Alarm Center, LLC (10)
Preferred Equity (335 Class Z units) (13)
Preferred Equity (1,485 Class A units),
8% PIK (4) (13)
Preferred Equity (1,198 Class B units)
(4)
Common Equity (64,149 units) (4) (13)
Online Tech Stores, LLC (4) (6)
Subordinated Loan
Panther BF Aggregator 2 LP (14) (15)
(19)
Senior Secured Loan
Parfums Holding Company, Inc.
Senior Secured Loan (14) (15)
Senior Secured Loan
Industry
Administrative Management and
General Management Consulting
Services
All Other Professional, Scientific,
and Technical Services
Marketing Consulting Services
Administrative Management and
General Management Consulting
Services
Security Systems Services
(except Locksmiths)
Stationery and Office Supplies
Merchant Wholesalers
Other Commercial and Service
Industry Machinery
Manufacturing
Cosmetics, Beauty Supplies, and
Perfume Stores
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net Assets
8.75%
(L +8.50%)
3/4/2019
3/5/2027
$
6,244 $
6,099 $
6,244
3.9 %
4.90%
(L +4.75%)
12/20/2019
8/24/2025
1,980
1,921
1,905
1.2
9.50%
n/m (18)
(L +8.50%)
(L +8.50%)
12/30/2020
12/30/2020
7/10/2025
7/10/2025
5,325
—
5,325
5,232
(3)
5,229
5,232
(3)
5,229
3.3
—
3.3
7.62%
(L +6.62%)
7/16/2019
7/16/2025
22,574
22,404
22,485
14.0
9/12/2018
7/14/2017
7/14/2017
7/14/2017
325
1,571
1,198
—
3,094
97
—
—
—
97
0.1
—
—
—
0.1
13.50% PIK
N/A
2/1/2018
8/1/2023
18,360
16,129
2,426
1.5
3.65%
(L +3.50%)
11/19/2019
4/30/2026
1,939
1,925
1,936
1.2
4.23%
9.75%
(L +4.00%)
(L +8.75%)
6/25/2019
11/16/2017
6/30/2024
6/30/2025
1,537
5,171
6,708
1,536
5,202
6,738
1,530
5,171
6,701
1.0
3.3
4.3
110
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2020
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Pelican Products, Inc.
Senior Secured Loan
Pike Corp. (14) (15)
Senior Secured Loan
PM Acquisition LLC (20)
Senior Secured Loan
Common Equity (499 units) (10) (13)
Quest Software US Holdings Inc. (14)
(15)
Senior Secured Loan
Resource Label Group, LLC
Senior Secured Loan
Rocket Software, Inc. (15)
Senior Secured Loan
Industry
Unlaminated Plastics Profile
Shape Manufacturing
Electrical Contractors and Other
Wiring Installation Contractors
All Other General Merchandise
Stores
Computer and Computer
Peripheral Equipment and
Software Merchant Wholesalers
Commercial Printing (except
Screen and Books)
Software Publishers
RPLF Holdings, LLC (10) (13)
Common Equity (254,110 Class A units)
Software Publishers
Sentry Centers Holdings, LLC (10) (13)
Preferred Equity (2,248 Series A units)
Preferred Equity (1,603 Series B units)
Common Equity (269 units)
Other Professional, Scientific,
and Technical Services
SkyMiles IP Ltd. and Delta Air Lines,
Inc. (14) (15)
Senior Secured Loan
Scheduled Passenger Air
Transportation
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net Assets
8.75%
(L +7.75%)
9/24/2018
5/1/2026
$
6,055 $
6,059 $
5,994
3.8 %
3.14%
(L +3.00%)
9/17/2020
7/24/2026
469
469
469
0.3
11.50% cash /
2.50% PIK
N/A
9/30/2017
9/30/2017
10/29/2021
4,780
4,780
4,753
499
5,252
4,780
280
5,060
3.0
0.2
3.2
4.46%
(L +4.25%)
6/25/2019
5/16/2025
1,970
1,955
1,942
1.2
9.50%
(L +8.50%)
6/7/2017
11/26/2023
4,821
4,789
4,812
3.0
8.46%
(L +8.25%)
11/20/2018
11/28/2026
6,275
6,190
6,241
3.9
1/17/2018
492
605
0.4
9/4/2020
9/4/2020
9/4/2020
51
160
3
214
47
160
3
210
—
0.1
—
0.1
4.75
(L +3.75%)
9/15/2020
10/20/2027
500
495
520
0.3
111
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2020
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
SourceHOV Tax, Inc. (4) (8)
Senior Secured Loan
Industry
Other Accounting Services
Southern Technical Institute, LLC (4)
(10)
Equity appreciation rights
Colleges, Universities, and
Professional Schools
Spring Education Group, Inc. (F/K/A
SSH Group Holdings, Inc.)
Senior Secured Loan
Child Day Care Services
SSJA Bariatric Management LLC (15)
Senior Secured Loan
Senior Secured Loan
Senior Secured Loan (Revolver) (5)
Stancor, L.P. (4)
Preferred Equity (1,250,000 Class A
units), 8% PIK (10)
Staples, Inc. (14) (15)
Senior Secured Loan
STS Operating, Inc.
Senior Secured Loan (14) (15)
Senior Secured Loan
Offices of Physicians, Mental
Health Specialists
Pump and Pumping Equipment
Manufacturing
Business to Business Electronic
Markets
Industrial Machinery and
Equipment Merchant Wholesalers
Sunshine Luxembourg VII SARL (14) (15)
Senior Secured Loan
Pharmaceutical Preparation
Manufacturing
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent
of
Net
Assets
7.61
(L +6.11%)
3/16/2020
3/16/2025
$ 19,892 $
19,742 $ 19,988
12.6
6/27/2018
—
4,295
2.7
8.50%
(L +8.25%)
7/26/2018
7/30/2026
5,216
5,178
4,656
2.9
6.00%
6.25%
n/m (18)
(L +5.00%)
(L +5.25%)
(L +5.00%)
8/26/2019
12/31/2020
8/26/2019
8/26/2024
8/26/2024
8/26/2024
9,875
1,067
—
10,942
9,803
1,056
(5)
10,854
9,647
1,042
15
10,704
6.1
0.7
—
6.8
8/19/2014
1,501
1,281
0.8
5.21%
(L +5.00%)
6/24/2019
4/16/2026
2,960
2,891
2,875
1.8
5.25%
9.00%
(L +4.25%)
(L +8.00%)
5/16/2018
5/15/2018
12/11/2024
4/30/2026
625
9,073
9,698
626
9,070
9,696
601
8,578
9,179
0.4
5.4
5.8
5.00%
(L +4.00%)
11/20/2019
9/25/2026
1,980
1,988
1,992
1.3
112
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2020
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Tank Holding Corp. (15)
Senior Secured Loan (14)
Senior Secured Loan
The Escape Game, LLC (4)
Senior Secured Loan
Senior Secured Loan
Senior Secured Loan
Senior Secured Loan (Delayed Draw)
Industry
Unlaminated Plastics Profile
Shape Manufacturing
Other amusement and recreation
industries
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net Assets
5.50%
3.40%
(L +4.00%)
(L +3.25%)
6/24/2019
12/18/2020
3/26/2026
3/26/2026
$
1,975 $
896
2,871
1,981 $
882
2,863
1,942
882
2,824
1.2 %
0.6
1.8
9.75%
9.75%
8.00%
9.75%
(L +8.75%)
(L +8.75%)
(L +7.00%)
(L +8.75%)
7/18/2019
12/22/2017
7/20/2018
7/20/2018
12/22/2022
12/31/2021
12/31/2021
12/22/2022
7,000
2,333
4,667
7,000
21,000
6,973
2,329
4,665
7,000
20,967
6,647
2,216
4,463
6,647
19,973
4.2
1.4
2.8
4.2
12.6
Truck Hero, Inc. (15)
Senior Secured Loan
Truck Trailer Manufacturing
9.25%
(L +8.25%)
5/30/2017
4/21/2025
8,174
8,118
8,174
5.1
United Biologics Holdings, LLC (4)
(10)
Preferred Equity (151,787 units)
Warrants (29,374 units)
United Natural Foods (14) (15)
Senior Secured Loan
Medical Laboratories
General Line Grocery Merchant
Wholesalers
Wastebuilt Environmental Solutions,
LLC (4)
Senior Secured Loan
Industrial Supplies Merchant
Wholesalers
Weight Watchers International, Inc. (14)
(15)
Senior Secured Loan
Diet and Weight Reducing
Centers
Xperi (14) (15)
Senior Secured Loan
Semiconductor and Related
Device Manufacturing
4/16/2013
7/26/2012
3/5/2022
(12)
9
82
91
26
12
38
—
—
—
4.40%
(L +4.25%)
6/9/2020
10/22/2025
286
275
284
0.2
10.25%
(L +8.75%)
10/11/2018
10/11/2024
7,000
6,908
5,476
3.4
5.50%
(L +4.75%)
6/10/2020
11/29/2024
477
477
479
0.3
4.15%
(L +4.00%)
6/1/2020
6/1/2025
433
399
434
0.3
Total Debt and Equity Investments
$ 306,683 $ 307,768 $ 272,240
171.3 %
113
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2020
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Structured Finance Note
Investments
Apex Credit CLO 2020 (7)
Subordinated Notes
Dryden 53 CLO, LTD. (7)
Income Notes
Subordinated Notes
Dryden 76 CLO, Ltd. (7)
Subordinated Notes
Elevation CLO 2017-7, Ltd. (7)
Subordinated Notes
Flatiron CLO 18, Ltd. (7)
Subordinated Notes
Madison Park Funding XXIII, Ltd. (7)
Subordinated Notes
Madison Park Funding XXIX, Ltd. (7)
Subordinated Notes
Monroe Capital MML CLO X, LTD.
Mezzanine bond - Class E
Octagon Investment Partners 39, Ltd.
(7)
Subordinated Notes
Industry
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net Assets
14.16% (9)
16.68% (9)
16.68% (9)
18.68% (9)
12.32% (9)
20.73% (9)
21.99% (9)
14.22% (9)
11/16/2020
11/19/2031
(17)
$ 11,080
$9,461
(16) $ 10,006
6.3 %
10/26/2020
10/26/2020
1/15/2031
(17)
1/15/2031
(17)
2,700
1,779
1,967
2,159
4,859
1,423 (16)
3,202
1,573
3,540
1.2
1.0
2.2
9/27/2019
10/20/2032
(17)
2,750
2,282 (16)
2,235
1.4
2/6/2019
7/15/2030
(17)
10,000
6,955 (16)
6,226
3.9
1/2/2019
4/17/2031
(17)
9,680
7,265 (16)
7,702
4.8
1/8/2020
7/27/2047
(17)
10,000
6,654 (16)
7,129
4.5
12/22/2020
10/18/2047
(17)
9,500
7,529 (16)
7,569
4.8
9.08%
(L +8.85%)
8/7/2020
8/20/2031
(17)
863
802
838
0.5
20.81% (9)
1/23/2020
10/20/2030
(17)
7,000
5,173 (16)
5,493
3.5
114
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2020
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Park Avenue Institutional Advisers CLO
2017-1
Mezzanine bond - Class D
Regatta II Funding
Mezzanine bond - Class DR2
THL Credit Wind River 2019‐3 CLO
Ltd. (7)
Subordinated Notes
Total Structured Finance Note
Investments
Total Non-control/Non-affiliate
Investments
Industry
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net Assets
6.44%
(L +6.22%)
6/5/2020
7.19%
(L +6.95%)
6/5/2020
11/14/2029
(17)
1/15/2029
(17)
$
100 $
83 $
95
0.1 %
800
695
768
0.5
14.69% (9)
4/5/2019
4/15/2031
(17)
7,000
5,759 (16)
4,824
3.0
$ 73,632 $
55,860 $ 56,425
35.5 %
$ 380,315 $ 363,628 $ 328,665
206.8 %
Affiliate Investments
3rd Rock Gaming Holdings, LLC (20)
Software Publishers
Senior Secured Loan (6)
Common Equity (2,547,250 units) (10)
(13)
Chemical Resources Holdings, Inc. (20)
Senior Secured Loan (4)(8)
Common Equity (1,832 Class A shares)
(10) (13)
Contract Datascan Holdings, Inc. (4)
(20)
Preferred Equity (3,061 Series A shares)
10% PIK
Common Equity (11,273 shares) (10)
Custom Compounding of
Purchased Resins
Office Machinery and Equipment
Rental and Leasing
DRS Imaging Services, LLC (20)
Common Equity (1,135 units) (10) (13)
Data Processing, Hosting, and
Related Services
8.50% cash /
1.00% PIK
(L +7.50%)
3/13/2018
3/12/2023
20,858
19,570
9,258
3/13/2018
20,858
2,547
22,117
—
9,258
5.8
—
5.8
9.22%
(L +7.72%)
1/25/2019
1/25/2024
13,743
13,630
13,744
8.6
1/25/2019
8/5/2015
6/28/2016
13,743
1,814
15,444
3,420
17,164
2.2
10.8
5,849
104
5,953
2,690
46
2,736
1.7
—
1.7
3/8/2018
1,135
1,749
1.1
115
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2020
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Industry
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net Assets
Master Cutlery, LLC (4) (10)(20)
Subordinated Loan (6)
Preferred Equity (3,723 Series A units),
8% PIK
Common Equity (15,564 units)
NeoSystems Corp. (4)(20)
Preferred Equity (521,962 convertible
shares) 10% PIK
Sporting and Recreational Goods
and Supplies Merchant
Wholesalers
Other Accounting Services
Pfanstiehl Holdings, Inc. (4)(20)(21)
Common Equity (400 Class A shares)
Pharmaceutical Preparation
Manufacturing
Professional Pipe Holdings, LLC (19)
Plumbing, Heating, and Air-
Conditioning Contractors
Senior Secured Loan
Common Equity (1,414 Class A units)
(10)
TalentSmart Holdings, LLC (20)
Common Equity (1,595,238 Class A
shares) (10) (13)
TRS Services, LLC (4)(20)
Preferred Equity (1,937,191 Class A
units), 11% PIK
Common Equity (3,000,000 units) (10)
TTG Healthcare, LLC (20)
Senior Secured Loan (4)
Preferred Equity ( 2,309 Class B units)
(10) (13)
Professional and Management
Development Training
Commercial and Industrial
Machinery and Equipment
(except Automotive and
Electronic) Repair and
Maintenance
Diagnostic Imaging Centers
13.00% (11)
N/A
4/17/2015
7/20/2022
$
6,759 $
4,764 $
346
0.2 %
4/17/2015
4/17/2015
3,483
—
8,247
—
—
346
—
—
0.2
6,759
8/14/2014
1,879
2,250
1.4
1/1/2014
217
36,221
22.8
9.75% cash /
1.50% PIK
(L +8.75%)
3/23/2018
3/23/2023
6,263
6,193
6,086
3/23/2018
6,263
1,414
7,607
1,208
7,294
3.8
0.8
4.6
10/11/2019
1,595
1,306
0.8
12/10/2014
12/10/2014
—
572
572
915
—
915
0.6
—
0.6
8.50%
(L +7.50%)
3/1/2019
11/28/2025
19,603
19,409
19,530
12.3
3/1/2019
19,603
2,309
21,718
4,077
23,607
2.6
14.9
116
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2020
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Total Affiliate Investments
Control Investment
MTE Holding Corp. (4)(19)
Subordinated Loan (to Mirage Trailers,
LLC, a controlled, consolidated
subsidiary of MTE Holding Corp.)
Common Equity (554 shares) (10)
Total Control Investment
Total Investments
Industry
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net Assets
$ 67,226 $
86,484 $ 102,846
64.7 %
Travel Trailer and Camper
Manufacturing
11.00% cash /
5.00% PIK
(L +10.00%)
11/25/2015
11/25/2015
11/25/2021 $
7,842 $
7,842
7,842 $
$
7,822
7,842 $
2,990
3,069
10,911
10,812
10,911 $ 10,812
4.9 %
1.9
6.8
6.8 %
$ 455,383 $ 461,023 $ 442,323
278.3 %
(1) Equity ownership may be held in shares or units of companies affiliated with the portfolio company. The Company's investments are generally classified as "restricted securities" as such
term is defined under Regulation S-X Rule 6-03(f) or Securities Act Rule 144.
(2) Substantially all of the investments that bear interest at a variable rate are indexed to LIBOR (L), generally between 0.75% and 1.0% at December 31, 2020, and reset monthly, quarterly, or
semi-annually. Variable-rate loans with an aggregate cost of $328,736 include LIBOR reference rate floor provisions of generally 0.75% to 1.0% at December 31, 2020, the reference rate on
such instruments was generally below the stated floor provisions. For each investment, the Company has provided the spread over the reference rate and current interest rate in effect at
December 31, 2020. Unless otherwise noted, all investments with a stated PIK rate require interest payments with the issuance of additional securities as payment of the entire PIK
provision.
(3) Unless otherwise noted with footnote 14, fair value was determined using significant unobservable inputs for all of the Company's investments and are considered Level 3 under GAAP.
See Note 5 for further details.
Investments (or portion thereof) held by SBIC I LP. These assets are pledged as collateral of the SBA debentures and cannot be pledged under any debt obligation of the Company.
(4)
(5) Subject to unfunded commitments. See Note 6 for further details.
(6)
Investment was on non-accrual status as of December 31, 2020, meaning the Company has suspended recognition of all or a portion of income on the investment. See Note 4 for further
details.
(7) CLO subordinated debt positions are entitled to recurring distributions which are generally equal to the remaining cash flow of payments made by underlying securities less contractual
payments to debt holders and fund expenses.
(8) The Company has entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, it has agreed to receive its payment after the repayment of certain co‑lenders
pursuant to a payment waterfall. The table below provides additional details as of December 31, 2020:
Portfolio Company
Chemical Resources Holdings, Inc.
Milrose Consultants, LLC
SourceHOV Tax, Inc.
Reported Interest
Rate
9.17%
7.62%
7.61%
Interest Rate per
Credit Agreement
7.50%
7.00%
7.00%
Additional Interest per Annum
1.67%
0.62%
0.61%
(9) The rate disclosed is the estimated effective yield, generally established at purchase and re-evaluated upon receipt of distributions, and based upon projected amounts and timing of future
distributions and the projected amount and timing of terminal principal payments at the time of estimation. The estimated yield and investment cost may ultimately not be realized.
(10) Non-income producing.
117
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2020
(Dollar amounts in thousands)
(11) The interest rate on these investments contains a PIK provision, whereby the issuer has the option to make interest payments in cash or with the issuance of additional securities as payment
of the entire PIK provision. The interest rate in the schedule represents the current interest rate in effect for these investments. The following table provides additional details on these PIK
investments, including the maximum annual PIK interest rate allowed as of December 31, 2020:
Portfolio Company
Community Intervention Services, Inc.
Eblens Holdings, Inc.
Master Cutlery, LLC
Investment Type
Subordinated Loan
Subordinated Loan
Senior Secured Loan
Range of PIK
Option
0% or 6.00%
0% or 1.00%
0% to 13.00%
Range of Cash
Option
13.00% or 7.00%
13.00% or 12.00%
13.00% to 0%
Maximum PIK
Rate Allowed
6.00%
1.00%
13.00%
(12) Represents expiration date of the warrants.
(13) All or portion of investment held by a wholly-owned subsidiary subject to income tax.
(14) Fair value was determined by reference to observable inputs other than quoted prices in active markets and are considered Level 2 under GAAP. See Note 5 for further details.
(15) Investments (or portion thereof) held by OFSCC-FS. These assets are pledged as collateral of the BNP Facility and cannot be pledged under any other debt obligation of the Company.
(16) Amortized cost reflects accretion of effective yield less any cash distributions received or entitled to be received from CLO subordinated debt investments.
(17) Maturity date represents the contractual maturity date of the Structured Finance Notes. Projected cash flows, including the projected amount and timing of terminal principal payments
which may be projected to occur prior to the contractual maturity date, were utilized in deriving the effective yield of the investments.
(18) Not meaningful as there is no outstanding balance on the revolver. The Company earns unfunded commitment fees on undrawn revolving lines of credit balances, which are reported in fee
income.
(19) The Company holds at least one seat on the portfolio company’s board of directors.
(20) The Company has an observer seat on the portfolio company’s board of directors.
(21) Portfolio company represents greater than 5% of total assets at December 31, 2020.
See Notes to Consolidated Financial Statements.
118
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2019
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Non-control/Non-affiliate Investments
Acrisure, LLC (14) (15) (19)
Senior Secured Loan
Industry
Insurance Agencies and
Brokerages
AHP Health Partners (14) (15) (19)
Senior Secured Loan
General Medical and Surgical
Hospitals
Albertson's Holdings LLC (14) (15)
(19)
Senior Secured Loan
Supermarkets and Other
Grocery (except Convenience)
Stores
All Star Auto Lights, Inc. (4)
Senior Secured Loan
Motor Vehicle Parts (Used)
Merchant Wholesalers
American Bath Group, LLC (14) (15)
(19)
Senior Secured Loan
Plastics Plumbing Fixture
Manufacturing
AppLovin Corporation (14) (15) (19)
Senior Secured Loan
Advertising Agencies
Asurion, LLC (14) (15) (19)
Senior Secured Loan
Senior Secured Loan
Senior Secured Loan
Communication Equipment
Repair and Maintenance
Athenahealth, Inc. (14) (15) (19)
Senior Secured Loan
Software Publishers
Bass Pro Group, LLC (14) (15) (19)
Senior Secured Loan
Sporting Goods Stores
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net
Assets
6.19%
(L +4.25%)
10/29/2019
11/15/2023 $
1,995 $
1,971 $ 2,004
1.2 %
6.30%
(L +4.50%)
6/27/2019
6/30/2025
2,607
2,612
2,632
1.6
4.55%
(L +2.75%)
6/24/2019
11/17/2025
1,082
1,081
1,094
0.7
9.24%
(L +7.50%)
12/19/2019
8/20/2024
13,250
13,119
13,119
7.9
6.05%
(L +4.25%)
6/24/2019
9/30/2023
1,489
1,484
1,498
0.9
5.30%
(L +3.50%)
6/24/2019
8/15/2025
1,985
1,987
2,001
1.2
4.80%
4.80%
8.30%
(L +3.00%)
(L +3.00%)
(L +6.50%)
6/24/2019
7/24/2019
11/19/2019
11/3/2024
11/3/2023
8/24/2025
1,985
995
1,500
4,480
1,985
997
1,511
4,493
1,998
1,002
1,511
4,511
6.40%
(L +4.50%)
6/24/2019
2/11/2026
1,985
1,990
1,998
1.2
0.6
0.9
2.7
1.2
6.80%
(L +5.00%)
6/24/2019
9/25/2024
1,985
1,921
1,983
1.2
119
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
BayMark Health Services, Inc.
Senior Secured Loan
Industry
Outpatient Mental Health and
Substance Abuse Centers
Blackhawk Network Holdings, Inc.
(14) (15) (19)
Senior Secured Loan
Computer and Computer
Peripheral Equipment and
Software Merchant Wholesalers
BrightSpring Health Services (14) (15)
(19)
Senior Secured Loan
Residential Intellectual and
Developmental Disability
Facilities
Brookfield WEC Holdings Inc. (14)
(15) (19)
Senior Secured Loan
Business to Business Electronic
Markets
Carolina Lubes, Inc.
Senior Secured Loan (4) (8)
Senior Secured Loan (Revolver) (5)
Automotive Oil Change and
Lubrication Shops
Charter NEX US, Inc. (14) (15) (19)
Senior Secured Loan
Unlaminated Plastics Profile
Shape Manufacturing
CHG Healthcare Services, Inc. (15)
(19)
Senior Secured Loan
All Other Outpatient Care
Centers
Cirrus Medical Staffing, Inc. (4)
Senior Secured Loan
Senior Secured Loan (Revolver)
Temporary Help Services
Community Intervention Services, Inc.
(4) (6) (10) (11)
Outpatient Mental Health and
Substance Abuse Centers
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net
Assets
10.21%
(L +8.25%)
3/22/2018
3/1/2025
$
4,000 $
3,970 $ 4,000
2.4 %
4.80%
(L +3.00%)
10/30/2019
6/15/2025
1,995
1,982
1,999
1.2
6.21%
(L +4.50%)
6/24/2019
3/5/2026
2,985
2,991
3,006
1.8
4.67%
(L +3.00%)
7/25/2019
8/1/2025
1,990
2,000
2,000
1.2
9.83%
0.25% (18)
(L +7.73%)
(L +7.25%)
8/23/2017
8/23/2017
8/23/2022
8/23/2022
20,268
—
20,268
20,172
(8)
20,164
20,466
(8)
20,458
12.3
—
12.3
5.30%
(L +3.50%)
10/30/2019
5/16/2024
2,000
1,985
1,985
1.2
4.80%
(L +3.00%)
7/24/2019
6/7/2023
1,999
2,001
2,015
1.2
10.19%
10.19%
(L +8.25%)
(L +8.25%)
3/5/2018
3/5/2018
10/19/2022
10/19/2022
12,564
1,408
13,972
12,458
1,408
13,866
12,358
1,384
13,742
7.4
0.8
8.2
Subordinated Loan
7.00% cash /
6.00% PIK
N/A
7/16/2015
1/16/2021
9,624
7,639
—
—
120
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Confie Seguros Holdings II Co. (14)
Senior Secured Loan
Industry
Insurance Agencies and
Brokerages
Connect U.S. Finco LLC (14) (15)
(19)
Senior Secured Loan
Taxi Service
Constellis Holdings, LLC (6)
Senior Secured Loan
Other Justice, Public Order, and
Safety Activities
Convergint Technologies Holdings,
LLC
Senior Secured Loan
Security Systems Services
(except Locksmiths)
Curium BidCo S.A R.L. (14) (15) (19)
Senior Secured Loan
Pharmaceutical and Medicine
Manufacturing
Davis Vision, Inc.
Senior Secured Loan
Direct Health and Medical
Insurance Carriers
Dexko Global Inc. (14) (15) (19)
Senior Secured Loan
Motor Vehicle Body
Manufacturing
Diamond Sports Group, LLC (14) (15)
(19)
Senior Secured Loan
Television Broadcasting
DuPage Medical Group (15) (19)
Senior Secured Loan
Offices of Physicians, Mental
Health Specialists
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net
Assets
10.41%
(L +8.50%)
7/7/2015
11/1/2025
$
9,678 $
9,515 $ 9,382
5.6 %
6.29%
(L +4.50%)
11/20/2019
12/11/2026
2,000
1,990
1,990
1.2
10.93%
(L +9.00%)
4/28/2017
4/21/2025
9,950
9,846
407
0.2
8.55%
(L +6.75%)
9/28/2018
2/2/2026
3,481
3,430
3,424
2.1
5.94%
(L +4.00%)
10/29/2019
7/1/2026
848
853
853
0.5
8.55%
(L +6.75%)
10/31/2019
12/1/2025
405
395
405
0.2
5.30%
(L +3.50%)
10/30/2019
7/24/2024
1,995
1,970
1,997
1.2
5.03%
(L +3.25%)
11/19/2019
8/24/2026
1,995
1,997
1,997
1.2
8.80%
(L +7.00%)
8/22/2017
8/15/2025
10,098
10,170
10,098
6.1
121
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Eblens Holdings, Inc.
Subordinated Loan (11)
Common Equity (71,250 Class A
units) (10)
Industry
Shoe Store
Interest Rate
(2)
12.00% cash /
1.00% PIK
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net
Assets
7/13/2017
1/13/2023
$
9,010 $
8,962 $ 9,025
5.4 %
7/13/2017
9,010
713
9,675
892
9,917
0.5
5.9
Endo International PLC (14) (15) (19)
Senior Secured Loan
Pharmaceutical Preparation
Manufacturing
Envocore Holding, LLC (FKA LRI
Holding, LLC) (4)
Electrical Contractors and Other
Wiring Installation Contractors
Senior Secured Loan
Preferred Equity (238,095 Series B
units) (10)
Preferred Equity (13,315 Series C
units) (10)
Excelin Home Health, LLC
Senior Secured Loan
Home Health Care Services
Explorer Holdings, Inc. (14) (15) (19)
Senior Secured Loan
Testing Laboratories
Garda World Security (14) (15) (19)
Senior Secured Loan
Security Systems Services
(except Locksmiths)
GGC Aerospace Topco L.P.
Senior Secured Loan
Common Equity (368,852 Class A
units) (10)
Common Equity (40,984 Class B
units) (10)
Hyland Software, Inc.
Senior Secured Loan (14) (15) (19)
Senior Secured Loan
Other Aircraft Parts and
Auxiliary Equipment
Manufacturing
Software Publishers
6.06%
(L +4.25%)
6/24/2019
4/29/2024
1,985
1,897
1,906
1.1
6.00% cash /
5.00% PIK
(L +6.00%)
6/30/2017
6/30/2022
16,367
16,207
14,639
6/30/2017
8/13/2018
300
—
16,367
13
16,520
—
14,639
11.50%
(L +9.50%)
10/25/2018
4/25/2024
4,250
4,183
4,070
8.8
—
—
8.8
2.4
5.60%
(L +3.75%)
6/25/2019
5/2/2023
1,985
1,987
2,004
1.2
6.66%
(L +4.75%)
10/24/2019
10/30/2026
1,667
1,634
1,680
1.0
10.65%
(L +8.75%)
12/29/2017
9/8/2024
5,000
4,912
4,084
12/29/2017
12/29/2017
5.30%
8.80%
(L +3.50%)
(L +7.00%)
10/24/2018
10/24/2018
7/1/2024
7/7/2025
450
124
50
5,412
1,655
2,614
4,269
5
4,213
1,672
2,617
4,289
5,000
1,660
2,601
4,261
2.5
0.1
—
2.6
1.0
1.6
2.6
122
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
Industry
Other Computer Related
Services
Administrative Management
and General Management
Consulting Services
All Other Professional,
Scientific, and Technical
Services
Home Health Care Services
Software Publishers
Internet Publishing and
Broadcasting and Web Search
Portals
Administrative Management
and General Management
Consulting Services
Security Systems Services
(except Locksmiths)
Portfolio Company (1)
Investment Type
Inergex Holdings, LLC
Senior Secured Loan
Senior Secured Loan (Revolver) (5)
(18)
Institutional Shareholder Services,
Inc.
Senior Secured Loan
Intouch Midco Inc. (15) (19)
Senior Secured Loan
Kindred Healthcare, Inc. (FKA
Kindred at Home) (14) (15) (19)
Senior Secured Loan
McAfee, LLC (14) (15) (19)
Senior Secured Loan
Senior Secured Loan
Micro Holding Corp (14) (15) (19)
Senior Secured Loan
Milrose Consultants, LLC (4) (8)
Senior Secured Loan
My Alarm Center, LLC (4) (10) (13)
Preferred Equity (1,485 Class A
units), 8% PIK
Preferred Equity (1,198 Class B units)
Preferred Equity (335 Class Z units)
25% PIK
Common Equity (64,149 units)
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net
Assets
8.94%
(L +7.00%)
10/1/2018
10/1/2024
$ 16,590 $
16,389 $ 16,489
9.9 %
6.05%
(L +7.00%)
10/1/2018
10/1/2024
1,875
18,465
1,853
18,242
1,864
18,353
1.1
11.0
10.44%
(L +8.50%)
3/4/2019
3/5/2027
6,244
6,075
6,098
3.7
6.05%
(L +4.25%)
12/20/2019
8/24/2025
1,995
1,925
1,925
1.2
5.56%
(L +3.75%)
6/25/2019
7/2/2025
2,985
2,998
3,004
1.8
5.55%
10.30%
(L +3.75%)
(L +8.50%)
6/25/2019
11/15/2019
9/30/2024
9/29/2025
1,985
2,000
3,985
1,987
2,002
3,989
1,996
2,018
4,014
1.2
1.2
2.4
5.55%
(L +3.75%)
6/25/2019
9/13/2024
1,985
1,969
1,991
1.2
8.14%
(L +6.20%)
7/16/2019
7/16/2025
11,500
11,420
11,394
6.7
7/14/2017
7/14/2017
9/12/2018
7/14/2017
1,571
1,198
325
—
3,094
984
—
1,136
—
2,120
0.6
—
0.7
—
1.3
123
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Online Tech Stores, LLC (4)
Subordinated Loan
OnSite Care, PLLC (4) (8)
Senior Secured Loan
Industry
Stationery and Office Supplies
Merchant Wholesalers
Home Health Care Services
Panther BF Aggregator 2 LP (14) (15)
(19)
Senior Secured Loan
Other Commercial and Service
Industry Machinery
Manufacturing
Parfums Holding Company, Inc.
Senior Secured Loan (14) (15) (19)
Senior Secured Loan
Pelican Products, Inc.
Senior Secured Loan
Performance Team LLC (4)
Senior Secured Loan
Cosmetics, Beauty Supplies,
and Perfume Stores
Unlaminated Plastics Profile
Shape Manufacturing
General Warehousing and
Storage
PM Acquisition LLC
All Other General Merchandise
Stores
Senior Secured Loan
Common Equity (499 units) (10) (13)
Quest Software US Holdings Inc. (14)
(15) (19)
Senior Secured Loan
Computer and Computer
Peripheral Equipment and
Software Merchant Wholesalers
Refinitiv (14) (15) (19)
Senior Secured Loan
Public Finance Activities
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net
Assets
10.50% cash /
3.00% PIK
N/A
2/1/2018
8/1/2023
$ 16,323 $
16,113 $ 14,559
8.7 %
9.09%
(L +7.78%)
8/10/2018
8/10/2023
9,541
9,446
9,162
5.5
5.30%
(L +3.50%)
11/19/2019
4/30/2026
1,995
1,978
2,006
1.2
6.16%
10.70%
(L +4.25%)
(L +8.75%)
6/25/2019
11/16/2017
6/30/2024
6/30/2025
87
6,320
6,407
87
6,332
6,419
87
6,276
6,363
0.1
3.8
3.9
9.49%
(L +7.75%)
9/24/2018
5/1/2026
6,055
6,059
5,969
3.6
11.80%
(L +10.00%)
5/24/2018
11/24/2023
13,889
13,790
14,165
8.4
11.50% cash /
2.50% PIK
N/A
9/30/2017
9/30/2017
10/29/2021
4,963
4,963
4,903
499
5,402
4,800
220
5,020
2.9
0.1
3.0
6.18%
(L +4.25%)
6/25/2019
5/16/2025
1,990
1,973
1,978
1.2
5.05%
(L +4.25%)
6/24/2019
10/1/2025
1,987
1,941
2,007
1.2
124
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Resource Label Group, LLC
Senior Secured Loan
Industry
Commercial Printing (except
Screen and Books)
Restaurant Technologies, Inc. (15)
(19)
Senior Secured Loan
Other Grocery and Related
Products Merchant Wholesalers
Rocket Software, Inc. (15) (19)
Senior Secured Loan
Senior Secured Loan
Software Publishers
RPLF Holdings, LLC (10) (13)
Common Equity (254,110 Class A
units)
Software Publishers
Sentry Centers Holdings, LLC (10)
(13)
Common Equity (5,000 Series C units)
Other Professional, Scientific,
and Technical Services
Southern Technical Institute, LLC (4)
(6) (10)
Subordinated Loan
Other
Spring Education Group, Inc. (F/K/A
SSH Group Holdings, Inc.)
Senior Secured Loan
Senior Secured Loan
Colleges, Universities, and
Professional Schools
Child Day Care Services
Sprint Communications, Inc. (14) (15)
(19)
Senior Secured Loan
Wired Telecommunications
Carriers
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net
Assets
10.60%
(L +8.50%)
6/7/2017
11/26/2023 $
4,821 $
4,777 $ 4,591
2.8 %
5.05%
(L +3.25%)
8/8/2019
10/1/2025
1,990
1,994
2,003
1.2
6.05%
10.05%
(L +4.25%)
(L +8.25%)
11/20/2018
11/20/2018
11/28/2025
11/28/2026
665
6,275
6,940
663
6,167
6,830
649
6,094
6,743
0.4
3.7
4.1
1/17/2018
254
186
0.1
3/31/2014
—
500
1,490
0.9
6.00% PIK
N/A
6/27/2018
6/27/2018
12/31/2021
6.19%
10.19%
(L +4.25%)
(L +8.25%)
7/26/2018
7/26/2018
7/30/2025
7/30/2026
1,611
—
1,611
972
7,216
8,188
—
—
—
—
—
—
970
7,157
8,127
978
7,288
8,266
—
—
—
0.6
4.4
5.0
4.81%
(L +3.00%)
6/24/2019
2/2/2024
1,985
1,972
1,980
1.2
125
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
SSJA Bariatric Management LLC (15)
(19)
Senior Secured Loan
Senior Secured Loan (Revolver) (5)
Stancor, L.P. (4) (10)
Preferred Equity (1,250,000 Class A
units), 8% PIK
Industry
Offices of Physicians, Mental
Health Specialists
Pump and Pumping Equipment
Manufacturing
Staples, Inc. (14) (15) (19)
Senior Secured Loan
Business to Business Electronic
Markets
STS Operating, Inc.
Senior Secured Loan (14) (15) (19)
Senior Secured Loan
Industrial Machinery and
Equipment Merchant
Wholesalers
Sunshine Luxembourg VII SARL (14)
(15) (19)
Senior Secured Loan
Pharmaceutical Preparation
Manufacturing
Tank Holding Corp. (14) (15) (19)
Senior Secured Loan
Unlaminated Plastics Profile
Shape Manufacturing
The Escape Game, LLC (4)
Senior Secured Loan
Senior Secured Loan
Senior Secured Loan
Truck Hero, Inc. (15) (19)
Senior Secured Loan
Other amusement and recreation
industries
Truck Trailer Manufacturing
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net
Assets
6.94%
0.50% (18)
(L +5.00%)
(L +5.00%)
8/26/2019
8/26/2019
8/26/2024
8/26/2024
$
9,975 $
—
9,975
9,883 $ 9,861
(14)
9,847
(6)
9,877
5.9 %
—
5.9
8/19/2014
—
1,501
1,607
1.0
6.69%
(L +5.00%)
6/24/2019
4/16/2026
1,990
1,920
1,960
1.1
6.05%
9.80%
(L +4.25%)
(L +8.00%)
5/16/2018
5/15/2018
12/11/2024
4/30/2026
632
9,073
9,705
631
9,070
9,701
632
9,030
9,662
0.4 %
5.4
5.8
6.19%
(L +4.25%)
11/20/2019
9/25/2026
2,000
2,010
2,021
1.2
6.41%
(L +4.00%)
6/24/2019
3/26/2026
1,995
2,002
2,005
1.2
8.80%
10.55%
10.55%
(L +7.00%)
(L +8.75%)
(L +8.75%)
7/18/2019
12/22/2017
7/20/2018
3/31/2020
12/22/2022
12/22/2022
4,667
7,000
7,000
18,667
4,642
6,969
7,000
18,611
4,648
6,972
6,972
18,592
2.8
4.2
4.2
11.2
10.05%
(L +8.25%)
5/30/2017
4/21/2025
7,014
6,990
6,690
4.0
126
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
United Biologics Holdings, LLC (4)
(10)
Preferred Equity (151,787 units)
Warrants (29,374 units)
Industry
Medical Laboratories
U.S. Anesthesia Partners (14) (15)
(19)
Senior Secured Loan
Freestanding Ambulatory
Surgical and Emergency
Centers
Verifone Intermediate Holdings, Inc.
(14) (15) (19)
Senior Secured Loan
Other Commercial and Service
Industry Machinery
Manufacturing
Wastebuilt Environmental Solutions,
LLC (4)
Senior Secured Loan
Industrial Supplies Merchant
Wholesalers
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent
of
Net
Assets
4/16/2013
7/26/2012
3/05/2022
(12)
$
— $
9 $
—
—
82
91
15
7
22
— %
—
—
4.80%
(L +3.00%)
6/24/2019
6/23/2024
2,980
2,950
2,976
1.8
5.90%
(L +4.00%)
6/24/2019
8/20/2025
258
252
256
0.2
10.69%
(L +8.75%)
10/11/2018
10/11/2024
7,000
6,883
6,584
4.0
Total Debt and Equity Investments
$ 372,094 $ 373,074 $ 350,925
210.7 %
Structured Finance Note
Investments (7)
Dryden 76 CLO, Ltd.
Subordinated Notes
Elevation CLO 2017-7, Ltd.
Subordinated Notes
Flatiron CLO 18, Ltd.
Subordinated Notes
THL Credit Wind River 2019‐3 CLO
Ltd.
Subordinated Notes
Total Structured Finance Note
Investments
15.37% (9)
15.71% (9)
16.68% (9)
9/27/2019
10/20/2032
(17)
2,750
2,491
2,509
1.5
2/6/2019
7/15/2030
(17)
10,000
7,485
6,559
3.9
1/2/2019
4/17/2031
(17)
9,680
7,355
7,345
4.4
12.33% (9)
4/5/2019
4/15/2031
(17)
7,000
5,796
5,197
3.1
$ 29,430 $
23,127 $ 21,610
12.9 %
127
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Total Non-control/Non-affiliate
Investments
Affiliate Investments
3rd Rock Gaming Holdings, LLC
Senior Secured Loan
Common Equity (2,547,250 units)
(10) (13)
Chemical Resources Holdings, Inc.
Senior Secured Loan (4)(8)
Common Equity (1,832 Class A
shares) (10) (13)
Contract Datascan Holdings, Inc. (4)
Subordinated Loan
Preferred Equity (3,061 Series A
shares) 10% PIK (10)
Common Equity (11,273 shares) (10)
DRS Imaging Services, LLC
Senior Secured Loan (4) (8)
Common Equity (1,135 units) (10)
(13)
Master Cutlery, LLC (4) (6) (10)
Subordinated Loan (11)
Preferred Equity (3,723 Series A
units), 8% PIK
Common Equity (15,564 units)
Industry
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net
Assets
$ 401,524 $ 396,201 $ 372,535
223.6 %
Software Publishers
Custom Compounding of
Purchased Resins
Office Machinery and
Equipment Rental and Leasing
Data Processing, Hosting, and
Related Services
Sporting and Recreational
Goods and Supplies Merchant
Wholesalers
9.44% cash /
1.00% PIK
(L +7.50%)
3/13/2018
3/12/2023
21,373
21,176
20,099
12.1
3/13/2018
—
21,373
2,547
23,723
1,044
21,143
0.6
12.7
9.82%
(L +7.89%)
1/25/2019
1/25/2024
13,743
13,592
13,746
1/25/2019
13,743
1,813
15,405
2,662
16,408
12.00%
N/A
8/5/2015
2/5/2021
8,000
7,995
8,000
8/5/2015
6/28/2016
5,599
104
13,698
5,671
671
14,342
8,000
11.21%
(L +9.27%)
3/8/2018
11/20/2023
10,741
10,670
10,569
3/8/2018
10,741
1,135
11,805
1,331
11,900
13.00%
N/A
4/17/2015
4/17/2020
5,947
4,764
4/17/2015
4/17/2015
—
—
5,947
3,483
—
8,247
255
—
—
255
8.2
1.6
9.8
4.8
3.4
0.4
8.6
6.3
0.8
7.1
0.2
—
—
0.2
128
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
NeoSystems Corp. (4) (10)
Preferred Equity (521,962 convertible
shares) 10% PIK
Pfanstiehl Holdings, Inc. (4)
Subordinated Loan
Common Equity (400 Class A shares)
Industry
Other Accounting Services
Pharmaceutical Preparation
Manufacturing
Professional Pipe Holdings, LLC
Plumbing, Heating, and Air-
Conditioning Contractors
Professional and Management
Development Training
Commercial and Industrial
Machinery and Equipment
(except Automotive and
Electronic) Repair and
Maintenance
Senior Secured Loan
Common Equity (1,414 Class A units)
(10)
TalentSmart Holdings, LLC
Senior Secured Loan (4)
Senior Secured Loan (Revolver) (5)
(18)
Common Equity (1,500 Class A
shares) (10) (13)
TRS Services, LLC (4) (11)
Senior Secured Loan
Preferred Equity (329,266 Class AA
units), 15% PIK (10)
Preferred Equity (3,000,000 Class A
units), 11% PIK (10)
Common Equity (3,000,000 units)
(10)
TTG Healthcare, LLC
Senior Secured Loan (4)
Preferred Equity ( 2,309 Class B units)
(10) (13)
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net
Assets
8/14/2014
$
— $
1,698 $ 2,250
1.4 %
10.50%
N/A
1/1/2014
1/1/2014
9/29/2022
3,788
—
3,788
3,807
217
4,024
3,788
11,979
15,767
10.55% cash /
1.50% PIK
(L +9.27%)
3/23/2018
3/23/2023
7,099
7,008
7,170
3/23/2018
—
7,099
1,414
8,422
2,413
9,583
8.50%
(L +6.75%)
10/11/2019
10/11/2024
10,000
9,833
9,833
8.50%
(L +6.75%)
10/11/2019
10/11/2024
250
242
242
10/11/2019
—
10,250
1,500
11,575
1,500
11,575
2.3
7.2
9.5
4.3
1.4
5.7
5.9
0.1
0.9
6.9
8.8
0.3
1.9
—
11.0
7.1
1.5
8.6
10.55% cash /
1.00% PIK
(L +8.75%)
12/10/2014
3/16/2020
14,624
14,615
14,623
6/30/2016
12/10/2014
12/10/2014
—
—
545
547
3,374
3,095
—
14,624
572
19,106
—
18,265
Diagnostic Imaging Centers
10.71%
(L +9.00%)
3/1/2019
3/1/2024
12,103
11,938
11,767
3/1/2019
12,103
2,309
14,247
2,424
14,191
129
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
Portfolio Company (1)
Investment Type
Total Affiliate Investments
Control Investment
MTE Holding Corp. (4)
Subordinated Loan (to Mirage
Trailers, LLC, a controlled,
consolidated subsidiary of MTE
Holding Corp.)
Common Equity (554 shares)
Total Control Investment
Total Investments
Industry
Interest Rate
(2)
Spread
Above
Index (2)
Initial
Acquisition
Date
Maturity
Principal
Amount
Amortized
Cost
Fair
Value (3)
Percent of
Net
Assets
$ 107,668 $ 131,950 $ 135,679
81.5 %
Travel Trailer and Camper
Manufacturing
10.26% cash /
4.50% PIK
(L +8.50%)
11/25/2015
11/25/2015
11/25/2020 $
$
7,464 $
—
7,464
7,464 $
7,451 $
3,069
10,520
10,520 $
7,464
1,253
8,717
8,717
4.5 %
0.8
5.3
5.3 %
$ 516,656 $ 538,671 $ 516,931
310.4 %
(1) Equity ownership may be held in shares or units of companies affiliated with the portfolio company. The Company's investments are generally classified as "restricted securities" as such
term is defined under Regulation S-X Rule 6-03(f) or Securities Act Rule 144.
(2) Substantially all of the investments that bear interest at a variable rate are indexed to LIBOR (L), generally between 1.7% and 2.1% at December 31, 2020, and reset monthly, quarterly, or
semi-annually. Variable-rate loans with an aggregate cost of $309,350 include LIBOR reference rate floor provisions of generally 1% to 2%; at December 31, 2020, the reference rate on all
such instruments was above the stated floors. For each investment, the Company has provided the spread over the reference rate and current interest rate in effect at December 31, 2020.
Unless otherwise noted, all investments with a stated PIK rate require interest payments with the issuance of additional securities as payment of the entire PIK provision.
(3) Unless otherwise noted with footnote 14, fair value was determined using significant unobservable inputs for all of the Company's investments and are considered Level 3 under GAAP.
(4)
See Note 5 for further details.
Investments (or portion thereof) held by SBIC I LP. These assets (or a portion thereof) are held to support the SBA debentures and cannot be pledged under any debt obligation of the
Company.
(5) Subject to unfunded commitments. See Note 6 for further details.
(6)
Investment was on non-accrual status as of December 31, 2020, meaning the Company has ceased recognition of all or a portion of income on the investment. See Note 4 for further details.
(7) Structured Finance Notes are considered CLO subordinated debt positions. CLO subordinated debt positions are entitled to recurring distributions which are generally equal to the remaining
cash flow of payments made by underlying securities less contractual payments to debt holders and fund expenses.
(8) The Company has entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, it has agreed to receive its payment after the repayment of certain co‑lenders
pursuant to a payment waterfall. The table below provides additional details as of December 31, 2020:
Portfolio Company
Carolina Lubes, Inc.
Chemical Resources Holdings, Inc.
DRS Imaging Services, LLC
Milrose Consultants, LLC
OnSite Care, PLLC
Reported Interest
Rate (%)
9.83%
9.82%
11.21%
8.14%
9.49%
Interest Rate per
Credit Agreement
(%)
9.35%
7.93%
9.94%
7.44%
7.96%
Additional Interest per Annum
(%)
0.48%
1.89%
1.27%
0.70%
1.53%
(9) The rate disclosed is an estimated effective yield based upon the current projection of the amount and timing of distributions in addition to the estimated amount and timing of terminal
principal payments. Effective yields for the Company's Structured Finance Note investments are monitored and evaluated at each reporting date. The estimated yield and investment cost
may ultimately not be realized.
130
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
(10) Non-income producing.
(11) The interest rate on these investments contains a PIK provision, whereby the issuer has the option to make interest payments in cash or with the issuance of additional securities as payment
of the entire PIK provision. The interest rate in the schedule represents the current interest rate in effect for these investments. The following table provides additional details on these PIK
investments, including the maximum annual PIK interest rate allowed as of December 31, 2020:
Portfolio Company
Community Intervention Services, Inc.
Eblens Holdings, Inc.
Master Cutlery, LLC
TRS Services, LLC
Investment Type
Subordinated Loan
Subordinated Loan
Senior Secured Loan
Senior Secured Loan
Range of PIK
Option (%)
0% or 6.00%
0% or 1.00%
0% to 13.00%
0% or 1.00%
Range of Cash
Option (%)
13.00% or 7.00%
13.00% or 12.00%
13.00% to 0%
12.65% or 1.00%
Maximum PIK
Rate Allowed (%)
6.00%
1.00%
13.00%
1.00%
(12) Represents expiration date of the warrants.
(13) All or portion of investment held by OFSCC-MB.
(14) Fair value was determined by reference to observable inputs other than quoted prices in active markets and are considered Level 2 under GAAP. See Note 5 for further details.
(15) Investments (or portion thereof) held by OFSCC-FS. These assets are pledged as collateral of the BNP Credit Facility and cannot be pledged under any other debt obligation of the
Company.
(16) Amortized cost reflects accretion of effective yield less any cash distributions received or entitled to be received from CLO Structured Finance Note investments.
(17) Maturity represents the contractual maturity date of the Structured Finance Notes. Expected maturity and cash flows, not contractual maturity and cash flows, were utilized in deriving the
effective yield of the investments.
(18) Commitment fee on undrawn funds.
See Notes to Consolidated Financial Statements.
131
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 1. Organization
OFS Capital Corporation (the “Company”), a Delaware corporation, is an externally managed, closed-end, non-diversified management investment
company. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended
(“1940 Act”). In addition, for income tax purposes, the Company has elected to be treated as a regulated investment company (“RIC”) under Subchapter M
of Code under the Internal Revenue Code of 1986, as amended (the “Code”).
The Company’s investment objective is to provide stockholders with current income and capital appreciation through its strategic investment focus
primarily on debt investments and, to a lesser extent, equity investments primarily in middle-market companies principally in the United States. OFS
Capital Management, LLC, a registered investment advisor under the Advisers Act (“Advisor”), and a wholly owned subsidiary of Orchard First Source
Asset Management, LLC, a full-service provider of capital and leveraged finance solutions to U.S. Corporations (“OFSAM”), manages the day-to-day
operations of, and provides investment advisory services to, the Company.
In addition, OFS Advisor also serves as the investment adviser for Hancock Park Corporate Income, Inc. (“HPCI”), a Maryland corporation and a BDC.
HPCI’s investment objective is similar to that of the Company. OFS Advisor also serves as the investment adviser for OFS Credit Company, Inc. (“OCCI”),
a non-diversified, externally managed, closed-end management investment company that has registered as an investment company under the 1940 Act that
primarily invests in CLO debt and subordinated securities.
The Company may make investments directly, or follow-on investments in current portfolio companies held through OFS SBIC I LP (“SBIC LP”), its
investment company subsidiary licensed under the U.S. Small Business Administration's (“SBA”) small business investment company program (“SBIC
Program”). The SBIC Program is designed to stimulate the flow of capital into eligible businesses. SBIC I LP is subject to SBA regulatory requirements,
including limitations on the businesses and industries in which it can invest, requirements to invest at least 25% of its “regulatory capital” in “eligible
smaller businesses”, as defined under the Small Business Investment Act of 1958, as amended (“SBIC Act”), limitations on the financing terms of
investments, and capitalization thresholds that may limit distributions to the Company; and is subject to periodic audits and examinations of its financial
statements.
The Company may also make investments through OFSCC-FS, LLC (“OFSCC-FS”), a special-purpose vehicle formed in April 2019 for the purpose of
acquiring senior secured loan investments and through OFSCC-MB, LLC (“OFSCC-MB”), a wholly owned subsidiary taxed under subchapter C of the
Code, that generally holds the equity investments of the Company that are taxed as pass-through entities.
Note 2. Summary of Significant Accounting Policies
Basis of presentation: The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the
United States of America ("GAAP"), including ASC Topic 946, Financial Services-Investment Companies, and the requirements for reporting on Form 10-
K, the 1940 Act, and Articles 6 and 12 of Regulation S-X. The consolidated financial statements include all adjustments, consisting only of normal and
recurring accruals and adjustments, necessary for fair presentation in accordance with GAAP. Certain amounts in the prior period financial statements have
been reclassified to conform to the current year presentation.
Reclassifications: Certain prior period amounts have been reclassified to conform to the current period presentation in the consolidated financial statements
and the accompanying notes thereto. Reclassifications did not impact net increase in net assets resulting from operations, total assets, total liabilities or total
net assets, or consolidated statements of changes in net assets and consolidated statements of cash flows classifications.
Principles of consolidation: The Company consolidates majority-owned investment company subsidiaries. The Company does not own any controlled
operating company whose business consists of providing services to the Company, which would also require consolidation. All intercompany balances and
transactions are eliminated upon consolidation.
Investments: The Company applies fair value accounting in accordance with ASC Topic 820, Fair Value Measurements, which defines fair value,
establishes a framework to measure fair value, and requires disclosures regarding fair value measurements. Fair value is defined as the price to sell an asset
or transfer a liability in an orderly transaction between market participants at
132
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
the measurement date. Fair value is determined through the use of models and other valuation techniques, valuation inputs, and assumptions market
participants would use to value the investment. Highest priority is given to prices for identical assets quoted in active markets (Level 1) and the lowest
priority is given to unobservable valuation inputs (Level 3). The availability of observable inputs can vary significantly and is affected by many factors,
including the type of product, whether the product is new to the market, whether the product is traded on an active exchange or in the secondary market,
and the current market conditions. To the extent that the valuation is based on unobservable inputs, the determination of fair value requires more judgment.
Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for financial instruments classified as Level 3 (i.e.,
those instruments valued using unobservable inputs), which comprise the majority of the Company’s investments. See Note 5 for details.
Changes to the valuation policy are reviewed by management and the Company’s board of directors (the “Board”). As the Company’s investments change,
markets change, new products develop, and valuation inputs become more or less observable, the Company will continue to refine its valuation
methodologies.
See Note 5 for more detailed disclosures of the Company’s fair value measurements of its financial instruments.
Investment classification: The Company classifies its investments in accordance with the 1940 Act. Under the 1940 Act, “Control Investments” are
defined as investments in those companies in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50%
of board representation, “Affiliate Investments” are defined as investments in those companies in which the Company owns between 5% and 25% of the
voting securities, and “Non-Control/Non-Affiliate Investments” are those that neither qualify as Control Investments nor Affiliate Investments.
Significant Subsidiaries: The Company evaluates the issuers of its Control Investments for significance in accordance with Rules 3-09 and 4-08(g) of
Regulation S-X. No issuers of Control Investments were considered a significant subsidiary under these rules as of or for the years ended December 31,
2020, 2019 and 2018.
Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of investment income, expenses, gains and losses during the reporting period. Actual results could differ significantly from those estimates.
Reportable segments: The Company has a single reportable segment and single operating segment structure.
Cash and cash equivalents: Cash and cash equivalents consist of cash and highly liquid investments not held for resale with initial maturities of three
months or less. The Company’s cash and cash equivalents are maintained with a member bank of the FDIC and at times, such balances may be in excess of
the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. Included in cash and cash equivalents was $37,708 and $13,447 held in a US Bank
Money Market Deposit Account as of December 31, 2020 and 2019, respectively. In addition, the Company's use of cash and cash equivalents held by
SBIC I LP is limited by SBA regulation, including, but not limited to, investment in eligible portfolio companies and general corporate purposes;
distributions by SBIC I LP subject to a statutory measure of undistributed accumulated earnings.
Revenue recognition:
Interest income: Interest income is recognized on an accrual basis and reported as an interest receivable until collected. Interest income is accrued daily
based on the outstanding principal amount on the consolidated statements of assets and liabilities and the contractual terms of the debt investment. Certain
of the Company’s investments contain a payment-in-kind interest income provision (“PIK interest”). The PIK interest, computed at the contractual rate
specified in the applicable investment agreement, is added to the principal balance of the investment, rather than being paid in cash. Recognition of PIK
interest includes assessments of collectibility, and may result in recognition of the PIK income that corresponds to the fair value of the associated
investment. The Company discontinues accrual of interest income, including PIK interest, when there is reasonable doubt that the interest income will be
collected.
Loan origination fees, original issue discount (“OID”), market discount or premium, and loan amendment fees (collectively, “Net Loan Fees”) are recorded
as an adjustment to the amortized cost of the investment, and accreted or amortized as an adjustment to interest income over the life of the respective debt
investment using a method that approximates the effective interest method. When the Company receives a loan principal payment, the unamortized Net
Loan Fees related to the paid principal is accelerated and recognized in interest income.
133
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Further, the Company may acquire or receive equity, warrants or other equity-related securities (“Equity”) in connection with the Company’s acquisition of,
subsequent amendment or restructuing to, debt investments. The Company determines the cost basis of Equity based on its fair value, and the fair value of
debt investments and other securities or consideration received. Any resulting difference between the face amount of the debt and its recorded cost resulting
from the assignment of value to the Equity is treated as OID, and accreted into interest income as described above.
Interest income - Structured Finance Notes: Interest income from investments in CLO mezzanine debt and CLO subordinated debt positions (“Structured
Finance Notes”) is recognized on the basis of the estimated effective yield to expected redemptions utilizing assumed cash flows in accordance with ASC
Sub-topic 325-40, Beneficial Interests in Securitized Financial Assets. The Company monitors the expected cash flows from its Structured Finance Notes
and the effective yield is generally established at purchase and re-evaluated upon receipt of distributions.
Dividend income: Dividend income on common equity securities in limited liability companies, partnerships and other private entities, generally payable in
cash, is recorded at the time dividends are declared. Dividend income on preferred equity investments is accrued daily based on the contractual terms of the
preferred equity investment. Dividends on preferred equity securities may be payable in cash or in additional preferred securities, and are generally not
payable unless declared or upon liquidation. Declared dividends payable in cash are reported as dividend receivables until collected. Non-cash dividends
payable in additional preferred securities or contractually earned but not declared (“PIK dividends”) are recognized at fair value and recorded as an
adjustment to the cost basis of the investment. Distributions in excess of the accumulated net income of the underlying portfolio company are recorded as a
reduction in the cost of the common or preferred stock investment.
Fee income: The Company generates fee revenue in the form of syndication, prepayment, and other contractual fees, that are recognized as the related
services are rendered. In the general course of its business, the Company receives certain fees, such as management fees, from portfolio companies which
are non-recurring in nature. Prepayment fees are received on certain loans when repaid prior to their scheduled due date, which are recognized as earned
when received, and syndication fees are received for capital structuring, loan syndication or advisory services from certain portfolio companies, which are
recognized as earned upon closing of the investment.
Investment Transactions and net realized and unrealized gain or loss on investments: Investment transactions are reported on a trade-date basis. Unsettled
trades as of the statement of assets and liabilities date are included in payable for investments purchased. Realized gains or losses on investments are
measured by the difference between the net proceeds from the disposition and the amortized cost basis of the investment. Investments are valued at fair
value as determined in good faith by Company management under the supervision and review of the Board. After recording all appropriate interest,
dividend, and other income, some of which is recorded as an adjustment to the cost basis of the investment as described above, the Company reports
changes in the fair value of investments as net changes in unrealized appreciation (depreciation) on investments in the consolidated statements of
operations.
Non-accrual loans: When there is reasonable doubt that principal, cash interest, or PIK interest, will be collected, debt investments are placed on non-
accrual status and the Company will cease recognizing cash interest, PIK interest, or Net Loan Fee amortization, as applicable. When an investment is
placed on non-accrual status, all interest previously accrued but not collected is reserved against current period interest income. Interest payments
subsequently received on non-accrual investments may be recognized as income or applied to principal depending upon management’s judgment. Interest
accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal, interest, and
when, in the judgment of management, the investments are estimated to be fully collectible as to all principal and interest. If there is a question as to the
ability of the debtor to meet the terms of the loan agreement, or interest or principal is more than 90 days contractually past due, the loan investment will be
placed on non-accrual status. Past due status is based on how long after the contractual due date a principal or interest payment is received. See Note 4 for
further information.
Income taxes: The Company has elected to be treated, and intends to qualify annually, as a RIC under Subchapter M of the Code. To qualify as a RIC, the
Company must, among other things, meet certain source of income and asset diversification requirements, and timely distribute at least 90% of its
investment company taxable income (“ICTI”) to its stockholders. The Company has made, and intends to continue to make, the requisite distributions to its
stockholders, which generally relieves the Company from U.S. federal income taxes.
Depending on the level of ICTI earned in a tax year, the Company may choose to retain ICTI in an amount less than that which would trigger U.S. federal
income tax liability under Subchapter M of the Code. However, the Company would be liable for a
134
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
4% excise tax on such income. Excise tax liability is recognized when the Company determines its estimated current year annual ICTI, as defined in the
Code, exceeds distributions from current year ICTI.
The Company may utilize OFSCC-MB when making equity investments in portfolio companies taxed as pass-through entities to meet its source-of-income
requirements as a RIC. OFSCC-MB is an investment company under GAAP, and is consolidated in the Company’s GAAP financial statements and may
incur current and deferred federal and state income tax expense with respect to income derived from those investments. Such income, net of applicable
income taxes, is not included in the Company’s tax-basis net investment income until distributed by OFSCC-MB which may result in timing and character
differences between the Company’s GAAP and tax-basis net investment income and realized gains and losses. Income tax expense from OFSCC-MB
related to net investment income is included in general and administrative expenses, or the applicable net realized or unrealized gain (loss) line item from
which the federal or state income tax originated for capital gains and losses. See Note 8 for further information.
The Company evaluates tax positions taken in the course of preparing its tax returns to determine whether they 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 could result in greater and undistributed
ICTI, income and excise tax expense, and, if involving multiple years, a re-assessment of the Company’s RIC status. GAAP requires recognition of accrued
interest and penalties related to uncertain tax benefits as income tax expense. There were no uncertain income tax positions at December 31, 2020, 2019
and 2018. The current and prior three tax years remain subject to examination by U.S. federal and most state tax authorities.
Distributions: Distributions to common stockholders are recognized on the record date. The timing of distributions as well as the amount to be paid out as
a distribution is determined by the Board each quarter. Distributions from net investment income and net realized gains are determined in accordance with
the Code. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment.
Distributions paid in excess of ICTI and not capital gains are considered returns of capital to stockholders.
The Company has adopted a distribution reinvestment plan (“DRIP”) that provides for reinvestment of any distributions the Company declares in cash on
behalf of its stockholders, unless a stockholder elects to receive cash. As a result, if the Board authorizes and the Company declares a cash distribution,
then stockholders who have not “opted out” of the DRIP will have their cash distribution automatically reinvested in additional shares of the Company’s
common stock, rather than receiving the cash distribution.
The Company may use newly issued shares under the guidelines of the DRIP, or the Company may purchase shares in the open market in connection with
its obligations under the plan.
Deferred debt issuance costs: Deferred debt issuance costs represent fees and other direct incremental costs incurred in connection with the Company’s
borrowings. Deferred debt issuance costs are presented as a direct reduction of the related debt liability on the consolidated statements of assets and
liabilities except for deferred debt issuance costs associated with the Company’s line of credit arrangements, which are included in prepaid expenses and
other assets on the consolidated statements of assets and liabilities. Unamortized debt issuance costs included in prepaid expenses and other assets on the
consolidated statements of assets and liabilities as of December 31, 2020 and 2019 were $1,015 and $1,628, respectively. Deferred debt issuance costs are
amortized to interest expense over the term of the related debt.
Goodwill: On December 4, 2013, in connection with the Company's acquisition of the remaining ownership interests in SBIC I LP and SBIC I GP, LLC,
making SBIC I LP a wholly owned subsidiary of the Company (“SBIC Acquisition”), the Company recorded goodwill of $1,077. The decline in the price
of the Company’s common stock and the level at which it continued to trade relative to the broader stock indices for the BDC industry, led management to
conclude in the third quarter of 2020 that an impairment in the value of the Company’s goodwill was more likely than not. Moreover, due to the discount at
which the Company’s stock traded to its net asset value management concluded that the impairment of goodwill equal to the full amount of its carrying
value of $1,077 was appropriate.
Intangible asset: On December 4, 2013, in connection with the SBIC Acquisition, the Company recorded an intangible asset of $2,500 attributable to the
SBIC license. The Company amortizes this intangible asset on a straight-line basis over its estimated useful life, initially 154 months ended September 30,
2026. The Company changed its estimate on the useful life to terminate on December 31, 2025. The Company recognized amortization of $206 for the year
ended December 31, 2020, and anticipates recognizing $216 on an annual basis through December 31, 2025 based on the current estimated useful life.
135
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The Company tests its intangible asset for impairment if events or circumstances suggest that the asset carrying value may not be fully recoverable. The
intangible asset, net of accumulated amortization of $1,392 and $1,186 at December 31, 2020 and 2019, respectively, is included in prepaid expenses and
other assets in the consolidated statements of assets and liabilities.
Interest expense: Interest expense is recognized on an accrual basis as incurred.
Concentration of credit risk: Aside from its debt instruments, financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of cash deposits at financial institutions. At various times during the year, the Company may exceed the federally insured limits. To
mitigate this risk, the Company places cash deposits only with high credit quality institutions. Management believes this risk of loss is minimal. The
amount of loss due to credit risk from debt investments if borrowers fail to perform according to the terms of the contracts, and the collateral or other
security for those instruments proved to be of no value to the Company, is equal to the Company's recorded investment in debt instruments and the
unfunded loan commitments as disclosed in Note 6.
New Accounting Standards
The following table discusses recently issued ASUs by the FASB:
Standard
Description
Period of Adoption
Effect of Adoption on the Financial Statements
Standards that were adopted
ASU 2020-04, Reference Rate
Reform (Topic 840): Facilitation
of the Effects of Reference Rate
Reform on Financial Reporting
Provides companies with optional
guidance to ease the potential
accounting burden associated with
transitioning away from reference
rates (e.g., LIBOR) that are expected
to be discontinued. ASU 2020-04
allows, among other things, certain
contract modifications, such as those
within the scope of Topic 310 on
receivables, to be accounted as a
continuation of the existing contract.
First Quarter 2020,
prospectively
Through December 31, 2020, no contracts have
transitioned away from discontinued reference rates.
Note 3. Related Party Transactions
Investment Advisory and Management Agreement: OFS Advisor manages the day-to-day operations of, and provides investment advisory services to, the
Company pursuant to an agreement dated November 7, 2012 (“Investment Advisory Agreement”). The Investment Advisory Agreement was most recently
re-approved on April 2, 2020. Under the terms of the Investment Advisory Agreement, which are in accordance with the 1940 Act and subject to the
overall supervision of the Board, OFS Advisor is responsible for sourcing potential investments, conducting research and diligence on potential
investments and equity sponsors, analyzing investment opportunities, structuring investments, and monitoring investments and portfolio companies on an
ongoing basis. OFS Advisor is a subsidiary of OFSAM and a registered investment advisor under the Investment Advisers Act of 1940, as amended.
OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to the Company and OFS Advisor is free to furnish similar services to
other entities, including other BDCs affiliated with OFS Advisor, so long as its services to the Company are not impaired. OFS Advisor also serves as the
investment adviser or collateral manager to CLOs and other companies, including HPCI and OCCI.
OFS Advisor receives fees for providing services, consisting of two components: a base management fee and an incentive fee. The base management fee is
calculated at an annual rate of 1.75% and based on the average value of the Company’s total assets (other than cash and cash equivalents but including
assets purchased with borrowed amounts and including assets owned by any consolidated entity) at the end of the two most recently completed calendar
quarters, adjusted for any share issuances or repurchases during the quarter. OFS Advisor has elected to exclude the value of the intangible assets resulting
from the SBIC Acquisition from the base management fee calculation.
136
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
On June 11, 2019, OFS Advisor agreed to reduce a portion of its base management fee by reducing the portion of such fee from 0.4375% per quarter
(1.75% annualized) to 0.25% per quarter (1.00% annualized) of the average value of the portion of the total assets held by the Company through OFSCC-
FS (the "OFSCC-FS Assets"), at the end of the two most recently completed calendar quarters to the extent that such portion of the OFSCC-FS Assets are
financed using leverage (also calculated on an average basis) that causes the Company’s statutory asset coverage ratio to fall below 200%. When
calculating its statutory asset coverage ratio, the Company excludes its SBA guaranteed debentures from its total outstanding senior securities as permitted
pursuant to exemptive relief granted by the SEC dated November 26, 2013. Effective as of January 1, 2020, OFS Advisor agreed to further reduce the base
management fee to 0.25% per quarter (1.00% annualized) of the average value of the portion of total assets held by the Company through OFSCC-FS at the
end of the two most recently completed calendar quarters without regard to the statutory asset coverage ratio. The base management fee reduction by OFS
Advisor is renewable on an annual basis and the amount of the base management fee reduced with respect to the OFSCC-FS Assets shall not be subject to
recoupment by OFS Advisor; this agreement was renewed on February 16, 2021.
The incentive fee has two parts. The first part ("Part One") is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net
investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income,
dividend income and any other income (including any other fees such as commitment, origination and sourcing, structuring, diligence and consulting fees
or other fees that the Company receives from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar
quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement (as
defined below) and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net
investment income includes, in the case of investments with a deferred interest or dividend feature (such as OID, debt instruments with PIK interest, equity
investments with accruing or PIK dividend and zero coupon securities), accrued income that the Company has not yet received in cash.
Pre-incentive fee net investment income is expressed as a rate of return on the value of the Company’s net assets (defined as total assets less indebtedness
and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter and adjusted for any
share issuances or repurchases during such quarter. Accordingly, as a result of the follow-on public offering of 3,625,000 shares of common stock in April
2017 (the "Offering"), the Part One incentive fee was reduced by $593 for the three months ended June 30, 2017, determined by adjusting the value of net
assets, as defined above, at March 31, 2017 by the daily weighted average of the Offering proceeds available to the Company during the three months
ended June 30, 2017. The incentive fee with respect to pre-incentive fee net income is 20.0% of the amount, if any, by which the pre-incentive fee net
investment income for the immediately preceding calendar quarter exceeds a 2.0% (which is 8.0% annualized) hurdle rate and a “catch-up” provision
measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, OFS Advisor receives no incentive fee until the net
investment income equals the hurdle rate of 2.0%, but then receives, as a “catch-up,” 100.0% of the pre-incentive fee net investment income with respect to
that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if
pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, OFS Advisor will receive 20.0% of the pre-incentive fee net investment
income.
Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or
depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter in which the Company
incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, the Company
will pay the applicable incentive fee even if the Company has incurred a loss in that quarter due to realized and unrealized capital losses. The Company’s
net investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the base
management fee. These calculations are appropriately prorated for any period of less than three months.
The second part ("Part Two") of the incentive fee (the “Capital Gain Fee”) is determined and payable in arrears as of the end of each calendar year (or upon
termination of the Investment Advisory Agreement, as of the termination date), commencing on December 31, 2012, and equals 20.0% of the Company’s
aggregate realized capital gains, if any, on a cumulative basis from the date of the election to be a BDC through the end of each calendar year, computed net
of all realized capital losses and unrealized capital depreciation through the end of such year, less all previous amounts paid in respect of the Capital Gain
Fee; provided that the incentive fee determined as of December 31, 2012, was calculated for a period of shorter than twelve calendar months to take into
account any realized capital gains computed net of all realized capital losses and unrealized capital depreciation for the period beginning on the date of the
Company’s election to be a BDC and ending December 31, 2012.
137
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The Company accrues the Capital Gain Fee if, on a cumulative basis, the sum of net realized capital gains and (losses) plus net unrealized appreciation and
(depreciation) is positive. If, on a cumulative basis, the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation) decreases
during a period, the Company will reverse any excess Capital Gain Fee previously accrued such that the amount of Capital Gains Fee accrued is no more
than 20% of the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation).
On May 4, 2020, OFS Advisor agreed to irrevocably waive the receipt of $441 in Income Incentive Fees (based on net investment income) related to net
investment income, that it would otherwise be entitled to receive under the Investment Advisory Agreement for the three months ended March 31, 2020.
As a result of the voluntary fee waiver, the Company incurred Income Incentive Fee expense of $442 for the three months ended March 31, 2020, which is
equal to half the Income Incentive Fee expense the Company would have incurred for the three months ended March 31, 2020. The voluntary fee waiver
did not include Capital Gain Fees, which was $0 for the three months ended March 31, 2020.
License Agreement: The Company entered into a license agreement with OFSAM under which OFSAM has agreed to grant the Company a non-exclusive,
royalty-free license to use the name “OFS.”
Administration Agreement: OFS Services furnishes the Company with office facilities and equipment, necessary software licenses and subscriptions, and
clerical, bookkeeping and record keeping services at such facilities pursuant to an Administration Agreement. The Administration Agreement was most
recently re-approved by the Board on April 2, 2020. Under the Administration Agreement, OFS Services performs, or oversees the performance of, the
Company’s required administrative services, which include being responsible for the financial records that the Company is required to maintain and
preparing reports to its stockholders and all other reports and materials required to be filed with the SEC or any other regulatory authority. In addition, OFS
Services assists the Company in determining and publishing its net asset value, oversees the preparation and filing of its tax returns and the printing and
dissemination of reports to its stockholders, and generally oversees the payment of the Company’s expenses and the performance of administrative and
professional services rendered to the Company by others. Under the Administration Agreement, OFS Services also provides managerial assistance on the
Company’s behalf to those portfolio companies that have accepted the Company’s offer to provide such assistance. Payment under the Administration
Agreement is equal to an amount based upon the Company’s allocable portion of OFS Services’s overhead in performing its obligations under the
Administration Agreement, including, but not limited to, rent, information technology services and the Company’s allocable portion of the cost of its
officers, including its chief executive officer, chief financial officer, chief compliance officer, chief accounting officer, and their respective staffs. To the
extent that OFS Services outsources any of its functions, the Company will pay the fees associated with such functions on a direct basis without profit to
OFS Services.
Equity Ownership: As of December 31, 2020, affiliates of OFS Advisor held 3,033,257 shares of common stock, which is approximately 23% of the
Company's outstanding shares of common stock.
Distributions paid to affiliates and expenses recognized under agreements with OFS Advisor and OFS Services for the years ended December 31, 2020,
2019 and 2018 are presented below:
Base management fees
Incentive fees:
Income Incentive Fee
Incentive fee waiver
Administration fees
Distributions paid to affiliates
2020
December 31,
2019
2018
$
7,605 $
8,271 $
2,025
(441)
1,855
2,553
4,760
—
1,747
4,007
6,335
4,409
(22)
1,601
5,097
138
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 4. Investments
As of December 31, 2020, the Company had loans to 49 portfolio companies, of which 95% were senior secured loans and 5% were subordinated loans, at
fair value, as well as equity investments in 10 of these portfolio companies. The Company also held an equity investment in 13 portfolio companies in
which it did not hold a debt investment, as well as 12 investments in Structured Finance Notes. At December 31, 2020, investments consisted of the
following:
Senior secured debt investments
Subordinated debt investments
Preferred equity
Common equity and warrants
Total debt and equity investments
Structured Finance Notes
Total
Percentage of Total
Percentage of Total
Amortized
Cost
325,647
45,409
18,648
15,459
405,163
55,860
461,023
$
$
Amortized Cost
70.6 %
9.8
4.0
3.4
87.8 %
12.2
100.0 %
Net Assets
Fair Value
Fair Value
Net Assets
204.9 % $
28.6
11.7
9.7
254.9 %
35.1
290.0 % $
306,304
15,067
11,543
52,984
385,898
56,425
442,323
69.2 %
3.4
2.6
12.0
87.2 %
12.8
100.0 %
192.7 %
9.5
7.3
33.3
242.8 %
35.5
278.3 %
At December 31, 2020, the Company had four loans (Community Intervention Services, Inc., Master Cutlery, LLC, 3rd Rock Gaming Holdings, LLC, and
Online Tech Stores, LLC) on non-accrual status with respect to all interest and Net Loan Fee amortization, with an aggregate amortized cost and fair value
of $48,102 and $12,135, respectively.
On March 27, 2020, the Company's debt investment in Constellis Holdings, LLC was restructured, pursuant to which the Company converted its non-
accrual debt investment into 20,628 common shares of equity. As of March 31, 2020, the cost and fair value of the common shares received were $703 and
$703, respectively. The Company recognized a realized loss on the restructuring of $9,145 for the year ended December 31, 2020, which was fully
recognized as an unrealized loss as of December 31, 2019.
On September 4, 2020, the Company's equity investment in Sentry Centers Holdings, LLC was restructured, pursuant to which the Company converted its
500 Series C units into 269 shares of common equity. In addition, the Company invested $160 in a capital raise and received Series A and Series B
preferred units. Accordingly, during the year ended December 31, 2020, the Company recognized a realized loss of $446.
On September 30, 2020, the Company's debt investment in Southern Technical Institute, LLC was restructured, pursuant to which the Company received
proceeds of $529, in full satisfaction of contractually due interest of $215 and principal of $1,660. This investment was carried at a cost of $-0-.
Accordingly, during the year ended December 31, 2020, the Company fully recognized a realized gain of $314 as the investment was carried at cost as of
December 31, 2019. As of December 31, 2020, the Company holds equity appreciation rights with a cost and fair value of $-0- and $4,295, respectively.
Geographic composition is determined by the location of the corporate headquarters of the portfolio company. As of December 31, 2020, the Company's
investment portfolio was domiciled as follows:
December 31, 2020
December 31, 2019
United States of America
Canada
1
Cayman Islands
Ireland
Luxembourg
Switzerland
Total investments
Amortized Cost
$
399,278 $
1,921
55,860
—
1,976
1,988
461,023 $
Fair Value
Amortized Cost
Fair Value
380,004 $
1,905
56,425
—
1,997
1,992
442,323 $
505,235 $
3,559
23,127
1,897
2,843
2,010
538,671 $
484,946
3,605
21,610
1,906
2,843
2,021
516,931
$
(1) Cayman Island investments represent Structured Finance Notes held by the Company. These investments generally hold underling portfolios of
investments in United States domiciled companies.
139
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
As of December 31, 2020, the industry compositions of the Company’s debt and equity investments were as follows:
Percentage of Total
Percentage of Total
Amortized
Cost
Amortized Cost
Net Assets
Fair Value
Fair Value
Net Assets
Administrative and Support and Waste
Management and Remediation Services
Convention and Trade Show Organizers
Security Systems Services (except Locksmiths)
$
Arts, Entertainment, and Recreation
Other Amusement and Recreation Industries
Construction
Electrical Contractors and Other Wiring
Installation Contractors
Plumbing, Heating, and Air-Conditioning
Contractors
Education Services
Colleges, Universities, and Professional Schools
Professional and Management Development
Training
Finance and Insurance
Insurance Agencies and Brokerages
Health Care and Social Assistance
Child Day Care Services
Diagnostic Imaging Centers
Home Health Care Services
Medical Laboratories
Offices of Physicians, Mental Health Specialists
Outpatient Mental Health and Substance Abuse
Centers
Information
Data Processing, Hosting, and Related Services
Software Publishers
Television Broadcasting
Manufacturing
Commercial Printing (except Screen and Books)
Custom Compounding of Purchased Resins
Other Aircraft Parts and Auxiliary Equipment
Manufacturing
Other Commercial and Service Industry
Machinery Manufacturing
Pharmaceutical Preparation Manufacturing
Pump and Pumping Equipment Manufacturing
214
6,531
20,967
17,837
7,607
—
1,595
9,544
5,178
21,718
4,199
91
21,013
11,615
1,135
28,799
1,977
4,789
15,444
5,431
1,925
2,205
1,501
— %
1.4
0.1 % $
4.1
210
3,487
— %
0.8
13.3
19,973
11.2
13,137
4.8
—
1.0
6.0
3.3
13.8
2.6
0.1
13.2
7.3
0.7
18.2
1.2
3.0
9.7
3.4
1.2
1.4
0.9
7,294
4,295
1,306
9,302
4,656
23,607
4,250
38
20,802
4,105
1,749
16,104
1,758
4,812
17,164
4,275
1,936
38,213
1,281
4.5
3.0
1.6
1.0
0.3
2.1
1.1
5.3
1.0
—
4.7
0.9
0.4
3.6
0.4
1.1
3.9
1.0
0.4
8.7
0.3
4.5
3.9
1.7
—
0.3
2.1
1.1
4.8
0.9
—
4.6
2.5
0.2
6.3
0.4
1.0
3.3
1.2
0.4
0.5
0.3
140
0.1 %
2.2
12.6
8.3
4.6
2.7
0.8
5.9
2.9
14.9
2.7
—
13.1
2.6
1.1
10.0
1.1
3.0
10.8
2.7
1.2
24.1
0.8
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Percentage of Total
Percentage of Total
Amortized
Cost
Amortized Cost
Net Assets
Fair Value
Fair Value
Net Assets
Semiconductor and Related Device
Manufacturing
Travel Trailer and Camper Manufacturing
Truck Trailer Manufacturing
Unlaminated Plastics Profile Shape
Manufacturing
$
Other Services (except Public Administration)
Commercial and Industrial Machinery and
Equipment (except Automotive and Electronic)
Repair and Maintenance
Diet and Weight Reducing Centers
Professional, Scientific, and Technical Services
Administrative Management and General
Management Consulting Services
All Other Professional, Scientific, and Technical
Services
Marketing Consulting Services
Other Accounting Services
Other Computer Related Services
Public Administration
399
10,911
8,118
8,922
572
477
28,503
1,921
5,229
21,621
16,247
Other Justice, Public Order, and Safety Activities
703
Real Estate and Rental and Leasing
Construction, Mining, and Forestry Machinery
and Equipment Rental and Leasing
Office Machinery and Equipment Rental and
Leasing
Retail Trade
Cosmetics, Beauty Supplies, and Perfume Stores
Shoe Store
Sporting Goods Stores
All Other General Merchandise Stores
Transportation and Warehousing
Scheduled Passenger Air Transportation
Taxi Service
Wholesale Trade
Business to Business Electronic Markets
Computer and Computer Peripheral Equipment
and Software Merchant Wholesalers
Construction and Mining (except Oil Well)
Machinery and Equipment Merchant Wholesalers
496
5,953
6,738
9,748
2,907
5,252
495
1,976
2,891
1,955
16,392
0.1 %
2.4
1.8
1.9
0.1
0.1
6.3
0.4
1.1
4.7
3.5
0.2
0.1
1.3
1.5
2.1
0.6
1.1
0.1
0.4
0.6
0.4
3.6
0.3 % $
6.9
5.1
5.6
0.4
0.3
18.0
1.2
3.3
13.7
10.2
0.4
0.3
3.7
4.2
6.1
1.8
3.3
0.3
1.2
1.8
1.2
434
10,812
8,174
8,818
915
479
28,729
1,905
5,229
22,238
16,000
676
499
2,736
6,701
4,368
2,968
5,060
520
1,997
2,875
1,942
10.3
16,777
0.1 %
2.4
1.8
2.0
0.3 %
6.8
5.1
5.5
0.2
0.1
6.6
0.4
1.2
5.0
3.6
0.2
0.1
0.6
1.5
1.0
0.7
1.1
0.1
0.5
0.6
0.4
3.8
0.6
0.3
18.2
1.2
3.3
14.0
10.1
0.4
0.3
1.7
4.2
2.7
1.9
3.2
0.3
1.3
1.8
1.2
10.6
141
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
General Line Grocery Merchant Wholesalers
Industrial Machinery and Equipment Merchant
Wholesalers
Industrial Supplies Merchant Wholesalers
Motor Vehicle Parts (Used) Merchant
Wholesalers
Sporting and Recreational Goods and Supplies
Merchant Wholesalers
Stationery and Office Supplies Merchant
Wholesalers
Total debt and equity investments
Structured Finance Notes
Total investments
Percentage of Total
Percentage of Total
Amortized
Cost
$
275
Amortized Cost
0.1 %
Net Assets
Fair Value
Fair Value
Net Assets
0.2 % $
284
0.1 %
0.2 %
9,696
6,908
14,167
8,247
16,129
405,163
55,860
461,023
$
$
2.1
1.5
3.1
1.8
6.1
4.3
8.9
5.2
3.5
87.9 %
12.1
100.0 %
10.1
254.9 % $
35.1
290.0 % $
9,179
5,476
13,581
346
2,426
385,898
56,425
442,323
2.1
1.2
3.1
0.1
5.8
3.4
8.5
0.2
0.5
87.2 %
12.8
100.0 %
1.5
242.8 %
35.5
278.3 %
As of December 31, 2019, the Company had loans to 79 portfolio companies, of which 90% were senior secured loans and 10% were subordinated loans, at
fair value, as well as equity investments in 15 of these portfolio companies. The Company also held an equity investment in six portfolio companies in
which it did not hold a debt investment, as well as four investments in Structured Finance Notes. At December 31, 2019, investments consisted of the
following:
Senior secured debt investments
Subordinated debt investments
Preferred equity
Common equity and warrants
Total debt and equity investments
Structured Finance Notes
Total
Percentage of Total
Percentage of Total
Amortized
Cost
421,970
56,731
21,925
14,919
515,545
23,126
538,671
$
$
Amortized Cost
78.3 %
10.5
4.1
2.8
95.7 %
4.3
100.0 %
Net Assets
Fair Value
Fair Value
Net Assets
253.2 % $
34.0
13.2
9.0
309.4 %
14.0
323.4 % $
408,724
43,091
17,729
25,777
495,321
21,610
516,931
79.1 %
8.3
3.4
5.0
95.8 %
4.2
100.0 %
245.3 %
25.9
10.6
15.5
297.3 %
12.9
310.2 %
At December 31, 2019, the Company had four loans (Community Intervention Services, Inc., Southern Technical Institute, LLC, Master Cutlery, LLC and
Constellis Holdings, LLC) on non-accrual status with respect to all interest and Net Loan Fee amortization, with an aggregate amortized cost and fair value
of $22,249 and $662, respectively.
On January 31, 2019, Maverick Healthcare Equity, LLC was acquired in a purchase transaction. Proceeds from this transaction were insufficient to redeem
the class of equity held by the Company. Accordingly, the Company recognized a net loss of $89, which is comprised of $900 realized loss net of $811
unrealized loss reversal, in the year ended December 31, 2019.
The industry compositions of the Company’s debt and equity investments were as follows:
Percentage of Total
Percentage of Total
Amortized
Cost
Amortized Cost
Net Assets
Fair Value
Fair Value
Net Assets
Administrative and Support and Waste
Management and Remediation Services
Security Systems Services (except Locksmiths)
Temporary Help Services
$
8,158
13,866
1.6 %
2.7
4.9 % $
8.3
7,224
13,742
1.5 %
2.8
4.3 %
8.2
142
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Arts, Entertainment, and Recreation
Other Amusement and Recreation Industries
$
18,611
3.6 %
11.2 % $
18,592
3.8 %
11.2 %
Percentage of Total
Percentage of Total
Amortized
Cost
Amortized Cost
Net Assets
Fair Value
Fair Value
Net Assets
Construction
Electrical Contractors and Other Wiring
Installation Contractors
Plumbing, Heating, and Air-Conditioning
Contractors
Education Services
Colleges, Universities, and Professional Schools
Professional and Management Development
Training
Finance and Insurance
Direct Health and Medical Insurance Carriers
Insurance Agencies and Brokerages
Health Care and Social Assistance
All Other Outpatient Care Centers
Child Day Care Services
Diagnostic Imaging Centers
Freestanding Ambulatory Surgical and
Emergency Centers
General Medical and Surgical Hospitals
Home Health Care Services
Medical Laboratories
Offices of Physicians, Mental Health Specialists
Outpatient Mental Health and Substance Abuse
Centers
Residential Intellectual and Developmental
Disability Facilities
Information
Data Processing, Hosting, and Related Services
Internet Publishing and Broadcasting and Web
Search Portals
Software Publishers
Television Broadcasting
Wired Telecommunications Carriers
Manufacturing
Commercial Printing (except Screen and Books)
Custom Compounding of Purchased Resins
Motor Vehicle Body Manufacturing
9.9
5.1
—
6.9
0.2
6.9
1.2
4.9
8.6
1.8
1.6
10.0
0.1
12.0
7.0
1.8
7.1
1.2
24.5
1.2
1.2
2.9
9.2
1.2
14,639
9,583
—
11,575
405
11,386
2,015
8,266
14,191
2,976
2,632
16,236
22
19,945
4,000
3,006
11,900
1,992
38,373
1,997
1,980
4,591
16,408
1,997
3.0
1.9
—
2.3
0.1
2.3
0.4
1.7
2.9
0.6
0.5
3.3
—
4.0
0.8
0.6
2.4
0.4
7.7
0.4
0.4
0.9
3.3
0.4
8.8
5.8
—
6.9
0.2
6.8
1.2
5.0
8.5
1.8
1.6
9.7
—
12.0
2.4
1.8
7.1
1.2
22.9
1.1
1.2
2.8
9.8
1.2
3.2
1.6
—
2.2
0.1
2.2
0.4
1.6
2.8
0.6
0.5
3.2
—
3.9
2.3
0.6
2.3
0.4
8.0
0.4
0.4
0.9
3.0
0.4
16,520
8,422
—
11,574
395
11,487
2,001
8,126
14,247
2,950
2,612
16,627
91
20,047
11,609
2,991
11,805
1,969
41,054
1,997
1,972
4,778
15,405
1,970
143
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Other Aircraft Parts and Auxiliary Equipment
Manufacturing
Other Commercial and Service Industry
Machinery Manufacturing
Pharmaceutical and Medicine Manufacturing
Pharmaceutical Preparation Manufacturing
Plastics Plumbing Fixture Manufacturing
Pump and Pumping Equipment Manufacturing
Travel Trailer and Camper Manufacturing
Truck Trailer Manufacturing
Unlaminated Plastics Profile Shape
Manufacturing
Other Services (except Public Administration)
Automotive Oil Change and Lubrication Shops
Commercial and Industrial Machinery and
Equipment (except Automotive and Electronic)
Repair and Maintenance
Communication Equipment Repair and
Maintenance
Professional, Scientific, and Technical Services
Administrative Management and General
Management Consulting Services
Advertising Agencies
All Other Professional, Scientific, and Technical
Services
Other Accounting Services
Other Computer Related Services
Other Professional, Scientific, and Technical
Services
Testing Laboratories
Public Administration
Other Justice, Public Order, and Safety Activities
Public Finance Activities
Real Estate and Rental and Leasing
Office Machinery and Equipment Rental and
Leasing
Retail Trade
Cosmetics, Beauty Supplies, and Perfume Stores
Shoe Store
Sporting Goods Stores
Percentage of Total
Percentage of Total
Amortized
Cost
Amortized Cost
Net Assets
Fair Value
Fair Value
Net Assets
$
5,412
1.0 %
3.2 % $
4,213
0.9 %
2.5 %
1.3
0.5
4.8
0.9
0.9
6.3
4.2
6.0
2,262
853
19,694
1,498
1,607
8,717
6,690
9,959
12.1
20,458
11.5
2.7
10.5
1.2
1.2
1.0
10.9
0.3
1.2
5.9
1.2
8.2
3.9
5.8
1.2
18,265
4,512
17,492
2,001
1,925
2,250
18,353
1,490
2,004
407
2,007
14,342
6,363
9,917
1,983
0.5
0.2
4.0
0.3
0.3
1.7
1.4
2.0
4.0
3.7
0.9
3.5
0.4
0.4
0.5
3.7
0.3
0.4
0.1
0.4
2.9
1.3
2.0
0.4
1.4
0.5
11.8
0.9
1.0
5.2
4.0
6.0
12.3
11.0
2.7
10.5
1.2
1.2
1.4
11.0
0.9
1.2
0.2
1.2
8.6
3.8
6.0
1.2
0.4
0.2
1.5
0.3
0.3
2.0
1.4
1.9
3.9
3.7
0.9
3.4
0.4
0.4
0.3
3.5
0.1
0.4
1.9
0.4
2.7
1.2
1.8
0.4
2,229
853
7,931
1,484
1,501
10,520
6,990
10,046
20,165
19,106
4,493
17,496
1,987
1,925
1,698
18,242
500
1,987
9,846
1,941
13,698
6,419
9,675
1,921
144
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Supermarkets and Other Grocery (except
Convenience) Stores
All Other General Merchandise Stores
$
Transportation and Warehousing
General Warehousing and Storage
Taxi Service
Wholesale Trade
Business to Business Electronic Markets
Computer and Computer Peripheral Equipment
and Software Merchant Wholesalers
Industrial Machinery and Equipment Merchant
Wholesalers
Industrial Supplies Merchant Wholesalers
Motor Vehicle Parts (Used) Merchant
Wholesalers
Other Grocery and Related Products Merchant
Wholesalers
Sporting and Recreational Goods and Supplies
Merchant Wholesalers
Stationery and Office Supplies Merchant
Wholesalers
Total debt and equity investments
Structured Finance Notes
Total investments
Note 5. Fair Value of Financial Instruments
Investments
Percentage of Total
Percentage of Total
Amortized
Cost
Amortized Cost
Net Assets
Fair Value
Fair Value
Net Assets
0.2 %
1.0
0.6 % $
3.2
1,081
5,402
13,790
1,990
3,920
3,955
9,700
6,883
13,119
1,995
8,247
2.7
0.4
0.8
0.8
1.9
1.3
2.5
0.4
1.6
1,094
5,020
14,165
1,990
3,960
3,976
9,662
6,584
13,119
2,003
255
14,559
495,321
21,610
516,931
0.2 %
1.0
0.7 %
3.0
2.9
0.4
0.8
0.8
2.0
1.3
2.6
0.4
0.1
8.5
1.2
2.4
2.4
5.8
4.0
7.9
1.2
0.2
2.9
100.0 %
—
100.0 %
8.7
297.3 %
12.9 %
310.2 %
8.3
1.2
2.4
2.4
5.8
4.1
7.9
1.2
4.9
9.7
309.4 % $
14.0 %
323.4 % $
16,113
515,545
23,126
538,671
$
$
3.1
100.0 %
—
100.0 %
The Company’s investments are valued at fair value as determined by the Board. These fair values are determined in accordance with a documented
valuation policy and a consistently applied valuation process.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. Fair values are determined with models or other valuation techniques, valuation inputs, and assumptions market participants would
use in pricing an asset or liability. Valuation inputs are organized in a hierarchy that gives the highest priority to prices for identical assets or liabilities
quoted in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of inputs in the fair value hierarchy are
described below:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2: Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or
liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs
include: (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in
markets that are not active, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived
principally from or corroborated by observable market data.
145
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Level 3: Unobservable inputs for the asset or liability, and situations where there is little, if any, market activity for the asset or liability at the
measurement date.
The inputs into the determination of fair value are based upon the best information under the circumstances and may require significant management
judgment or estimation. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an
investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s
assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the
investment. The Company generally categorizes its investment portfolio into Level 2 and Level 3 of the hierarchy.
The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the measurement date.
Senior securities with a fair value of $601 and $2,321 were transferred from Level 3 to Level 2 during the years ended December 31, 2020 and 2019,
respectively.
Certain of the Company's investments are exchanged in the non-public market among banks, CLOs and other institutional investors for loans to large U.S.
corporations. The Company classifies these loan investments as Level 2 when a sufficient number of market quotations or indicative prices from pricing
services or broker/dealers (collectively, “Indicative Prices”) are available, and the depth of the market is sufficient to transact to those prices in amounts
approximating the Company's investment position at the measurement date. Investments for which sufficient Indicative Prices exist are generally valued
consistent with such Indicative Prices.
In addition, each quarter, the Company assesses whether an arm’s length transaction occurred in the same security, including the Company's new
investments during the quarter, the cost of which (“Transaction Prices”), may be considered a reasonable indication of fair value for up to three months
after the transaction date. Senior secured debt investments with a fair value of $6,114 were valued at their Transaction Price at December 31, 2020. Based
on liquidity and other market factors, these securities are designated as Level 3 in the fair value hierarchy.
Investments that are not valued using Indicative Prices or Transaction Prices are typically valued using two different valuation techniques. The Company
typically estimates the fair value of debt investments by a discounted cash flows technique in which a current price is imputed for the investment based
upon an assessment of the expected market yield (or discount rate) for similarly structured investments with a similar level of risk. The Company considers
the current contractual interest rate, the maturity and other terms of the investment relative to risk of the portfolio company and various market indices. A
key determinant of portfolio-company risk is the leverage through the investment relative to earnings metrics of the portfolio company.
The fair value of Structured Finance Notes are also estimated primarily by discounted cash flow techniques. In valuing such investments, the Company
considers CLO performance metrics, including prepayment rates, default rates, loss-on-default and recovery rates, and other metrics, as well as estimated
market yields provided by a recognized industry pricing service as a primary source for discounted cash flow fair value estimates, supplemented by actual
trades executed in the market at or around period-end, as well as the indicative prices provided by broker-dealers in its estimate of the fair value of such
investments. The Company also considers the operating metrics of the CLO vehicle, including compliance with collateralization tests, concentration limits
and restructuring activity, if applicable.
The fair value of Company’s equity investments as well as certain of its non-performing debt investments are estimated through analysis of the portfolio
companies’ enterprise value under a market approach. Enterprise value means the entire value of the portfolio company to a market participant, including
the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. The primary method for determining enterprise value
under the market approach involves multiple analysis whereby appropriate multiples are applied to an earnings metric of the portfolio company, typically
earnings before net interest expense, income tax expense, depreciation and amortization (“EBITDA”). EBITDA multiples are typically determined based
upon review of market comparable transactions and publicly traded comparable companies, if any. The Company may also utilize other portfolio-company
earnings metrics to determine enterprise value, such as recurring monthly revenue ("RMR”) or a delineated measure of portfolio company EBITDA.
Application of these valuation methodologies involves a significant degree of judgment by management.
Due to the inherent uncertainty of determining the fair value of Level 3 investments, the fair value of the investments may differ significantly from the
values that would have been used had a ready market or observable inputs existed for such investments and may differ materially from the values that may
ultimately be received or settled. Further, such investments are generally subject to legal and other restrictions, or otherwise are less liquid than publicly
traded instruments. If the Company were
146
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
required to liquidate a portfolio investment in a forced or liquidation sale, the Company might realize significantly less than the value at which such
investment had previously been recorded. The Company’s investments are subject to market risk. Market risk is the potential for changes in the value due
to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments are traded.
The following tables presents the Company's investment portfolio measured at fair value on a recurring basis as of December 31, 2020 and 2019,
respectively.
Security
Debt investments
Equity investments
Structured Finance Notes
Security
Debt investments
Equity investments
Structured Finance Notes
$
$
$
$
Level 1
Level 2
Level 3
Fair Value at December
31, 2020
— $
—
—
— $
22,226 $
—
—
22,226 $
299,145 $
64.527
56.425
420,097 $
321,371
64,527
56,425
442,323
Level 1
Level 2
Level 3
Fair Value at December
31, 2019
74,666 $
—
—
74,666 $
377,149 $
43,506
21,610
442,265 $
451,815
43,506
21,610
516,931
— $
—
—
— $
147
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The following tables provide quantitative information about the Company’s significant unobservable inputs to the Company’s Level 3 fair value
measurements as of December 31, 2020 and 2019.
Debt investments:
Senior secured
Senior secured
Senior secured
Senior secured
Subordinated
Subordinated
Subordinated
Fair Value at
December 31,
2020
Valuation technique
Unobservable inputs
$
256,042 Discounted cash flow
12,668 Market approach
9,257 Market approach
6,111 Market approach
7,822 Discounted cash flow
6,794 Market approach
451 Market approach
Discount rates
EBITDA multiples
Revenue multiples
Discount rates
EBITDA multiples
Revenue multiples
Range
(Weighted average)
6.30% - 24.43% (10.18%)
8.50x - 8.50x (8.50x)
0.86x - 0.86x (0.86x)
17.83% - 17.83% (17.83%)
7.05x - 9.10x (7.78x)
0.10x - 0.20x (0.18x)
Structured Finance Notes:
Subordinated notes
(1)
54,724 Discounted cash flow
Mezzanine debt
1,701 Discounted cash flow
Discount rates
Constant default rate
Constant default rate after
6 months
Recovery rate
15.00% - 19.50% (17.79%)
0.00% - 2.00% (1.63%)
2.00% - 2.00% (2.00%)
60.00% - 60.00% (60.00%)
Discount Margin
Constant default rate
Constant default rate after
9 months
Recovery rate
7.25% - 9.45% (8.58%)
0.00% - 2.00% (1.01%)
2.00% - 3.00% (2.49%)
60.00% - 60.00% (60.00%)
Equity investments:
Preferred equity
Preferred equity
Common equity and warrants
Common equity and warrants
10,395 Market approach
1,148 Market approach
52,969 Market approach
15 Market approach
EBITDA multiples
Revenue multiples
EBITDA multiples
Revenue multiples
4.73x - 8.50x (7.37x)
0.20x - 1.56x (0.96x)
3.75x - 11.50x (8.10x)
0.20x - 1.56x (0.47x)
$
420,097
(1) The cash flows utilized in the discounted cash flow calculations assume liquidation at current market prices and redeployment of proceeds on all assets
currently in default and all assets below specified fair value thresholds.
148
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Debt investments:
Senior secured
Senior secured
Senior secured
Subordinated
Subordinated
Subordinated
Fair Value at
December 31,
2019
Valuation technique
Unobservable inputs
$
295,835 Discounted cash flow
15,031 Market approach
23,193 Market approach
35,371 Discounted cash flow
7,464 Market approach
255 Market approach
Discount rates
EBITDA multiples
Transaction Price
Discount rates
EBITDA multiples
Revenue multiple
Range
(Weighted average)
5.64% - 17.42% (11.17%)
8.09x - 13.22x (13.08x)
6.38% - 18.86% (14.32%)
4.75x - 6.35x (6.35x)
0.23x - 0.23x (0.23x)
Structured Finance Notes:
Subordinated notes
(2)
21,610 Discounted cash flow
Equity investments:
Preferred equity
Preferred equity
Preferred equity
Common equity and warrants
Common equity and warrants
Common equity and warrants
13,185 Market approach
2,424 Market approach
2,120 Market approach
22,788 Market approach
1,489 Market approach
1,500 Transaction Price
$
442,265
(1) Constant default rates for the next twelve months.
Discount rates
Constant default rate
Recovery rate
(1)
14.50% - 19.50% (17.16%)
1.26% - 1.40% (1.33%)
69.30% - 70.00% (69.70%)
EBITDA multiples
Revenue multiples
Recurring monthly
revenue
EBITDA multiples
Revenue multiples
6.25x - 13.22x (4.96x)
0.23x - 9.58x (9.58x)
40.00x - 40.00x (40.00x)
4.50x - 13.22x (13.03x)
0.23x - 7.00x (7.00x)
(2) The cash flows utilized in the discounted cash flow calculations assume liquidation at current market prices and redeployment of proceeds on all assets
currently in default and all assets below specified fair value thresholds.
Changes in market credit spreads or events impacting the credit quality of the underlying portfolio company (both of which could impact the discount rate),
as well as changes in EBITDA and/or EBITDA multiples, among other things, could have a significant impact on fair values, with the fair value of a
particular debt investment susceptible to change in inverse relation to the changes in the discount rate. Changes in EBITDA and/or EBITDA multiples, as
well as changes in the discount rate, could have a significant impact on fair values, with the fair value of an equity investment susceptible to change in
tandem with the changes in EBITDA and/or EBITDA multiples, and in inverse relation to changes in the discount rate. Due to wide range of approaches
towards developing input assumptions to these valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the
Company’s disclosures and those of other companies may not be meaningful.
149
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The following tables present changes in investments measured at fair value using Level 3 inputs for the years ended December 31, 2020 and 2019:
Level 3 assets, January 1, 2020
$
334,059 $
43,090 $
17,729 $
25,777 $
21,610 $
Senior
Secured Debt
Investments
Subordinated
Debt
Investments
Preferred
Equity
Common
Equity and
Warrants
Structured
Finance Notes
Year Ended December 31, 2020
Total
442,265
Net realized loss on investments
Net change in unrealized appreciation (depreciation) on
investments
Amortization of net loan origination fees
Accretion of interest income on Structured Finance Notes
Capitalized PIK interest, dividends, and fees
Purchase and origination of portfolio investments
Proceeds from principal payments on portfolio
investments
Sale and redemption of portfolio investments
Proceeds from distributions received from Structured
Finance Notes
Conversion from debt investment to equity investment
(Note 4)
Transfers out of Level 3
(9,107)
(2,119)
1,421
—
1,066
79,695
(109,998)
(9,635)
—
(703)
(601)
—
51
(497)
—
(9,553)
(16,702)
11
—
478
—
(11,810)
—
—
—
—
(2,909)
—
—
437
160
—
(3,925)
—
—
—
26,668
—
—
—
333
—
—
—
703
—
2,081
30
5,877
—
33,536
7,019
1,462
5,877
1,981
113,724
—
—
(121,808)
(13,560)
(6,709)
(6,709)
—
—
—
(601)
Level 3 assets, December 31, 2020
$
284,078 $
15,067 $
11,543 $
52,984 $
56,425 $
420,097
150
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Level 3 assets, January 1, 2019
$
319,017 $
44,540 $
14,613 $
18,627 $
— $
Senior
Secured Debt
Investments
Subordinated
Debt
Investments
Preferred
Equity
Common
Equity and
Warrants
Structured
Finance Notes
Year Ended December 31, 2019
Total
396,797
Net realized loss on investments
Net change in unrealized appreciation (depreciation) on
investments
Amortization of net loan origination fees
Accretion of interest income on Structured Finance Notes
Capitalized PIK interest, dividends, and fees
Purchase and origination of portfolio investments
Proceeds from principal payments on portfolio
investments
Sale and redemption of portfolio investments
Proceeds from distributions received from Structured
Finance Notes
Transfers out of Level 3
(3,000)
(8,405)
1,278
—
489
122,184
(57,150)
(38,033)
—
(2,321)
—
(1,968)
86
—
432
—
—
—
—
—
(900)
811
—
—
896
2,309
—
—
—
—
—
3,837
—
—
—
3,313
—
—
—
—
—
(3,900)
(1,516)
—
2,861
—
23,341
—
—
(3,076)
—
(7,242)
1,364
2,861
1,817
151,147
(57,150)
(38,033)
(3,076)
(2,321)
Level 3 assets, December 31, 2019
$
334,059 $
43,090 $
17,729 $
25,777 $
21,610 $
442,264
The net unrealized appreciation (depreciation) reported in the Company’s consolidated statements of operations for the years ended December 31, 2020 and
2019, attributable to the Company’s Level 3 assets still held at those respective year ends was as follows:
Senior secured debt investments
Subordinated debt investments
Preferred equity
Common equity and warrants
Structured Finance Notes
Net unrealized depreciation on investments held
Other Financial Assets and Liabilities
Year Ended December 31,
2020
2019
$
$
(14,911) $
(16,716)
(2,907)
27,657
2,081
(4,796) $
(7,793)
(1,968)
—
3,837
(1,516)
(7,440)
GAAP requires disclosure of the fair value of financial instruments not reported at fair value on a recurring basis for which it is practical to estimate such
values. The Company believes that the carrying amounts of its other financial instruments such as cash, receivables and payables approximate the fair value
of such items due to the short maturity of such instruments. The senior secured revolving credit facility between the Company and Pacific Western Bank, as
lender (“PWB Credit Facility”) and the secured revolving credit facility that provides for borrowings in an aggregate principal amount up to $150,000
issued pursuant to a Revolving Credit and Security Agreement by and among OFSCC-FS, the lenders from time to time parties thereto, BNP Paribas, as
administrative agent, OFSCC-FS Holdings, LLC, a wholly owned subsidiary of the Company, as equityholder, the Company, as servicer, Citibank, N.A., as
collateral agent and Virtus Group, LP, as collateral administrator (“BNP Facility”) are variable rate instruments and fair value is approximately book value.
The following tables present the fair value measurements of the Company's debt and the level within fair value hierarchy of the significant unobservable
inputs used to determine such fair values as of December 31, 2020 and 2019:
151
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Description
PWB Credit Facility
BNP Facility
OFS Capital Corporation 6.375% Notes due 2025
OFS Capital Corporation 6.5% Notes due 2025
OFS Capital Corporation 5.95% Notes due 2026
OFS Capital Corporation 6.25% Notes due 2023
SBA-guaranteed debentures
Total debt, at fair value
Description
PWB Credit Facility
BNP Facility
OFS Capital Corporation 6.375% Notes due 2025
OFS Capital Corporation 6.5% Notes due 2025
OFS Capital Corporation 5.95% Notes due 2026
SBA-guaranteed debentures
Total debt, at fair value
Level 1
(2)
Level 2
Level 3
(1)
Total
December 31, 2020
— $
—
48,800
47,069
51,066
25,100
—
172,035 $
— $
—
—
—
—
—
—
— $
600 $
31,450
—
—
—
—
116,172
148,222 $
600
31,450
48,800
47,069
51,066
25,100
116,172
320,257
Level 1
(2)
Level 2
Level 3
(1)
Total
December 31, 2019
— $
—
50,600
49,282
54,282
—
154,164 $
— $
—
—
—
—
—
— $
— $
56,450
—
—
—
155,562
212,012 $
—
56,450
50,600
49,282
54,282
155,562
366,176
$
$
$
$
(1) For Level 3 measurements, fair value is estimated through discounting remaining payments using current market rates for similar instruments at the
measurement date through the legal maturity date.
(2) For Level 1 measurements, fair value is estimated by using the closing price of the security on the Nasdaq Global Select Market.
The following are the carrying values and fair values of the Company’s debt as of December 31, 2020 and 2019:
Description
PWB Credit Facility
BNP Facility
OFS Capital Corporation 6.375% Notes due 2025
OFS Capital Corporation 6.5% Notes due 2025
OFS Capital Corporation 5.95% Notes due 2026
OFS Capital Corporation 6.25% Notes due 2023
SBA-guaranteed debentures
Total debt, at fair value
As of December 31, 2020
As of December 31, 2019
Carrying Value
Fair Value
Carrying Value
Fair Value
$
$
600 $
600 $
— $
31,450
48,891
47,339
52,617
24,106
31,450
48,800
47,069
51,066
25,100
56,450
48,634
47,093
52,325
—
—
56,450
50,600
49,282
54,282
—
104,182
309,185 $
116,172
320,257 $
147,976
352,478 $
155,562
366,176
152
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 6. Commitments and Contingencies
The Company has the following unfunded commitments to portfolio companies as of December 31, 2020:
Name of Portfolio Company
A&A Transfer, LLC
I&I Sales Group, LLC
Inergex Holdings
SSJA Bariactric Management LLC
Senior Secured Loan (Revolver)
Senior Secured Loan (Revolver)
Senior Secured Loan (Revolver)
Senior Secured Loan (Revolver)
Investment Type
Amount
2,136
156
2,813
667
5,772
$
$
From time to time, the Company is involved in legal proceedings in the normal course of its business. Although the outcome of such litigation cannot be
predicted with any certainty, management is of the opinion, based on the advice of legal counsel, that final disposition of any litigation should not have a
material adverse effect on the financial position of the Company as of December 31, 2020.
Additionally, the Company is subject to periodic inspection by regulators to assess compliance with applicable BDC regulations and the SBIC I LP is
subject to periodic inspections by the SBA.
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide
general indemnifications. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made
against the Company that have not yet occurred. The Company believes the risk of any material obligation under these indemnifications to be remote.
Note 7. Borrowings
SBA Debentures: The SBIC Program enabled SBIC I LP to obtain leverage by issuing SBA-guaranteed debentures, subject to issuance of a capital
commitment by the SBA and customary procedures. These debentures are non-recourse to the Company, have interest payable semi-annually and a ten-
year maturity. The interest rate is fixed at the time of SBA pooling, which is March and September of each year, at a market-driven spread over U.S.
Treasury Notes with ten-year maturities. As of December 31, 2020 and 2019, SBIC I LP had outstanding SBA debentures of $105,270 and $149,880,
respectively.
On a stand-alone basis, SBIC I LP held $223,795 and $249,576 in assets at December 31, 2020 and 2019, respectively, which accounted for approximately
46% and 46% of the Company’s total consolidated assets, respectively. These assets cannot be pledged under any debt obligation of the Company.
The following table shows the Company’s outstanding SBA debentures payable as of December 31, 2020 and 2019:
SBA debentures outstanding
Pooling Date
September 19, 2012
September 25, 2013
March 26, 2014
September 24, 2014
September 24, 2014
March 25, 2015
September 23, 2015
SBA debentures outstanding
Unamortized debt issuance costs
Maturity Date
September 1, 2022
September 1, 2023
March 1, 2024
September 1, 2024
September 1, 2024
March 1, 2025
September 1, 2025
SBA debentures outstanding, net of unamortized debt issuance costs
Fixed Interest
Rate
3.049 % $
4.448
3.995
3.819
3.370
2.872
3.184
December 31, 2020 December 31, 2019
14,000
7,000
5,000
4,110
31,265
65,920
22,585
149,880
(1,904)
147,976
14,000 $
—
—
—
2,765
65,920
22,585
105,270
(1,088)
104,182 $
$
The Company received exemptive relief from the SEC effective November 26, 2013, which permits the Company to exclude SBA guaranteed debentures
from the definition of senior securities in the statutory asset coverage ratio under the 1940 Act, allowing for greater capital deployment.
153
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The effective interest rate on the SBA debentures, which includes amortization of deferred debt issuance costs, was 3.31%, 3.43% and 3.43% as of
December 31, 2020, 2019 and 2018, respectively. Interest expense on the SBA debentures was $4,402, $5,137, and $5,137 for the years ended December
31, 2020, 2019 and 2018, respectively, which includes $332, $377, and $377 of debt issuance costs amortization, respectively.
The weighted-average fixed cash interest rate on the SBA debentures as of December 31, 2020 and 2019, was 2.98% and 3.18%, respectively.
During the year ended December 31, 2020, SBIC I LP prepaid $44,610 of SBA debentures that were contractually due September 1, 2023, March 1, 2024
and September 1, 2024. The Company recognized losses on extinguishment of debt of $678 related to the charge-off of deferred borrowing costs on the
prepaid debentures.
Unsecured Notes: The Company publicly offered the Unsecured Notes Due April 2025 with an aggregate principal of $50,000, the Unsecured Notes Due
October 2025 with an aggregate principal of $48,525, the Unsecured Notes Due October 2026 with an aggregate principal of $54,325 and the Unsecured
Notes Due September 2023 with an aggregate principal of $25,000. The Unsecured Notes Due September 2023, the Unsecured Notes Due April 2025, the
Unsecured Notes Due October 2025 and the Unsecured Notes Due October 2026, combined (the “Unsecured Notes”), totaled $177,850 in aggregate
principal debt, with net proceeds of $171,281 to the Company.
The Unsecured Notes are direct unsecured obligations and rank equal in right of payment with all current and future unsecured indebtedness of the
Company. Because the Unsecured Notes are not secured by any of the Company's assets, they are effectively subordinated to all existing and future secured
unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which the Company subsequently grant a security interest), to the extent
of the value of the assets securing such indebtedness, including, without limitation, borrowings under PWB Credit Facility and BNP Facility.
The indenture governing the Unsecured Notes contains certain covenants (i) prohibiting additional borrowings, including through the issuance of additional
debt securities, unless the Company's asset coverage, as defined in the 1940 Act, after giving effect to any exemptive relief granted to the Company by the
SEC, equals at least 150% after such borrowings; and (ii) prohibiting (a) the declaration of any cash dividend or distribution upon any class of the
Company’s capital stock (except to the extent necessary for the Company to maintain its treatment as a RIC under Subchapter M of the Code), or (b) the
purchase of any capital stock if the Company’s asset coverage, as defined in the 1940 Act, were below 150% at the time of such capital transaction and
after deducting the amount of such transaction.
As of December 31, 2020, the Unsecured Notes had the following terms and balances:
Unsecured Notes
Unsecured Notes Due September 2023
Unsecured Notes Due April 2025
Unsecured Notes Due October 2025
Unsecured Notes Due October 2026
Total
Principal
$
$
25,000 $
50,000
48,525
54,325
177,850 $
Unamortized
Discount and
Issuance Costs
Stated Interest
Rate
(1)
Effective
Interest Rate
(2)
894
1,109
1,186
1,708
4,897
6.25 %
6.38 %
6.50 %
5.95 %
7.56 %
6.88 %
7.01 %
6.49 %
Maturity
(3)
2020 Interest
Expense
(4)
9/30/2023 $
4/30/2025
10/31/2025
10/31/2026
$
550
3,444
3,410
3,548
10,952
(1) The weighted-average fixed cash interest rate on the Unsecured Notes as of December 31, 2020 was 6.26%.
(2) The effective interest rate on the Unsecured Notes includes deferred debt issuance cost amortization.
(3) The Unsecured Notes Due September 2023, the Unsecured Notes Due April 2025, the Unsecured Notes Due October 2025, and the Unsecured Notes
Due 2026 may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after September 30, 2021, April 30,
2020, October 31, 2020, and October 31, 2021, respectively.
(4) Interest expense includes debt issuance costs amortization of $909 for the year ended December 31, 2020.
PWB Credit Facility: The Company is party to a business loan agreement (“BLA”) with Pacific Western Bank, as lender, to provide the Company with a
$20,000 senior secured revolving credit facility. The PWB Credit Facility is available for general corporate purposes including investment funding and is
scheduled to mature on February 28, 2021. The maximum availability of the PWB Credit Facility is equal to 50% of the aggregate outstanding principal
amount of eligible loans included in the borrowing base, which excludes subordinated loan investments and as otherwise specified in the BLA. The PWB
Credit Facility is guaranteed by OFSCC-MB and secured by all of our current and future assets excluding assets held by SBIC I LP,
154
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
OFSCC-FS, and the Company’s partnership interests in SBIC I LP and SBIC I GP. During the year ended December 31, 2020, the BLA was amended to,
among other things: modify certain financial performance covenants and reduce the total commitment from $100,000 to $20,000. The Company recognized
a loss on extinguishment of debt of $142 related to the charge-off of deferred borrowing costs on the commitment reduction.
The PWB Credit Facility bears interest at a variable rate of the Prime Rate plus a 0.25% margin, with a 5.25% floor, and includes an unused commitment
fee, payable monthly in arrears, equal to 0.50% per annum on any unused portion. As of December 31, 2020, the stated interest rate of the PWB Credit
Facility was 5.25%.
The average dollar amount of borrowings outstanding during the year ended December 31, 2020, was $15,222. The effective interest rate, which includes
amortization of deferred debt issuance costs as of December 31, 2020, was 6.50% based on the maximum amount available under the PWB Credit Facility.
Interest expense on the PWB Credit Facility was $1,285, $2,136 and $959 for the years ended December 31, 2020, 2019, and 2018, respectively, which
includes $225, $283 and $180 of deferred financing amortization, respectively Unamortized debt issuance costs included in prepaid expenses and other
assets on the consolidated statements of assets and liabilities as of December 31, 2020 and 2019 were $11 and $399, respectively.
As of December 31, 2020, availability under the PWB Credit Facility was $19,400 based on the stated advance rate of 50% under the borrowing base, and
the $600 outstanding.
On February 17, 2021, the Company amended the BLA to among other things: (i) increase the maximum amount available from $20,000 to $25,000; (ii)
decrease the interest rate floor from 5.25% per annum to 5.00% per annum; (iii) modify certain financial performance covenants; and (iv) extend the
maturity date from February 28, 2021 to February 28, 2023.
The BLA contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting
requirements, a minimum tangible net asset value, a minimum quarterly net investment income after incentive fees, and a maximum debt/worth ratio. The
BLA also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a
material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change in investment advisor, and the occurrence of a material
adverse change in our financial condition. As of December 31, 2020, the Company was in compliance with the applicable covenants.
BNP Facility: OFSCC-FS is party to the BNP Facility, which provides for borrowings in an aggregate principal amount up to $150,000, of which $31,450
was drawn as of December 31, 2020. Borrowings under the BNP Facility bear interest of LIBOR plus an applicable spread, which is determined on the
basis of industry-recognized portfolio company metrics at the time of funding. The effective interest rate on the BNP Facility was 5.53% at December 31,
2020. The BNP Facility will mature on the earlier of June 20, 2024 or upon certain other events defined in the credit agreement which result in accelerated
maturity. The BNP Facility also contains customary events of default, including, without limitation, nonpayment, failure to maintain valid ownership
interest in all of the collateral and bankruptcy. Borrowings under the BNP Facility are secured by substantially all of the assets held by OFSCC-FS, which
were $72,412 and $92,513, or 15% and 17% of the Company's total consolidated assets at December 31, 2020 and 2019, respectively. OFSCC-FS incurred
fees to the lenders as well as legal costs of approximately $1,346 to establish the BNP Facility, which are amortized over the life of the facility.
Unamortized debt issuance costs included in prepaid expenses and other assets on the consolidated statements of assets and liabilities as of December 31,
2020 and 2019 were $1,004 and $1,229, respectively. The unused commitment under the BNP Facility was $118,550 as of December 31, 2020.
The average dollar amount of borrowings outstanding during the year ended December 31, 2020, was $39,182. For the year ended December 31, 2020
interest expense on the BNP Facility was $2,168, which included $225 of deferred financing amortization.
The average dollar borrowings and average interest rate for all Company debt during the years ended December 31, 2020, 2019 and 2018, were as follows:
Weighted Average
Interest Rate
Average Dollar
Borrowings
Year ended
December 31, 2020
December 31, 2019
December 31, 2018
$
347,229
307,826
206,936
5.32 %
4.99
4.37
155
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
As of December 31, 2020, the Company's debt liabilities are scheduled to mature as follows:
(1)
Debt liabilities
PWB Credit Facility
BNP Facility
SBA Debentures
Unsecured Notes
(2)
(3)
Total
Total
2021
Principal Due by Year
2023
2022
2024
2025
Thereafter
$
$
600
31,450
105,270
177,850
315,170 $
600 $
—
—
—
600 $
— $
—
14,000
—
14,000 $
— $
—
—
25,000
25,000 $
— $
31,450
2,765
—
34,215 $
— $
—
88,505
98,525
187,030 $
—
—
—
54,325
54,325
(1) The PWB Credit Facility was amended on February 17, 2021 to among other things, modify the scheduled maturity to February 28, 2023.
(2) During the year ended December 31, 2020, SBIC I LP prepaid $44,610 in SBA debentures prior to their scheduled maturities.
(3) On February 10, 2021, the Company exercised its option to redeem all issued and outstanding Unsecured Notes Due April 2025 and Unsecured Notes
Due October 2025. The Company will redeem the $98,525 in aggregate principal of such unsecured notes on March 12, 2021, and expects to recognize
a loss on extinguishment of debt of approximately $2,295 in the first quarter of 2021.
Note 8. Federal Income Tax
Filing status: The Company has elected to be taxed as a RIC under Subchapter M of the Code. In order to maintain its status as a RIC, the Company is
required to distribute annually to its stockholders at least 90% of its ICTI, as defined by the Code. Additionally, to avoid a 4% U.S. federal excise tax on
undistributed earnings the Company is required to distribute each calendar year the sum of (i) 98% of its ordinary income for such calendar year, (ii) 98.2%
of its net capital gains for the one-year period ending October 31 of that calendar year, and (iii) any income recognized, but not distributed, in preceding
years and on which the Company paid no U.S. federal income tax. Maintenance of the Company's RIC status also requires adherence to certain source of
income and asset diversification requirements.
OFSCC-MB, an entity taxed as a corporation under Subchapter C of the Code, is consolidated in the Company’s GAAP financial statements but is not
included in the determination of ICTI or the RIC compliance requirements of the Company. The income of OFSCC-MB, net of applicable income taxes, is
not included in the Company’s ICTI until distributed by OFSCC-MB, which may result in timing and character differences between the Company’s GAAP
and tax-basis net investment income and realized gains and losses.
Taxable income and distributions: The Company has met the required distribution, source of income and asset diversification requirements as of
December 31, 2020, and intends to continue meeting these requirements. Accordingly, there is no liability for federal income taxes at the Company level.
The Company’s ICTI differs from the net increase in net assets resulting from operations primarily due to differences in income recognition on the
unrealized appreciation/depreciation of investments, income from Company’s equity investments in pass-through entities, PIK dividends that have not yet
been declared and paid by underlying portfolio companies, capital gains and losses and the net creation or utilization of capital loss carryforwards. The
Company recognized approximately $15,449 of ordinary taxable income during the year ended December 31, 2020.
The distributions paid to stockholders are reported as ordinary income, long-term capital gains, and returns of capital. The tax character of distributions
paid were as follows:
Ordinary taxable income
Long-term capital gain
Total distributions to stockholders
Years Ended December 31,
2019
2020
2018
$
$
11,516 $
—
11,516 $
18,176 $
—
18,176 $
18,053
5,036
23,089
156
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Tax-basis components of distributable earnings (accumulated losses) as of December 31, 2020 and 2019, were as follows:
Ordinary income (RIC)
Net operating loss carry-forward (OFSCC-MB; C-Corporation)
Capital loss carryforwards:
RIC – short-term, non-expiring
RIC – long-term, non-expiring
OFSCC-MB (C-Corporation) – short-term, expires in 2025
December 31,
2020
2019
$
5,640 $
(1,188)
(695)
(17,325)
(446)
2,578
—
—
(8,578)
—
The Company records reclassifications to its capital accounts related to permanent differences between GAAP and tax treatment of goodwill amortization
and impairment, excise taxes, return-of-capital distributions, and other permanent differences. The Company recorded reclassifications to decrease
additional paid-in capital against total distributable earnings (accumulated loss) of $331, $462 and $62 for the years ended December 31, 2020, 2019 and
2018, respectively.
The tax-basis cost of investments and associated tax-basis gross unrealized appreciation (depreciation) inherent in the fair value of investments as of
December 31, 2020 and 2019, were as follows:
Tax-basis amortized cost of investments
Tax-basis gross unrealized appreciation on investments
Tax-basis gross unrealized depreciation on investments
Tax-basis net unrealized depreciation on investments
Fair value of investments
December 31,
2020
2019
$
$
456,634 $
50,176
(64,487)
(14,311)
442,323 $
531,781
24,326
(39,176)
(14,850)
516,931
Deferred taxes: The Company recognizes deferred taxes on the unrealized appreciation or depreciation of securities held through OFSCC-MB. Deferred
tax assets and liabilities are measured using enacted corporate federal tax rates expected to apply to taxable income in the years in which those unrealized
gains and losses are realized. The recoverability of deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more likely
than not that any portion of the deferred tax asset will not be realized on the basis of the projected taxable income or other taxable events in OFSCC-MB.
Deferred tax assets and liabilities, and related valuation allowance, as of December 31, 2020 and 2019, were as follows:
Total deferred tax assets
Total deferred tax liabilities
Valuation allowance on net deferred tax assets
December 31,
2020
2019
$
1,012 $
(1,153)
—
442
(838)
—
Net unrealized appreciation (depreciation) on investments reported in the consolidated statements of operations includes $275, $(416) and $(4) of net
deferred tax expense (benefit) for the years ended December 31, 2020, 2019 and 2018, respectively.
157
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 9. Financial Highlights
The following is a schedule of financial highlights for the each year in the five-year period ended December 31, 2020:
(4)
(4)
(4)
Per share operating performance:
Net asset value per share at beginning of year
Net investment income
Net realized gain (loss) on non-control/non-affiliate investments
Net realized gain on affiliate investments
Net unrealized depreciation on non-control/non-affiliate investments
(4)
Net unrealized appreciation (depreciation) on affiliate investments
(4)
Net unrealized appreciation (depreciation) on control investment
(4)
Loss on extinguishment of debt
Loss on impairment of goodwill
Total from operations
Distributions
Issuance of common stock
Other
(5)
(6)
(4)
(4)
Net asset value per share at end of year
(2)
Per share market value, end of period
(1)
Total return based on market value
Total return based on net asset value
Shares outstanding at end of period
Weighted average shares outstanding
Ratio/Supplemental Data (in thousands except ratios)
Average net asset value
Net asset value at end of year
Net investment income
Ratio of total expenses, net to average net assets
Ratio of total expenses, net and losses on impairment of goodwill and
(3)
(8)
extinguishment of debt to average net assets
(9)
Ratio of net investment income to average net assets
Ratio of goodwill impairment loss to average net assets
Ratio of loss on extinguishment of debt to average net assets
Portfolio turnover
(7)
(10)
2020
2019
Years Ended December 31,
2018
2017
2016
$
$
$
$
$
$
$
$
$
$
$
$
12.46
0.92
(0.75)
—
(0.82)
0.94
0.13
(0.06)
(0.08)
0.28
(0.86)
(0.03)
—
11.85
7.15
(24.0)%
13.6 %
13,409,559
13,394,005
148,175
158,956
12,295
22.4 %
23.7 %
8.3 %
0.7 %
0.6 %
28.1 %
$
$
$
$
$
$
13.10
1.43
(0.29)
—
(0.72)
0.40
(0.10)
—
—
0.72
(1.36)
—
—
12.46
11.17
18.3 %
6.7 %
13,376,836
13,364,244
171,889
166,627
19,098
19.4 %
— %
11.1 %
— %
— %
21.2 %
$
$
$
$
$
$
14.12
1.38
(0.37)
0.01
(0.19)
(0.06)
(0.06)
—
—
0.71
(1.73)
—
—
13.10
10.60
3.5 %
7.8 %
13,357,337
13,348,203
182,468
175,023
18,385
13.4 %
— %
10.5 %
— %
— %
41.9 %
$
$
$
$
$
$
14.82
1.28
(0.26)
0.81
(0.78)
(0.41)
—
—
—
0.64
(1.36)
(0.03)
0.05
14.12
11.90
(4.7)%
5.0 %
13,340,217
12,403,706
171,631
188,336
15,877
10.2 %
— %
8.4 %
— %
— %
50.4 %
14.76
1.46
0.25
—
(0.69)
0.33
0.07
—
—
1.42
(1.36)
—
—
14.82
13.76
32.3 %
10.9 %
9,700,297
9,693,801
142,818
143,778
14,145
11.9 %
— %
9.8 %
— %
— %
18.1 %
(1) Calculated as ending market value less beginning market value, adjusted for distributions reinvested at prices based on the Company’s dividend
reinvestment plan for the respective distributions.
(2) Calculated as ending net asset value less beginning net asset value, adjusted for distributions reinvested at the Company’s dividend reinvestment plan
for the respective distributions.
(3) Based on the average of the net asset value at the beginning of the indicated period and the end of each calendar quarter within the period indicated.
(4) Calculated on the average share method.
(5) The issuance of common stock on a per share basis reflects the incremental net asset value change as a result of the Offering.
158
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(6) Represents the impact of different share amounts used in calculating per share data as a result of calculating certain per share data based on a weighted
average shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.
(7) Portfolio turnover rate is calculated using the lesser of year-to-date sales, Structured Finance Note distributions and principal payments or year-to-date
purchases over the average of the invested assets at fair value at the beginning of the indicated period and the end of each calendar quarter within the
period indicated.
(8) Ratio of total expenses before incentive fee waiver to average net assets was 22.7% and 13.4% for the years ended December 31, 2020 and December
31, 2018, respectively.
(9) Ratio of total expenses before incentive fee waiver and losses on impairment of goodwill and extinguishment of debt to average net assets was 24.0%
for the year ended December 31, 2020.
(10)Ratio of net investment income before incentive fee waiver to average net assets was 8.0% and 10.5% for the years ended December 31, 2020 and
December 31, 2018, respectively.
Note 10. Capital Transactions
Distributions: The Company intends to make distributions to stockholders on a quarterly basis of substantially all of its net investment income. In addition,
although the Company intends to make distributions of any net realized capital gains, out of assets legally available for such distributions at least annually,
the Company may in the future decide to retain such net investment income and capital gains for investment or corporate purposes.
The Company may be limited in its ability to make distributions due to the BDC asset coverage requirements of the 1940 Act. The Company’s ability to
make distributions may also be affected by its restrictions imposed by the SBA regulations on the Company's wholly owned SBIC subsidiary, and currently
require the prior approval of the SBA. In addition, distributions from OFSCC-FS to the Company are restricted by the terms and conditions of the BNP
Facility. At December 31, 2020 and December 31, 2019, net assets of SBIC I LP were $118,554 and $99,848, respectively, which included cash of $32,187
and $1,851, of which $18,257 and $1,851 were available for distribution at December 31, 2020 and 2019, respectively. At December 31, 2020 and
December 31, 2019, net assets of OFSCC-FS were $39,942 and $25,578, respectively, which included cash of $3,264 and $2,172 of which $618 and $-0-
were available for distribution to the Company at December 31, 2020 and 2019, respectively.
The following table summarizes distributions declared and paid for the years ended December 31, 2020, 2019 and 2018:
(1)
Date Declared
Year ended December 31, 2018
February 12, 2018
February 27, 2018
May 1, 2018
August 3, 2018
October 30, 2018
Year ended December 31, 2019
March 5, 2019
April 30, 2019
July 30, 2019
November 6, 2019
Year ended December 31, 2020
March 11, 2020
May 4, 2020
July 28, 2020
November 3, 2020
Record Date
Payment Date
Amount
Per Share
Cash
Distribution
DRIP Shares
Issued
DRIP Shares
Value
March 22, 2018
March 22, 2018
June 22, 2018
September 14, 2018
December 17, 2018
March 29, 2018
March 29, 2018
June 29, 2018
September 28, 2018
December 31, 2018
March 22, 2019
June 21, 2019
September 23, 2019
December 24, 2019
March 29, 2019
June 28, 2019
September 30, 2019
December 31, 2019
March 24, 2020
June 23, 2020
September 23, 2020
December 24, 2020
March 31, 2020
June 30, 2020
September 30, 2020
December 31, 2020
$
$
$
$
$
$
0.37 $
0.34
0.34
0.34
0.34
1.73 $
0.34 $
0.34
0.34
0.34
1.36 $
0.34 $
0.17
0.17
0.18
0.86 $
4,886
4,490
4,518
4,511
4,489
22,894
4,497
4,479
4,487
4,486
17,949
4,484
2,244
2,246
2,391
11,365
4,459 $
4,098
1,684
2,366
4,813
17,420 $
3,797 $
5,327
4,990
5,385
19,499 $
15,693 $
7,165
6,708
3,157
32,723 $
50
46
20
28
51
195
45
64
58
60
227
64
32
32
22
150
(1) Special distribution representing undistributed net long-term capital gains realized by the Company in 2017.
159
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The following table represents DRIP participation for the years ended December 31, 2020, 2019 and 2018, respectively:
For the Year Ended
December 31, 2020
December 31, 2019
December 31, 2018
DRIP Shares
Value
Total Distribution
Declared
DRIP Shares
Issued
Average Value Per
Share
150 $
227
195
11,516
18,176
23,089
32,723 $
19,500
17,420
4.60
11.62
11.16
Since the Company’s IPO in 2012, distributions to stockholders total $120,555, or $10.58 per share on a cumulative basis.
Distributions in excess of the Company’s current and accumulated ICTI would be treated first as a return of capital to the extent of the stockholder’s tax
basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of the Company’s distributions is made
annually as of the end of its fiscal year based upon its ICTI for the full year and distributions paid for the full year. Therefore, a determination made on a
quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. Each year, a statement on Form 1099-
DIV identifying the source of the distribution is mailed to the Company’s stockholders. For the year ended December 31, 2020, approximately $0.86 per
share, $0.00 per share, and $0.00 per share of the Company’s distributions represented ordinary income, long-term capital gain, and a return of capital to its
stockholders, respectively.
Stock repurchase program: The Company is authorized to acquire up to $10,000 of our outstanding common stock through May 22, 2022 (the “Stock
Repurchase Program”). Under the Stock Repurchase Program, the Company may repurchase shares in open-market transactions, including through block
purchases, depending on prevailing market conditions and other factors. The Company expects the Stock Repurchase Program to be in place through May
22, 2022, or until the approved dollar amount has been used to repurchase shares. The Stock Repurchase Program may be extended, modified or
discontinued at any time for any reason.
The following table summarizes the shares of common stock the Company repurchased under the Stock Repurchase Program (amount in thousands except
shares):
Period
May 22, 2018 through December 31, 2018
January 1, 2019 through December 31, 2019
January 1, 2020 through December 31, 2020
Total
Total Number of
Shares
Purchased
Average
Price Paid
Per Share
10.29
—
—
10.29
300 $
—
—
300
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Number (or
Approximate Dollar Value) of
Shares (or Units) That May
Yet be Purchased Under the
Plans or Programs
300 $
—
—
300
9,997
—
—
9,997
160
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 11. Consolidated Schedule of Investments In and Advances To Affiliates
Year Ended December 31, 2020
Name of
Portfolio
Company
Control
Investment
MTE Holding
Corp.
Total Control
Investment
Affiliate
Investments
3rd Rock
Gaming
Holdings,
LLC
Subordinated
Loan
Common
Equity
Senior Secured
Loan
Common
(6)
Equity
Chemical
Resources
Holdings, Inc.
Senior Secured
Loan
Common
(6)
Equity
Investment
Type
(1)
Net
Realized
Gain
(Loss)
Net change in
unrealized
appreciation/
(depreciation)
Interest
& PIK
Interest Dividends
Fees
Total
Income
(2)
December 31,
2019, Fair
Value
Gross
Additions
(3)
Gross
Reductions
(4)
December 31,
2020, Fair
(5)
Value
$
— $
(33) $
1,217 $
— $
66 $
1,283 $
7,464 $
391 $
(33) $
7,822
—
—
—
—
—
—
—
—
—
1,737
1,704
—
1,217
—
—
—
66
—
1,283
1,253
8,717
1,737
2,128
—
(33)
2,990
10,812
1,704
1,217
—
66
1,283
8,717
2,128
(33)
10,812
—
—
—
—
—
—
572
—
572
1,352
—
1,352
20,099
1,044
21,143
13,746
2,662
16,408
—
—
—
38
758
796
(10,841)
(1,044)
(11,885)
(40)
—
(40)
9,258
—
9,258
13,744
3,420
17,164
(9,235)
(1,044)
(10,279)
572
—
572
(40)
757
717
1,352
—
1,352
—
—
—
—
—
—
161
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Name of
Portfolio
Company
Investment
Type
(1)
Net
Realized
Gain
(Loss)
Net change in
unrealized
appreciation/
(depreciation)
Interest
& PIK
Interest Dividends
Fees
Total
Income
(2)
December 31,
2019, Fair
Value
Gross
Additions
(3)
Gross
Reductions
(4)
December 31,
2020, Fair
(5)
Value
Year Ended December 31, 2020
Contract
Datascan
Holdings, Inc.
DRS
Imaging
Services,
LLC
Master
Cutlery, LLC
Subordinated
Loan
Preferred
(7)
Equity
Common
(6)
Equity
Senior
Secured Loan
Common
(6)
Equity
Subordinated
(6)
Loan
Preferred
(6)
Equity
Common
(6)
Equity
NeoSystems
Corp.
Preferred
Stock
(7)
Pfanstiehl
Holdings, Inc.
Subordinated
Loan
Common
Equity
$
— $
(5) $
912 $
— $ — $
912 $
8,000 $
27 $ (8,027) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,231)
250
(625)
(3,861)
—
1,162
101
1,188
418
519
—
1,188
91
—
—
91
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
250
—
1,162
5,671
671
14,342
250
—
277
(3,231)
(625)
(11,883)
2,690
46
2,736
1,188
10,569
172
(10,741)
—
—
1,188
1,331
11,900
418
590
—
(10,741)
1,749
1,749
—
—
—
—
255
—
—
255
91
—
—
91
—
—
—
—
346
—
—
346
(181)
180
—
—
180
2,250
181
(181)
2,250
—
—
—
361
450
811
3,788
19
(3,807)
—
11,979
15,767
24,242
24,261
—
(3,807)
36,221
36,221
19
24,242
24,261
361
—
361
—
450
450
162
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Name of
Portfolio
Company
Professional
Pipe Holdings,
LLC
TalentSmart
Holdings,
LLC
TRS Services,
Inc.
Investment
Type
(1)
Senior Secured
Loan
Common
(6)
Equity
Senior Secured
Loan
Senior Secured
Loan
(Revolver)
Common
(6)
Equity
Senior Secured
Loan
Preferred
Equity (Class
AA units)
Preferred
Equity (Class
A units)
Common
(6)
Equity
Year Ended December 31, 2020
Net
Realized
Gain
(Loss)
Net change in
unrealized
appreciation/
(depreciation)
Interest
& PIK
Interest Dividends
Fees
Total
Income
(2)
December 31,
2019, Fair
Value
Gross
Additions
(3)
Gross
Reductions
(4)
December 31,
2020, Fair
(5)
Value
$
— $
(269) $
848 $
— $
— $
848 $
7,170 $
128 $
(1,212) $
6,086
—
—
—
—
—
—
—
—
—
—
—
(1,205)
(1,474)
—
848
—
—
—
—
—
848
2,413
9,583
—
128
(1,205)
(2,417)
—
—
(289)
(289)
(8)
(2)
1,194
—
1,184
855
—
205
1,060
9,833
167
(10,000)
—
—
205
7
—
—
—
7
42
—
1,102
88
6
69
—
163
242
1,500
11,575
14,623
547
258
95
520
9
6
(500)
(289)
(10,789)
(14,632)
(553)
3,095
1,194
(3,374)
—
18,265
—
1,209
—
(18,559)
42
897
81
6
69
—
156
—
—
—
—
—
—
—
—
163
1,208
7,294
—
—
1,306
1,306
—
—
915
—
915
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Name of
Portfolio
Company
TTG
Healthcare,
LLC
Investment
Type
(1)
Senior Secured
Loan
Preferred
(6)
Equity
Total Affiliate
Investments
Total Control
and Affiliate
Investments
Year Ended December 31, 2020
Net
Realized
Gain
(Loss)
Net change in
unrealized
appreciation/
(depreciation)
Interest
& PIK
Interest Dividends
Fees
Total
Income
(2)
December 31,
2019, Fair
Value
Gross
Additions
(3)
Gross
Reductions
(4)
December 31,
2020, Fair
(5)
Value
$
— $
291 $
1,338 $
— $
253 $
1,591 $
11,767 $
7,891 $
(128) $
19,530
—
—
1,653
1,944
—
1,338
—
—
—
253
—
1,591
2,424
14,191
1,653
9,544
—
(128)
4,077
23,607
—
12,633
8,054
450
465
8,969
135,679
37,598
(70,430)
102,846
— $
14,337 $
9,271 $
450 $
531 $ 10,252 $
144,396 $
39,726 $ (70,463) $
113,658
(1) Principal balance of debt investments and ownership detail for equity investments are shown in the consolidated schedule of investments. The
Company's investments are generally classified as "restricted securities" as such term is defined under Regulation S-X Rule 6-03(f) or Securities Act
Rule 144.
(2) Represents the total amount of interest, fees or dividends included in 2020 income for the portion of the year ended December 31, 2020, that an
investment was included in Control or Affiliate Investment categories, respectively.
(3) Gross additions include increases in cost basis resulting from a new portfolio investment, PIK interest, fees and dividends, accretion of OID, and net
increases in unrealized net appreciation or decreases in net unrealized depreciation.
(4) Gross reductions include decreases in the cost basis of investments resulting from principal repayments and sales, if any, and net decreases in net
unrealized appreciation or net increases in net unrealized depreciation.
(5) Fair value was determined using significant unobservable inputs. See Note 5 for further details.
(6) Non-income producing.
(7) Dividends credited to income include dividends contractually earned but not declared.
164
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Name of
Portfolio
Company
Control
Investment
MTE Holding
Corp.
Total Control
Investment
Affiliate
Investments
3rd Rock
Gaming
Holdings, LLC
Senior Secured
Loan
Common Equity
(6)
Chemical
Resources
Holdings, Inc.
Senior Secured
Loan
Common Equity
(6)
Contract
Datascan
Holdings, Inc.
Subordinated
Loan
Preferred Equity
Common Equity
(7)
(6)
Year Ended December 31, 2019
Investment Type
(1)
Net
Realized
Gain
(Loss)
Net change in
unrealized
appreciation/
(depreciation)
Interest
& PIK
Interest Dividends Fees
Total
Income
(2)
December 31,
2018, Fair
Value
Gross
Additions
(3)
Gross
Reductions
(4)
December 31,
2019, Fair
(5)
Value
Subordinated
Loan
Common Equity
$
— $
—
—
(15) $ 1,172 $
(1,396)
(1,411)
—
1,172
— $ 42 $ 1,214 $
89
89
89
1,303
—
42
7,296 $
2,649
9,945
183 $
—
183
(15) $
(1,396)
(1,411)
7,464
1,253
8,717
—
(1,411)
1,172
89
42
1,303
9,945
183
(1,411)
8,717
—
—
—
2,360
—
2,360
20,023
1,073
21,096
451
—
451
204
—
204
1,599
—
1,599
—
—
—
13,932
2,662
16,594
(375)
(29)
(404)
(186)
—
(186)
—
—
—
—
931
656
—
1,587
8,000
6,652
2,313
16,965
5
656
—
661
(5)
(1,637)
(1,642)
(3,284)
20,099
1,044
21,143
13,746
2,662
16,408
8,000
5,671
671
14,342
—
—
—
—
—
—
—
—
—
—
253
(29)
224
2,360
—
2,360
154
849
1,003
1,395
—
1,395
(5)
(1,636)
(1,642)
(3,283)
931
656
—
1,587
—
—
—
—
—
—
—
—
—
—
165
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Name of
Portfolio
Company
DRS Imaging
Services, LLC
Master Cutlery,
LLC
Subordinated
(6)
Loan
Preferred Equity
Common Equity
(6)
(6)
NeoSystems
Corp.
Preferred Stock
(7)
Pfanstiehl
Holdings, Inc.
Subordinated
Loan
Common Equity
Professional
Pipe Holdings,
LLC
Senior Secured
Loan
Common Equity
(6)
TalentSmart
Holdings, LLC
Senior Secured
Loan
Senior Secured
Loan (Revolver)
Common Equity
(6)
Year Ended December 31, 2019
Investment Type
(1)
Net
Realized
Gain
(Loss)
Net change in
unrealized
appreciation/
(depreciation)
Interest
& PIK
Interest Dividends Fees
Total
Income
(2)
December 31,
2018, Fair
Value
Gross
Additions
(3)
Gross
Reductions
(4)
December 31,
2019, Fair
(5)
Value
Senior Secured
Loan
Common Equity
(6)
$
— $
—
—
56 $ 1,317 $
134
190
—
1,317
— $ — $ 1,317 $
—
—
—
1,317
—
—
10,617 $
1,197
11,814
75 $
134
209
(123) $
—
(123)
10,569
1,331
11,900
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(595)
—
—
(595)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
850
—
—
850
718
—
—
718
(1,313)
—
—
(1,313)
255
—
—
255
(161)
162
—
—
162
2,250
162
(162)
2,250
—
—
—
—
—
—
—
—
—
—
390
413
803
999
—
999
203
4
—
207
3,788
8,360
12,148
7,466
769
8,235
—
—
—
—
8
3,619
3,627
470
1,644
2,114
10,008
251
1,500
11,759
(8)
—
(8)
(766)
—
(766)
(175)
(9)
—
(184)
3,788
11,979
15,767
7,170
2,413
9,583
9,833
242
1,500
11,575
7
3,619
3,626
343
1,644
1,987
—
—
—
—
390
—
390
999
—
999
203
4
—
207
—
413
413
—
—
—
—
—
—
—
166
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Name of
Portfolio
Company
TRS Services,
Inc.
Investment Type
(1)
Senior Secured
Loan
Preferred Equity
(Class AA units)
(7)
Preferred Equity
(6)
(Class A units)
Common Equity
(6)
TTG
Healthcare,
LLC
Senior Secured
Loan
Preferred Equity
(6)
Total Affiliate
Investments
Total Control
and Affiliate
Investments
Year Ended December 31, 2019
Net
Realized
Gain
(Loss)
Net change in
unrealized
appreciation/
(depreciation)
Interest
& PIK
Interest Dividends
Fees
Total
Income
(2)
December 31,
2018, Fair
Value
Gross
Additions
(3)
Gross
Reductions
(4)
December 31,
2019, Fair
(5)
Value
$
— $
179 $ 1,842 $
— $
6 $ 1,848 $
14,446 $
14,995 $
(14,818) $
14,623
—
—
—
—
—
—
—
—
(6)
80
2,269
—
2,442
—
—
1,922
(171)
115
(56)
1,282
1,282
—
—
—
—
—
—
—
—
—
6
11
11
80
—
—
1,928
1,293
—
1,293
473
80
(6)
547
826
—
15,745
2,269
—
17,344
—
—
(14,824)
—
—
—
14,951
2,424
17,375
(3,184)
—
(3,184)
3,095
—
18,265
11,767
2,424
14,191
5,376
11,621
413
221
12,255
89,103
71,014
(24,438)
135,679
— $
3,965 $ 12,793 $
502 $ 263 $ 13,558 $
99,048 $
71,197 $
(25,850) $
144,396
Principal balance of debt investments and ownership detail for equity investments are shown in the consolidated schedule of investments. The
(1)
Company's investments are generally classified as "restricted securities" as such term is defined under Regulation S-X Rule 6-03(f) or Securities Act Rule
144.
(2) Represents the total amount of interest, fees or dividends included in 2019 income for the portion of the year ended December 31, 2019, that an
investment was included in Control or Affiliate Investment categories, respectively.
(3) Gross additions include increases in cost basis resulting from a new portfolio investment, PIK interest, fees and dividends, accretion of OID, and net
increases in unrealized net appreciation or decreases in net unrealized depreciation.
(4) Gross reductions include decreases in the cost basis of investments resulting from principal repayments and sales, if any, and net decreases in net
unrealized appreciation or net increases in net unrealized depreciation.
(5) Fair value was determined using significant unobservable inputs. See Note 5 for further details.
(6) Non-income producing.
(7) Dividends credited to income include dividends contractually earned but not declared.
167
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 12. Subsequent Events Not Disclosed Elsewhere
On January 5, 2021, SBIC I LP prepaid $9,765 of SBA debentures that were contractually due September 1, 2022 and September 1, 2024.
On February 10, 2021, the Company and U.S. Bank National Association, entered into a Fifth Supplemental Indenture, relating to the Company’s issuance
of $100,000 aggregate principal amount of its 4.75% notes due 2026 (the “Unsecured Notes Due February 2026”). The Unsecured Notes Due February
2026 will mature on February 10, 2026, and the Company may redeem the Unsecured Notes Due February 2026 in whole or in part at any time, or from
time to time, at the Company’s option at par plus a "make-whole" premium, if applicable. The Unsecured Notes Due February 2026 bear interest at a rate
of 4.75% per year payable semi-annually in arrears on February 10 and August 10 of each year, commencing on August 10, 2021.
Also, on February 10, 2021, the Company caused notices to be issued to the holders of the Unsecured Notes Due April 2025 and the holders of the
Unsecured Notes Due October 2025 regarding its exercise of the option to redeem all of the issued and outstanding Unsecured Notes Due April 2025 and
Unsecured Notes Due October 2025. The Company will redeem all $50,000 in aggregate principal amount of the Unsecured Notes Due April 2025 and all
$48,525 in aggregate principal amount of the Unsecured Notes Due October 2025 on March 12, 2021. The Unsecured Notes Due April 2025 and the
Unsecured Notes Due October 2025 will be redeemed at 100% of their principal amount ($25 per Note), plus the accrued and unpaid interest thereon from
January 31, 2021, through, but excluding, March 12, 2021. The Company expects to recognize a loss on extinguishment of debt of $2,295 related to the
charge-off of deferred borrowing costs on the redemption of the notes.
On March 2, 2021, the Company’s Board declared a distribution of $0.20 per share for the first quarter of 2021, payable on March 31, 2021 to stockholders
of record as of March 24, 2021.
168
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure
controls and procedures as of December 31, 2020. The term “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in
reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s
rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the foregoing evaluation of our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and our Chief Financial
Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act). Our internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for
external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP,
and that the receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with polices or procedures may deteriorate.
Our management (with the supervision and participation of our Chief Executive Officer and Chief Financial Officer) conducted an evaluation of
the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the framework in Internal Control – Integrated
Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our assessment, management concluded that, as of December 31, 2020, our internal control over financial reporting is effective based on
those criteria.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the fiscal quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information
None.
169
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by Item 10 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the
Company’s 2021 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the
Company’s fiscal year.
Item 11. Executive Compensation
The information required by Item 11 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the
Company’s 2021 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the
Company’s fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
The information required by Item 12 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the
Company’s 2021 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the
Company’s fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the
Company’s 2021 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the
Company’s fiscal year.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is hereby incorporated by reference from the Company’s definitive Proxy Statement relating to the
Company’s 2021 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the
Company’s fiscal year.
170
Item 15. Exhibits and Financial Statement Schedules
a. Documents Filed as Part of this Report
PART IV
1. Financial Statements: See "Part II, Item 8. Financial Statements and Supplementary Data" of this report for a list of financial statements.
2. Financial Statement Schedules: Schedule 12-14 Investments in and Advances to Affiliates—See "Part II, Item 8. Financial Statements and
Supplementary Data—Note 11. " of this report.
3. Exhibits required to be filed by Item 601 of Regulation S-K: See Item 15b. below.
b. Exhibits
The following table lists exhibits filed as part of this report, according to the number assigned to them in Item 601 of Regulation S-K. All exhibits
listed in the following table are incorporated by reference except for those exhibits denoted in the last column. Please note that the agreements included as
exhibits to this Form 10-K are included to provide information regarding their terms and are not intended to provide any other factual or disclosure
information about us or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable
agreement that have been made solely for the benefit of the other parties to the applicable agreement and may not describe the actual state of affairs as of
the date they were made or at any other time.
Exhibit
Number
3.1
Certificate of Incorporation of OFS Capital Corporation
Description
Incorporated by Reference
Form and SEC File
No.
N-2 (333-166363)
Filing Date with SEC
March 18, 2011
Filed with this
10-K
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Certificate of Correction to Certificate of Incorporation of OFS
Capital Corporation
10-K (814-00813)
March 26, 2013
Bylaws of OFS Capital Corporation
N-2/A (333-166363)
March 18, 2011
Form of Stock Certificate of OFS Capital Corporation
N-2/A (333-166363)
March 18, 2011
Form of Base Indenture
Form of Warrant Agreement
N-2 (333-200376)
November 19, 2014
N-2/A (333-200376)
December 16, 2014
Form of Subscription Agent Agreement
N-2/A (333-200376)
December 16, 2014
Form of Subscription Certificate
N-2/A (333-200376)
December 16, 2014
Form of Certificate of Designation
N-2/A (333-200376)
December 16, 2014
First Supplemental Indenture dated as of April 16, 2018, between OFS
Capital Corporation and U.S. Bank National Association, as trustee
POS EX (333-217302)
April 16, 2018
Form of 6.375% Note due 2025 (incorporated by reference to Exhibit
4.8 thereto and Exhibit A therein)
POS EX (333-217302)
April 16, 2018
Second Supplemental Indenture dated as of October 16, 2018 between
OFS Capital Corporation and U.S. Bank National Association, as
trustee
POS EX (333-222419)
October 16, 2018
171
Exhibit
Number
Description
Incorporated by Reference
Form and SEC File
No.
Filing Date with SEC
Filed with this
10-K
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.9
Form of 6.50% Note due 2025 (incorporated by reference to Exhibit
4.10 thereto and Exhibit A therein)
POS EX (333-222419)
October 16, 2018
Third Supplemental Indenture dated as of October 15, 2019 between
OFS Capital Corporation and U.S. National Bank Association, as
trustee
POS EX (333-222419)
October 15, 2019
Form of 5.95% Note due 2026 (incorporated by reference to Exhibit
4.11 thereto and Exhibit A therein)
POS EX (333-222419)
October 15, 2019
Fourth Supplemental Indenture dated as of September 18, 2020
between OFS Capital Corporation and U.S. National Bank
Association, as trustee
Form of 6.25% Note due 2023 (incorporated by reference to Exhibit
4.1 thereto and Exhibit A therein)
Fifth Supplemental Indenture dated as of February 10, 2021 between
OFS Capital Corporation and U.S. Bank National Association, as
trustee
Form 8-K
(333-00813)
Form 8-K
(333-00813)
Form 8-K
(333-00813)
September 18, 2020
September 18, 2020
February 10, 2021
Form of 4.75% Note due 2026 (incorporated by reference to Exhibit
4.1 thereto and Exhibit A therein)
Form 8-K
(333-00813)
February 10, 2021
Description of Securities
*
Form of Dividend Reinvestment Plan
N-2/A (333-166363)
March 18, 2011
Investment Advisory and Management Agreement between OFS
Capital Corporation and OFS Capital Management, LLC
10-Q (814-00813)
November 7, 2014
Form of Custody Agreement
N-2/A (333-166363)
March 18, 2011
Administration Agreement between OFS Capital Corporation and
OFS Capital Services, LLC
N-2/A (333-166363)
March 18, 2011
License Agreement between OFS Capital Corporation and Orchard
First Source Asset Management, LLC
N-2/A (333-166363)
March 18, 2011
Form of Indemnification Agreement between OFS Capital
Corporation and each of its directors and executive officers
N-2/A (333-166363)
March 18, 2011
Form of Registration Rights Agreement between OFS Capital
Corporation and Orchard First Source Asset Management, LLC
N-2/A (333-166363)
July 24, 2012
Business Loan Agreement between OFS Capital Corporation and
Pacific Western Bank dated March 7, 2018
10-K (814-00813)
March 12, 2018
10.10
Promissory Note between OFS Capital Corporation and Pacific
Western Bank dated November 5, 2015
10-Q (814-00813)
November 6, 2015
172
Exhibit
Number
10.11
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
11.1
14.1
Description
Change in terms to the Business Loan Agreement between OFS
Capital Corporation and Pacific Western Bank dated March 7, 2018
Business Loan Agreement between OFS Capital Corporation and
Pacific Western Bank, dated April 10, 2019
Change in terms to the Business Loan Agreement between OFS
Capital Corporation and Pacific Western Bank, dated April 10, 2019
Commercial Guaranty Agreement between OFS Capital Corporation
and Pacific Western Bank, dated April 10, 2019
Amendment One to the Business Loan Agreement between OFS
Capital Corporation and Pacific Western Bank dated June 26, 2020
Amendment Two to the Business Loan Agreement between OFS
Capital Corporation and Pacific Western Bank dated July 29, 2020
Amendment Three to the Business Loan Agreement between OFS
Capital Corporation and Pacific Western Bank dated October 7, 2020
Commercial Guaranty Agreement between among OFS Capital
Corporation, OFSCC-MB, Inc., and Pacific Western Bank, dated April
10, 2019
Amendment Four to the Business Loan Agreement between OFS
Capital Corporation and Pacific Western Bank dated February 17,
2021
Change in Terms to the Business Loan Agreement between OFS
Capital Corporation and Pacific Western Bank dated February 17,
2021
Revolving Credit and Security Agreement by and among OFSCC-FS,
LLC, as borrower, the lenders from time to time parties thereto, BNP
Paribas, as administrative agent, OFSCC-FS Holdings LLC, as
equityholder, OFS Capital Corporation, LLC, as servicer, and
Citibank, N.A., as collateral agent, dated June 20, 2019.
Securities Account Control Agreement by and among OFSCC-FS,
LLC, as pledgor, BNP Paribas, as administrative agent, and Citibank,
N.A., as secured party and securities intermediary, dated June 20,
2019.
Custodian and Loan Administration Agreement by and among
OFSCC-FS, LLC, Citibank, N.A., as custodian, and Virtus Group, LP,
as collateral administrator, dated June 20, 2019.
Loan Sale and Contribution Agreement by and between OFSCC-FS,
LLC, as the buyer, and OFSCC-FS Holdings, LLC, as the seller, dated
June 20, 2019.
Computation of Per Share Earnings
Joint Code of Ethics of OFS Capital Corporation and OFS Advisor
173
Incorporated by Reference
Form and SEC File
No.
10-K (814-00813)
Filing Date with SEC
March 12, 2018
Filed with this
10-K
Form 8-K
(333-00813)
Form 8-K
(333-00813)
Form 8-K
(333-00813)
Form 8-K
(333-00813)
Form 10-Q
(333-00813)
Form 8-K
(333-00813)
Form 8-K
(333-00813)
Form 8-K
(333-00813)
Form 8-K
(333-00813)
Form 8-K
(814-00813)
Form 8-K
(814-00813)
Form 8-K
(814-00813)
Form 8-K
(814-00813)
April 15, 2019
April 15, 2019
April 15, 2019
July 2, 2020
July 31, 2020
October 9, 2020
April 15, 2019
February 19, 2021
February 19, 2021
June 24, 2019
June 24, 2019
June 24, 2019
June 24, 2019
+
*
Exhibit
Number
Description
Incorporated by Reference
Form and SEC File
No.
Filing Date with SEC
Filed with this
10-K
21.1
23.1
23.2
31.1
31.2
32.1
32.2
99.1
99.2
List of Subsidiaries
Consent from KPMG LLP
Consent from BDO USA, LLP
Certification of Chief Executive Officer pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934, as amended
Certification of Chief Financial Officer pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, as amended
Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certificate of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
* Filed herewith.
+ Included in the notes to the financial statements contained in this report
† Furnished herewith
Item 16. Form 10-K Summary
None.
174
*
*
*
*
*
†
†
*
*
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 5, 2021
OFS Capital Corporation
/s/ Bilal Rashid
Bilal Rashid
Chief Executive Officer and Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.
Date: March 5, 2021
Date: March 5, 2021
Date: March 5, 2021
Date: March 5, 2021
Date: March 5, 2021
Date: March 5, 2021
/s/ Bilal Rashid
Bilal Rashid, Chief Executive Officer and Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Marc Abrams
Marc Abrams, Director
/s/ Romita Shetty
Romita Shetty, Director
/s/ Elaine E. Healy
Elaine E. Healy, Director
/s/ Jeffrey A. Cerny
Jeffrey A. Cerny, Chief Financial Officer, Treasurer (Principal Financial Officer)
and Director
/s/ Jeffery S. Owen
Jeffery S. Owen, Chief Accounting Officer (Principal Accounting Officer)
175
DESCRIPTION OF SECURITIES
Exhibit 4.17
As of December 31, 2020, OFS Capital Corporation (the “Company,” “we,” “our,” or “us”) had two classes of securities registered under
Section 12 of the Securities Exchange Act of 1934, as amended: (1) our common stock and (2) our debt securities.
Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Annual Report on Form 10-K to which this
Description of Securities is attached as an exhibit.
A. Common Stock, $0.01 par value per share
As of December 31, 2020, the authorized capital stock of OFS Capital Corporation consisted of 100,000,000 shares of common stock, par value
$0.01 per share, and 2,000,000 shares of preferred stock, par value $0.01 per share. Our common stock is quoted on The Nasdaq Global Select Market
under the symbol “OFS.”
Common Stock
All shares of our common stock have equal rights as to earnings, assets, distributions and voting and, when they are issued, will be duly
authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our
board of directors and declared by us out of funds legally available therefor. Shares of our common stock have no preemptive, exchange, conversion or
redemption rights and are freely transferable, except when their transfer is restricted by federal and state securities laws or by contract. In the event of
our liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that are legally available
for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is
outstanding at such time. Each share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders, including the
election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess exclusive voting
power. There is no cumulative voting in the election of directors, which means that holders of a majority of the outstanding shares of common stock can
elect all of our directors, and holders of less than a majority of such shares will not be able to elect any directors.
Our certificate of incorporation authorizes our board of directors to classify and reclassify any unissued shares of stock into other classes or
series of stock, including preferred stock. Prior to issuance of shares of each class or series, the board of directors is required by Delaware law and by our
certificate of incorporation to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions,
qualifications and terms or conditions of redemption for each class or series.
Provisions of the DGCL and Our Certificate of Incorporation and Bylaws
Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses
The indemnification of our officers and directors is governed by Section 145 of the DGCL, our certificate of incorporation and bylaws. Our
certificate of incorporation provides that our directors will not be liable to us or our stockholders for monetary damages for breach of fiduciary duty as a
director to the fullest extent permitted by the current DGCL or as the DGCL may hereafter be amended. DGCL Section 102(b)(7) provides that the
personal liability of a director to a corporation or its stockholders for breach of fiduciary duty as a director may be eliminated except for liability (a) for
any breach of the director’s duty of loyalty to the registrant or its stockholders, (b) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (c) under Section 174 of the DGCL, relating to unlawful payment of distributions or unlawful stock purchases
or redemption of stock or (d) for any transaction from which the director derives an improper personal benefit.
Our bylaws provide for the indemnification of any person to the full extent permitted by law as currently in effect or as may hereafter be
amended. In addition, we have entered into indemnification agreements with each of our directors and officers in order to effect the foregoing.
Delaware Anti-Takeover Law
The DGCL and our certificate of incorporation and bylaws contain provisions that could make it more difficult for a potential acquirer to
acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to
discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first
with our board of directors. These measures may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests
of our stockholders. We believe, however, that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition
proposals because the negotiation of such proposals may improve their terms.
Classified Board of Directors
Our board of directors is divided into three classes of directors serving staggered three-year terms, with the term of office of only one of the three
classes expiring each year. A classified board may render a change in control of us or removal of our incumbent management more difficult. We believe,
however, that the longer time required to elect a majority of a classified board of directors helps to ensure the continuity and stability of our management
and policies.
Number of Directors; Removal; Vacancies
Our certificate of incorporation provides that the number of directors will be set only by the board of directors in accordance with our bylaws.
Our bylaws provide that a majority of our entire board of directors may at any time increase or decrease the number of directors. However, unless our
bylaws are amended, the number of directors may never be less than four nor more than eight. Under our certificate of incorporation and bylaws, any
vacancy on the board of directors, including a vacancy resulting from an enlargement of the board of directors, may be filled only by vote of a majority
of the directors then in office. The limitations on the ability of our stockholders to fill vacancies could make it more difficult for a third party to acquire,
or discourage a third-party from seeking to acquire, control of us.
Our charter provides that a director may be removed only for cause, as defined in our charter, and then only by the affirmative vote of at least
two-thirds of the votes entitled to be cast in the election of directors.
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
Our bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to the board of directors and the
proposal of business to be considered by stockholders may be made only (a) by or at the direction of the board of directors, (b) pursuant to our notice of
meeting or (c) by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice procedures of the bylaws.
Nominations of persons for election to the board of directors at a special meeting may be made only by or at the direction of the board of directors, and
provided that the board of directors has determined that directors will be elected at the meeting, by a stockholder who is entitled to vote at the meeting
and who has complied with the advance notice provisions of the bylaws.
The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our board of directors a
meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent
deemed necessary or desirable by our board of directors, to inform stockholders and make recommendations about such qualifications or business, as
well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our board of directors any power
to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a
contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring
a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.
Action by Stockholders
Under the DGCL, stockholder action can be taken only at an annual or special meeting of stockholders or by unanimous written consent in
lieu of a meeting, unless the certificate of incorporation provides for stockholder action by less than unanimous written consent (which our certificate
of incorporation does not). These provisions, combined with the requirements of our bylaws regarding the calling of a stockholder-requested special
meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposed until the next annual meeting.
Stockholder Meetings
Our certificate of incorporation and bylaws provide that, except as otherwise required by law, special meetings of the stockholders can only be
called by the chairman of the board, the vice chairman of the board, the president, the board of
directors or stockholders who own of record a majority of the outstanding shares of each class of stock entitled to vote at the meeting. In addition, our
bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed
nominations of candidates for election to the board of directors.
Stockholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at
the direction of the board of directors, or by a stockholder of record on the record date for the meeting who is entitled to vote at the meeting and who has
delivered timely written notice in proper form to the secretary of the stockholder’s intention to bring such business before the meeting. These provisions
could have the effect of delaying until the next stockholder meeting stockholder actions that are favored by the holders of a majority of our outstanding
voting securities.
Conflict with 1940 Act
Our bylaws provide that, if and to the extent that any provision of the DGCL or any provision of our certificate of incorporation or bylaws
conflicts with any provision of the 1940 Act, the applicable provision of the 1940 Act will control.
B. Debt Securities
As of December 31, 2020, we had four series of debt securities outstanding: 6.25% Notes due 2023, 6.375% Notes due 2025, 6.50% Notes due
2025, and 5.95% Notes due 2026. Each series is discussed in further detail below. Subsequent to December 31, 2020, on February 10, 2021, we issued the
$100.0 million aggregate principal amount of 4.75% notes due February 2026 ("February 2026 Notes"). The February 2026 Notes will mature on
February 10, 2026, and we may redeem the February 2026 Notes in whole or in part at any time, or from time to time, at our option at par plus a “make-
whole” premium, if applicable. The February 2026 Notes bear interest at a rate of 4.75% per year payable semi-annually in arrears on February 10 and
August 10 of each year, commencing on August 10, 2021.
The net proceeds we received from the sale of the February 2026 Notes was approximately $96.6 million based on a public offering price of of
98.906% of the aggregate principal amount of the February 2026 Notes, after deducting the underwriting discount and commissions payable by us and
estimated offering expenses payable by us. In connection with, and using the proceeds from the issuance of the February 2026 Notes, on February 10,
2021, we caused notices to be issued to the holders of the April 2025 Notes (as defined herein) and the holders of the October 2025 Notes (as defined
herein) regarding our exercise of our option to redeem all of the issued and outstanding April 2025 Notes and October 2025 Notes. We will redeem all
$50.0 million in aggregate principal amount of the April 2025 Notes and all $48.5 million in aggregate principal amount of the October 2025 Notes on
March 12, 2021 (the "Redemption Date"). The April 2025 Notes and the October 2025 Notes will be redeemed at 100% of their principal amount ($25 per
Note), plus the accrued and unpaid interest thereon from January 31, 2021, through, but excluding, the Redemption Date.
In April 2018, we issued $50,000,000 in aggregate principal amount of notes due April 2025 (the “April 2025 Notes”). The April 2025 Notes bear
interest at a rate of 6.375% per year payable quarterly on January 31, April 31, July 31 and October 31 of each year, commencing July 31, 2018. The April
2025 Notes are issued in minimum denominations of $25 and integral multiples of $25 in excess thereof. The April 2025 Notes were issued under a certain
Indenture, dated April 16, 2018 (the “Base Indenture”), by and between the Company and U.S. Bank National Association (the “Trustee”), as supplemented
by the First Supplemental Indenture, dated April 16, 2018 (the “First Supplemental Indenture”). As of December 31, 2020, we had $50,000,000 in
aggregate principal amount of April 2025 Notes outstanding. The April 2025 Notes are scheduled to mature on April 30, 2025. Additionally, the April 2025
Notes will not be subject to any sinking fund and are subject to defeasance and covenant defeasance by us. We have listed the April 2025 Notes on The
Nasdaq Global Select Market under the trading symbol “OFSSL.” As discussed above, we will redeem all $50.0 million in aggregate principal amount of
the April 2025 Notes on March 12, 2021.
In October 2018, we issued $48,525,000 in aggregate principal amount of notes due October 2025 (the “October 2025 Notes”). The October 2025
Notes bear interest at a rate of 6.50% per year payable quarterly on January 15, April 15, July 15 and October 15 of each year, commencing January 15,
2019. The October 2025 Notes are issued in minimum denominations of $25 and integral multiples of $25 in excess thereof. The October 2025 Notes were
issued under the Base Indenture, by and between the Company and the Trustee, as supplemented by the Second Supplemental Indenture, dated October 16,
2018 (the “Second Supplemental Indenture”). As of December 31, 2020, we had $48,525,000 in aggregate principal amount of October 2025 Notes
outstanding. The October 2025 Notes are scheduled to mature on October 30, 2025. Additionally, the October 2025 Notes will not be subject to any sinking
fund and are subject to defeasance and covenant defeasance by us. We have listed the October 2025 Notes on The Nasdaq Global Select Market under the
trading symbol “OFSSZ.” As discussed above, we will redeem all $48.5 million in aggregate principal amount of the October 2025 Notes on March 12,
2021.
In October 2019, we issued $54,325,000 in aggregate principal amount of notes due October 2026 (the “October 2026 Notes”, and collectively
with the April 2025 Notes and the October 2025 Notes, the “Notes”). The October 2026 Notes bear interest at a rate of 5.95% per year payable quarterly on
January 31, April 31, July 31 and October 31 of each year, commencing
January 31, 2020. The October 2026 Notes are issued in minimum denominations of $25 and integral multiples of $25 in excess thereof. The October 2026
Notes were issued under the Base Indenture, by and between the Company and the Trustee, as supplemented by the Third Supplemental Indenture, dated
October 15, 2019 (the “Third Supplemental Indenture”, and collectively with the Base Indenture, the First Supplemental Indenture, and the Second
Supplemental Indenture, the “Indentures”). As of December 31, 2020, we had $54,325,000 in aggregate principal amount of October 2026 Notes
outstanding. The October 2026 Notes are scheduled to mature on October 31, 2026. Additionally, the October 2026 Notes will not be subject to any sinking
fund and are subject to defeasance and covenant defeasance by us. We have listed the October 2026 Notes on The Nasdaq Global Select Market under the
trading symbol “OFSSI.”
In September 2020, we issued $25,000,000 in aggregate principal amount of notes due September 2023 (the “September 2023 Notes”, and
collectively with the April 2025 Notes, the October 2025 Notes and the October 2026 Notes, the “Notes”). The September 2023 Notes bear interest at a
rate of 6.25% per year payable quarterly on January 31, April 31, July 31 and October 31 of each year, commencing January 31, 2021. The September
2023 Notes are issued in minimum denominations of $25 and integral multiples of $25 in excess thereof. The September 2023 Notes were issued under
the Base Indenture, by and between the Company and the Trustee, as supplemented by the Fourth Supplemental Indenture, dated September 18, 2020
(the “Fourth Supplemental Indenture”, and collectively with the Base Indenture, the First Supplemental Indenture, the Second Supplemental Indenture,
and the Third Supplemental Indenture, the “Indentures”). As of December 31, 2020, we had $25,000,000 in aggregate principal amount of September
2023 Notes outstanding. The September 2023 Notes are scheduled to mature on September 30, 2023. Additionally, the September 2023 Notes will not be
subject to any sinking fund and are subject to defeasance and covenant defeasance by us. We have listed the September 2023 Notes on The Nasdaq
Global Select Market under the trading symbol “OFSSG.”
General
For purposes of this exhibit, any reference to the payment of principal of or premium or interest, if any, on the Notes will include additional
amounts if required by the terms of the Notes.
The Indentures do not limit the amount of debt securities that may be issued thereunder from time to time. Debt securities issued under the
Indentures, when a single trustee is acting for all debt securities issued under the Indentures, are called the “Indenture Securities.” The Indentures also
provides that there may be more than one trustee thereunder, each with respect to one or more different series of Indenture Securities. See “Resignation
of Trustee” section below. At a time when two or more trustees are acting under the Indentures, each with respect to only certain series, the term
“Indenture Securities” means the one or more series of debt securities with respect to which each respective trustee is acting. In the event that there is
more than one trustee under the Indentures, the powers and trust obligations of each trustee described in the applicable prospectus supplement will
extend only to the one or more series of Indenture Securities for which it is trustee. If two or more trustees are acting under the Indentures, then the
Indenture Securities for which each trustee is acting would be treated as if issued under separate Indentures.
We have the ability to issue Indenture Securities with terms different from those of Indenture Securities previously issued and, without the consent
of the holders thereof, to reopen a previous issue of a series of Indenture Securities and issue additional Indenture Securities of that series unless the
reopening was restricted when that series was created.
We expect that we will usually issue debt securities in book entry only form represented by global securities.
When we refer to “you” in this exhibit, we mean those who invest in the debt securities being offered under the Indentures, whether they are the
holders or only indirect holders of those debt securities. When we refer to your debt securities, we mean the debt securities in which you hold a direct or
indirect interest.
Global Securities
The Notes were issued as registered securities in book-entry form only. A global security represents one or any other number of individual debt
securities. Generally, all debt securities represented by the same global securities will have the same terms.
Each debt security issued in book-entry form will be represented by a global security that we deposit with and register in the name of a
financial institution or its nominee that we select. The financial institution that we select for this purpose is called the depositary. Unless we specify
otherwise in the applicable prospectus supplement, The Depository Trust Company, New York, New York, known as DTC, will be the depositary for all
debt securities issued in book-entry form.
A global security may not be transferred to or registered in the name of anyone other than the depositary or its nominee, unless special
termination situations arise. We describe those situations below under “- Termination of a Global Security.” As a result of these arrangements, the
depositary, or its nominee, will be the sole registered owner and holder of all debt securities represented by a global security, and investors will be
permitted to own only beneficial interests in a global security. Beneficial interests must be held by means of an account with a broker, bank or other
financial institution that in turn has an account with the depositary or with another institution that has an account with the depositary. Thus, an investor
whose security is represented by a global security will not be a holder of the debt security, but only an indirect holder of a beneficial interest in the
global security.
Special Considerations for Global Securities
As an indirect holder, an investor’s rights relating to a global security will be governed by the account rules of the investor’s financial
institution and of the depositary, as well as general laws relating to securities transfers. The depositary that holds the global security will be considered
the holder of the debt securities represented by the global security.
If debt securities are issued only in the form of a global security, an investor should be aware of the following:
•
•
•
•
an investor cannot cause the debt securities to be registered in his or her name and cannot obtain certificates for his or her interest in
the debt securities, except in the special situations we describe below;
an investor will be an indirect holder and must look to his or her own bank or broker for payments on the debt securities and protection
of his or her legal rights relating to the debt securities;
an investor may not be able to sell interests in the debt securities to some insurance companies and other institutions that are
required by law to own their securities in non-book-entry form;
an investor may not be able to pledge his or her interest in a global security in circumstances where certificates representing the debt
securities must be delivered to the lender or other beneficiary of the pledge in order for the pledge to be effective;
•
•
•
•
•
the depositary’s policies, which may change from time to time, will govern payments, transfers, exchanges and other matters
relating to an investor’s interest in a global security. We and the trustee have no responsibility for any aspect of the depositary’s
actions or for its records of ownership interests in a global security. We and the trustee also do not supervise the depositary in any
way;
if we redeem less than all the debt securities of a particular series being redeemed, DTC’s practice is to determine by lot the
amount to be redeemed from each of its participants holding that series;
an investor is required to give notice of exercise of any option to elect repayment of its debt securities, through its participant,
to the applicable trustee and to deliver the related debt securities by causing its participant to transfer its interest in those debt
securities, on DTC’s records, to the applicable trustee;
DTC requires that those who purchase and sell interests in a global security deposited in its book-entry system use immediately
available funds; your broker or bank may also require you to use immediately available funds when purchasing or selling
interests in a global security; and
financial institutions that participate in the depositary’s book-entry system, and through which an investor holds its interest in a
global security, may also have their own policies affecting payments, notices and other matters relating to the debt securities; there
may be more than one financial intermediary in the chain of ownership for an investor; we do not monitor and are not responsible for
the actions of any of those intermediaries.
Termination of a Global Security
If a global security is terminated for any reason, interests in it will be exchanged for certificates in non-book-entry form (certificated securities).
After that exchange, the choice of whether to hold the certificated debt securities directly or in street name will be up to the investor. Investors must
consult their own banks or brokers to find out how to have their interests in a global security transferred on termination to their own names, so that they
will be holders.
The applicable prospectus supplement may list situations for terminating a global security that would apply only to the particular series of debt
securities covered by the applicable prospectus supplement. If a global security is terminated, only the depositary, and not we or the applicable trustee, is
responsible for deciding the investors in whose names the debt securities represented by the global security will be registered and, therefore, who will be
the holders of those debt securities.
Payment and Paying Agents
We will pay interest to the person listed in the applicable trustee’s records as the owner of the debt security at the close of business on a particular
day in advance of each due date for interest, even if that person no longer owns the debt security on the interest due date. That day, often approximately
two weeks in advance of the interest due date, is called the “record date.” Because we will pay all the interest for an interest period to the holders on the
record date, holders buying and selling debt securities must work out between themselves the appropriate purchase price. The most common manner is to
adjust the sales price of the debt securities to prorate interest fairly between buyer and seller based on their respective ownership periods within the
particular interest period. This prorated interest amount is called “accrued interest.”
Payments on Global Securities
We will make payments on a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under
those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global
security. An indirect holder’s right to those payments will be governed by the rules and practices of the depositary and its participants.
Payment when Offices are Closed
If any payment is due on a debt security on a day that is not a business day, we will make the payment on the next day that is a business day.
Payments made on the next business day in this situation will be treated under the Indentures as if they were made on the original due date, except as
otherwise indicated in the applicable prospectus supplement. Such payment will not result in a default under any debt security or the Indentures, and no
interest will accrue on the payment amount from the original due date to the next day that is a business day.
Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on their debt
securities.
Events of Default
You will have rights if an Event of Default occurs in respect of the Notes and is not cured, as described later in this subsection.
The term “Event of Default” in respect of our debt securities means any of the following (unless the prospectus supplement relating to
such debt securities states otherwise):
•
•
•
•
•
•
•
we do not pay the principal of, or any premium on, any of the Notes on the due dates, and do not cure this default within five days;
we do not pay interest on the Notes when due, and such default is not cured within 30 days;
we do not deposit any sinking fund payment in respect of the Notes on the due date, and do not cure this default within five days;
we remain in breach of a covenant in respect of the Notes for 60 days after we receive a written notice of default stating we are in
breach. The notice must be sent by either the trustee or holders of at least 25% of the principal amount of the respective series of
Notes;
we file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and remain undischarged or
unstayed for a period of 60 days;
on the last business day of each of 24 consecutive calendar months, we have an asset coverage of less than 100%; and
any other Event of Default in respect of the Notes as described in the applicable prospectus supplement occurs.
An Event of Default for a particular series of Notes does not necessarily constitute an Event of Default for any other series of Notes issued
under the same or any other indenture. The trustee may withhold notice to the holders of Notes of any default, except in the payment of principal,
premium or interest, if it considers the withholding of notice to be in the best interests of the holders.
Remedies if an Event of Default Occurs
If an Event of Default has occurred and has not been cured, the trustee or the holders of at least 25% in principal amount of the debt securities
of the affected series may declare the entire principal amount of all the debt securities of that series to be due and immediately payable. This is called a
declaration of acceleration of maturity. In certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority
in principal amount of the debt securities of the affected series.
The trustee is not required to take any action under the Indentures at the request of any holders unless the holders offer the trustee reasonable
protection from expenses and liability (called an “indemnity”). If reasonable indemnity is provided, the holders of a majority in principal amount of the
outstanding debt securities of the relevant series may direct the time, method and place of conducting any lawsuit or other formal legal action seeking
any remedy available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any
right or remedy will be treated as a waiver of that right, remedy or Event of Default.
Before you are allowed to bypass your trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your
rights or protect your interests relating to the debt securities, the following must occur:
•
•
•
•
the holder must give your trustee written notice that an Event of Default has occurred and remains uncured;
the holders of at least 25% in principal amount of all outstanding debt securities of the relevant series must make a written request that
the trustee take action because of the default and must offer reasonable indemnity to the trustee against the cost and other liabilities of
taking that action;
the trustee must not have taken action for 60 days after receipt of the above notice and offer of indemnity; and
the holders of a majority in principal amount of the debt securities must not have given the trustee a direction inconsistent with the
above notice during that 60 day period.
However, you are entitled at any time to bring a lawsuit for the payment of money due on your debt securities on or after the due date.
Holders of a majority in principal amount of the debt securities of the affected series may waive any past defaults other than:
•
•
the payment of principal, any premium or interest; or
in respect of a covenant that cannot be modified or amended without the consent of each holder.
Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or
make a request of the trustee and how to declare or cancel an acceleration of maturity.
Each year, we will furnish to each trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance
with the Indentures and the debt securities, or else specifying any default.
Merger or Consolidation
Under the terms of the Indentures, we are generally permitted to consolidate or merge with another entity. We may also be permitted to sell all
or substantially all of our assets to another entity. However, unless the prospectus supplement relating to certain debt securities states otherwise, we may
not take any of these actions unless all the following conditions are met:
•
•
•
•
•
where we merge out of existence or sell our assets, the resulting entity must agree to be legally responsible for our obligations under
the debt securities;
immediately after giving effect to such transaction, no Default or Event of Default shall have happened and be continuing;
under the Indentures, no merger or sale of assets may be made if as a result any of our property or assets or any property or assets of
one of our subsidiaries, if any, would become subject to any mortgage, lien or other encumbrance unless either (a) the mortgage, lien or
other encumbrance could be created pursuant to the limitation on liens covenant in the Indentures without equally and ratably securing
the Indenture Securities or
(b) the Indenture Securities are secured equally and ratably with or prior to the debt secured by the mortgage, lien or other
encumbrance;
we must deliver certain certificates and documents to the trustee; and
we must satisfy any other requirements specified in the applicable prospectus supplement relating to a particular series of the
Notes.
Modification or Waiver
There are three types of changes we can make to the Indentures and the debt securities issued thereunder.
Changes Requiring Approval
First, there are changes that we cannot make to debt securities without specific approval of all of the holders. The following is a list of those
types of changes:
•
•
•
•
•
•
•
•
•
•
•
•
change the stated maturity of the principal of or interest on a debt security;
reduce any amounts due on a debt security;
reduce the amount of principal payable upon acceleration of the maturity of a security following a default;
adversely affect any right of repayment at the holder’s option;
change the place (except as otherwise described in the applicable prospectus or prospectus supplement) or currency of payment on
a debt security;
impair your right to sue for payment;
adversely affect any right to convert or exchange a debt security in accordance with its terms;
modify the subordination provisions in the Indentures in a manner that is adverse to holders of the debt securities;
reduce the percentage of holders of debt securities whose consent is needed to modify or amend the Indentures;
reduce the percentage of holders of debt securities whose consent is needed to waive compliance with certain provisions of the
Indentures or to waive certain defaults;
modify any other aspect of the provisions of the Indentures dealing with supplemental indentures, modification and waiver of past
defaults, changes to the quorum or voting requirements or the waiver of certain covenants; and
change any obligation we have to pay additional amounts.
Changes Not Requiring Approval
The second type of change does not require any vote by the holders of the debt securities. This type is limited to clarifications and certain other
changes that would not adversely affect holders of the outstanding debt securities in any material respect. We also do not need any approval to make any
change that affects only debt securities to be issued under the Indentures after the change takes effect.
Changes Requiring Majority Approval
Any other change to the Indentures and the debt securities would require the following approval:
•
•
if the change affects only one series of debt securities, it must be approved by the holders of a majority in principal amount of that
series; and
if the change affects more than one series of debt securities issued under the same indenture, it must be approved by the holders of a
majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this
purpose.
The holders of a majority in principal amount of all of the series of debt securities issued under an indenture, voting together as one class for
this purpose, may waive our compliance with some of our covenants in that indenture. However, we cannot obtain a waiver of a payment default or of
any of the matters covered by the bullet points included above under “- Changes Requiring Approval.”
Further Details Concerning Voting
When taking a vote, we will use the following rules to decide how much principal to attribute to a debt security:
•
•
•
for original issue discount securities, we will use the principal amount that would be due and payable on the voting date if the
maturity of these debt securities were accelerated to that date because of a default;
for debt securities whose principal amount is not known (for example, because it is based on an index), we will use a special rule
for that debt security described in the prospectus supplement; and
for debt securities denominated in one or more foreign currencies, we will use the U.S. dollar equivalent.
Debt securities will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their
payment or redemption. Debt securities will also not be eligible to vote if they have been fully defeased as described later under “Defeasance - Full
Defeasance.”
We will generally be entitled to set any day as a record date for the purpose of determining the holders of outstanding Indenture Securities that
are entitled to vote or take other action under the Indentures. If we set a record date for a vote or other action to be taken by holders of one or more
series, that vote or action may be taken only by persons who are holders of outstanding Indenture Securities of those series on the record date and must
be taken within eleven months following the record date.
Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or
denied if we seek to change the Indenture or the debt securities or request a waiver.
Defeasance
The following provisions will be applicable to each series of debt securities unless we state in the applicable prospectus supplement that
the provisions of covenant defeasance and full defeasance will not be applicable to that series.
Covenant Defeasance
Under current U.S. federal tax law, we can make the deposit described below and be released from some of the restrictive covenants in the
Indentures under which the particular series was issued. This is called “covenant defeasance.” In that event, you would lose the protection of those
restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay your debt securities. If
applicable, you also would be released from the subordination provisions as described under the “Indenture Provisions - Subordination” section below.
In order to achieve covenant defeasance, we must do the following:
▪
if the debt securities of the particular series are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of such
debt securities a combination of money and U.S. government or U.S. government agency notes or bonds that will generate enough cash
to make interest, principal and any other payments on the debt securities on their various due dates;
▪ we must deliver to the trustee a legal opinion of our counsel confirming that, under current U.S. federal income tax law, we may make
the above deposit without causing you to be taxed on the debt securities any differently than if we did not make the deposit and just
repaid the debt securities ourselves at maturity; and
▪ we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the
1940 Act, as amended, and a legal opinion and officers’ certificate stating that all conditions precedent to covenant defeasance have
been complied with.
If we accomplish covenant defeasance, you can still look to us for repayment of the debt securities if there were a shortfall in the trust deposit
or the trustee is prevented from making payment. For example, if one of the remaining Events of Default occurred (such as our bankruptcy) and the
debt securities became immediately due and payable, there might be a shortfall. Depending on the event causing the default, you may not be able to
obtain payment of the shortfall.
Full Defeasance
If there is a change in U.S. federal tax law, as described below, we can legally release ourselves from all payment and other obligations on the
debt securities of a particular series (called “full defeasance”) if we put in place the following other arrangements for you to be repaid:
•
•
•
if the debt securities of the particular series are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of
such debt securities a combination of money and United States government or United States government agency notes or bonds that
will generate enough cash to make interest, principal and any other payments on the debt securities on their various due dates;
we must deliver to the trustee a legal opinion confirming that there has been a change in current U.S. federal tax law or an IRS ruling
that allows us to make the above deposit without causing you to be taxed on the debt securities any differently than if we did not make
the deposit and just repaid the debt securities ourselves at maturity. Under current U.S. federal tax law, the deposit and our legal
release from the debt securities would be treated as though we paid you your share of the cash and notes or bonds at the time the cash
and notes or bonds were deposited in trust in exchange for your debt securities and you would recognize gain or loss on the debt
securities at the time of the deposit; and
we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the
1940 Act, as amended, and a legal opinion and officers’ certificate stating that all conditions precedent to defeasance have been
complied with.
If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the debt
securities. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from
claims of our lenders and other creditors if we ever became bankrupt or insolvent. If applicable, you would also be released from the subordination
provisions described later under “Indenture Provisions - Subordination.”
Form, Exchange and Transfer of Certificated Registered Securities
The Notes are represented by global securities that were deposited and registered in the name of DTC or its nominee.
Beneficial interests in the Notes are represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct
and indirect participants in DTC. Investors may elect to hold interests in the Notes through either DTC, if they are a participant, or indirectly through
organizations that are participants in DTC.
Resignation of Trustee
Each trustee may resign or be removed with respect to one or more series of Indenture Securities provided that a successor trustee is appointed
to act with respect to these series. In the event that two or more persons are acting as trustee with respect to different series of Indenture Securities under
the Indentures, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other trustee.
Indenture Provisions - Subordination
Upon any distribution of our assets upon our dissolution, winding up, liquidation or reorganization, the payment of the principal of (and
premium, if any) and interest, if any, on any Indenture Securities denominated as subordinated debt securities is to be subordinated to the extent provided
in the Indentures in right of payment to the prior payment in full of all senior indebtedness (as defined below), but our obligation to you to make payment
of the principal of (and premium, if any) and interest, if any, on such subordinated debt securities will not otherwise be affected. In addition, no payment
on account of principal (or premium, if any), sinking fund or interest, if any, may be made on such subordinated debt securities at any time unless full
payment of all amounts due in respect of the principal (and premium, if any), sinking fund and interest on senior indebtedness has been made or duly
provided for in money or money’s worth.
In the event that, notwithstanding the foregoing, any payment by us is received by the trustee in respect of subordinated debt securities or by the
holders of any of such subordinated debt securities before all senior indebtedness is paid in full, the payment or distribution must be paid over to the
holders of the senior indebtedness or on their behalf for application to the payment of all the senior indebtedness remaining unpaid until all the senior
indebtedness has been paid in full, after giving effect to any concurrent payment or distribution to the holders of the senior indebtedness. Subject to the
payment in full of all senior indebtedness upon this distribution by us, the holders of such subordinated debt securities will be subrogated to the rights of
the holders of the senior indebtedness to the extent of payments made to the holders of the senior indebtedness out of the distributive share of such
subordinated debt securities.
By reason of this subordination, in the event of a distribution of our assets upon our insolvency, certain of our senior creditors may recover
more, ratably, than holders of any subordinated debt securities. The Indentures provide that these subordination provisions will not apply to money and
securities held in trust under the defeasance provisions of the Indentures.
Senior indebtedness is defined in the Indentures as the principal of (and premium, if any) and unpaid interest on:
•
•
our indebtedness (including indebtedness of others guaranteed by us), whenever created, incurred, assumed or guaranteed, for
money borrowed (other than Indenture Securities issued under the Indentures and denominated as subordinated debt securities),
unless in the instrument creating or evidencing the same or under which the same is outstanding it is provided that this indebtedness
is not senior or prior in right of payment to the subordinated debt securities; and
renewals, extensions, modifications and refinancings of any of this indebtedness.
The applicable prospectus supplement will set forth the approximate amount of our senior indebtedness outstanding as of a recent date.
The Trustee under the Indenture
U.S. Bank National Association will serve as the trustee under the Indentures.
Exhibit 14.1
OFS Capital Management, LLC
OFS CLO Management, LLC
OFS Capital Corporation
OFS Credit Company, Inc.
Hancock Park Corporate Income, Inc.
Code of Ethics
Restated and Adopted on December 15, 2020
This Code of Ethics is the property of OFS Capital Management, LLC and certain affiliated entities and must be returned to it if
an individual’s association with it terminates for any reason.
The content of this Code of Ethics is confidential, and should not be revealed to third parties without the consent of the Chief
Compliance Officer (“CCO”). The policies and procedures set forth herein supersede previous versions.
I.
GENERAL (CODE OF ETHICS)
TABLE OF CONTENTS
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
INTRODUCTION
STATEMENT OF STANDARDS OF BUSINESS CONDUCT
PERIODIC COMPLIANCE AND TRAINING
ACKNOWLEDGMENT
REPORTING AND SANCTIONS
ADDITIONAL RESTRICTIONS AND WAIVERS BY OFS ADVISER AND THE OFS FUNDS
REVIEW BY THE BOARD OF DIRECTORS OF EACH OFS FUND
CCO REPORTING
CCO AND COMPLIANCE OVERSIGHT
CONFIDENTIALITY
CONFLICT WITH EMPLOYEE HANDBOOK
II.
PERSONAL INVESTMENT POLICY
A.
B.
INTRODUCTION AND DEFINITIONS
RECORDKEEPING AND REPORTING REQUIREMENTS
1. Reports
2. Determining Whether an Account is an Affiliated Account
3. Managed Accounts
4. Non-Transferable Accounts
5. Transactions Subject to Review
Page
1
1
3
6
6
6
7
7
8
8
8
9
10
10
12
12
13
13
13
14
TABLE OF CONTENTS (cont’d)
STATEMENT OF RESTRICTIONS
C.
1. Restricted List
2. Private Placements and Initial Public Offerings
3. Trades by OFS Fund Directors
4. Trades of OFS Fund Securities or CMCT
5. Trades by Access Persons Serving on Company Boards
6. No Personal Trades Through OFS Adviser’s Traders
7. Use of Brokerage for Personal or Family Benefit
8. No “Front Running”
9. No Short Sale Transactions
10. Acquiring Five (5) Percent or more of a Publicly Traded Company
D.
REQUIREMENTS OF DISINTERESTED DIRECTORS
III.
INSIDE INFORMATION POLICY
A.
B.
INTRODUCTION
KEY TERMS
1. What is a “Security”?
2. Who is an Insider?
3. What is Material Information?
4. What is Nonpublic Information?
5. Contacts with Companies
6. Tender Offers
7. Penalties for Insider Trading
Page
14
14
15
16
16
16
16
16
16
17
17
17
18
18
19
19
19
20
20
21
21
21
C.
TABLE OF CONTENTS (cont’d)
INSIDER TRADING PROCEDURES
1.
Identifying Inside Information
2. Restricting Access to Material and Nonpublic Information
3. Review and Dissemination of Certain Investment Related Information
4. Determination of Materiality
5. Policies and Procedures Relating to Paid Research Consultants and Expert Network Firms Regarding
Securities
IV.
A.
B.
GIFTS, ENTERTAINMENT AND POLITICAL ACTIVITIES
INTRODUCTION
GIFTS AND ENTERTAINMENT POLICY
1. Business Meals
2. Providing Gifts
3. Receiving Gifts
4. Entertainment
5. Travel and Lodging
6. Providing Meals, Gifts and Entertainment to Public Officials and Union Employees
7. Receipt of Meals, Gifts or Entertainment by Traders from Brokers/Agent Bank Employees
8. Charitable Contributions
C.
POLITICAL ACTIVITY POLICY
1.
Introduction
2. Indirect Violations
3. Periodic Disclosure
Page
21
21
22
22
22
23
25
25
25
25
25
26
26
27
27
28
28
28
28
29
29
V.
OUTSIDE AFFILIATIONS POLICY
TABLE OF CONTENTS (cont’d)
A.
B.
C.
OUTSIDE BUSINESS ACTIVITIES
DIRECTOR AND OFFICER POSITIONS
EMPLOYEE RELATIONSHIPS
ANTI-CORRUPTION POLICY
IT ACCEPTABLE USE POLICY
PERSONAL USE OF FIRMS RESOURCES AND RELATIONSHIPS POLICY
VI.
VII.
VIII.
Page
31
31
31
32
33
36
37
I. GENERAL (CODE OF ETHICS)
A.
INTRODUCTION
1
The Code of Ethics (“Code”) has been jointly adopted by OFS Capital Management and OFS CLO Management, LLC
(collectively, “OFS Adviser” or the "Firm”)and certain entities that are controlled by or under common control with OFS Capital
Management (“Affiliates”), as determined from time to time by Senior Management, and each of OFS Capital Corporation,
Hancock Park Corporate Income, Inc., OFS Credit Company, Inc. and any investment company that OFS Adviser may sponsor
and/or manage from time to time (each, an “OFS Fund” and collectively, “OFS Funds”) in order to establish applicable policies,
guidelines and procedures that promote ethical practices and conduct by all Supervised Persons of OFS Adviser, including, but
not limited to, certain employees, interns, temporary employees, principals and others designated by Compliance, and that
prevent violations of applicable laws including the Investment Advisers Act of 1940, as amended (“Advisers Act”) and the
Investment Company Act of 1940, as amended (“Company Act”). “Supervised Person” is defined as any director, officer,
member or employee (or other person occupying similar status or performing similar functions) of OFS Adviser or any other
person who provides investment advice on behalf of OFS Adviser and is subject to the supervision and control of OFS Adviser
.
Unless instructed otherwise or approved by the Compliance Department, temporary employees and consultants will generally be
deemed a Supervised Person if the employee’s or consultant’s work assignment or engagement exceeds ninety (90) calendar days.
This Code is available to all Supervised Persons on OFS Adviser’s automated compliance system. All Supervised Persons must
read it carefully and must verify at least annually (and at such other times that a Compliance Officer may request) that he or she
has read, understands, and agrees to abide by the Code.
1
2
The Code is designed to address conflicts of interest that may arise in your personal dealings and those in which you
engage on behalf of the Firm and its Advisory Clients . The following policies comprise the Code and address certain of these
conflicts:
3
1 The Code is adopted by OFS Adviser and each OFS Fund pursuant to and in accordance with the requirements of each of Rules 204A-1 and 206(4)-7 under the Advisers Act and Rules 17j-
1 and 38a-1under the Company Act.
2 The Chief Compliance Officer or his/her designee may consider any director, officer, member, principal or employee, including, but not limited to, intern and temporary employees, of an
Affiliate of OFS Adviser to be a Supervised Person of OFS Adviser if the Chief Compliance Officer determines that such person performs services for OFS Adviser, through any staffing
or similar agreement, such that the person would constitute a Supervised Person if such person was a director, officer, member, employee, intern or temporary employee of OFS Adviser.
The Compliance Department maintains a list of all such persons and whether each person is (1) a Supervised Person and (2) an Access Person and will notify each person of relevant
requirements. The majority of OFS Adviser’s personnel are employees of Orchard First Source Capital, Inc., an Affiliate of OFS Adviser..
3 Advisory Client means any individual, group of individuals, partnership, trust, company or other investment fund entity for whom OFS Adviser acts as investment adviser. For example, any
OFS Fund is an Advisory Client. For the avoidance of doubt, Advisory Clients include public and private investment funds, including comingled funds and single investor funds (“Funds”)
and managed accounts managed by OFS Adviser, but do not include the underlying individual investors in such Funds (“Investors”), although certain protections afforded to Advisory
Clients pursuant to this Code do extend to Investors through Rule 206(4)-8 of the Advisers Act.
1
the Personal Investment Policy,
•
the Inside Information Policy,
•
the Gifts and Entertainment Policy,
•
Political Activity Policy,
•
• Outside Affiliations Policy,
• Anti-Corruption Policy,
• OFS Acceptable Use Policy; and
•
Personal Use of the Firm’s Resources and Relationships Policy
OFS Adviser and each OFS Fund require that all Supervised Persons observe the applicable standards of care set forth in
these policies and not seek to evade the provisions of the Code in any way, including through indirect acts by Related Persons or
other associates.
All activities involving the OFS Funds are subject to the Company Act and the policies and procedures adopted by each OFS Fund in
connection therewith as set forth in the Rule 38a-1 Compliance Manual (“38a-1 Manual”) for each OFS Fund. The obligations set forth in the
Code and the 38a-1 Manual are in addition to and not in lieu of the policies and procedures set forth in the Firm’s Employee Handbook and any
other Compliance Policies adopted by OFS Adviser in respect of the conduct of its business.
2
B.
STATEMENT OF STANDARDS OF BUSINESS CONDUCT
As a fundamental mandate, OFS Adviser and each OFS Fund demand the highest standards of ethical conduct and care
from all Supervised Persons and OFS Fund Directors. Supervised Persons and OFS Fund Directors must abide by this basic
business standard and must not take inappropriate advantage of their position with the Firm or OFS Fund. Each Supervised
Person and OFS Fund Director is under a duty to exercise his or her authority and responsibility for the primary benefit of our
Advisory Clients, including the OFS Funds, and the Firm, and may not have outside interests or engage in activities that
inappropriately conflict or appear to conflict with the interests of the Firm or its Advisory Clients, including the OFS Funds.
Examples of such conflicts include:
•
•
engaging a service provider on behalf of Advisory Clients or the Firm in which you or your Related Person has
a financial interest;
accepting extravagant gifts or entertainment from a potential service provider to the Firm;
• making charitable donations at the request of a prospective Advisory Client when the Advisory Client will
directly benefit from such donation;
•
•
•
contributing to the election campaign of a government official or candidate who has, or will have if elected, the
authority to appoint pension plan board members who are responsible for selecting investment advisers for such
pension plan;
purchasing an interest in a company or property that you know the Firm is targeting for investment; and
assuming an outside position with a company that competes directly with the Firm.
The above list of examples is not exhaustive, and you, as a Supervised Person or OFS Fund Director, are responsible for
assessing the unique facts and circumstances of your activities for potential conflicts and consulting with OFS Adviser’s Legal
and Compliance Departments prior to engaging in such activities.
Each Supervised Person and OFS Fund Director must avoid circumstances or conduct that adversely affect or that appear
to adversely affect OFS Adviser or its Advisory Clients, including the OFS Funds. Every Supervised Person and OFS Fund
Director must comply with applicable federal securities laws and must promptly report suspected violations of the Code to a
Compliance Officer. OFS Adviser strictly prohibits retaliation against any individual reporting suspected violations, who, in good
faith, seeks help or reports known or suspected violations, including Supervised Persons who assist in making a report or who
cooperate in an investigation (see Section I.E. Reporting and Sanctions).
GENERAL GUIDELINES
1.
Supervised Persons and OFS Directors may not employ any device, scheme or artifice to defraud an OFS Fund or
any Advisory Client, make any untrue statement of a material fact to an OFS Fund or any Advisory Client, or omit
to state a material fact necessary in order to make the statements not misleading, engage in any act, practice or
course of business that operates or would operate as a fraud or deceit upon an OFS Fund or any other Advisory
Client, engage in any manipulative practice with respect to an OFS Fund or any
3
2.
3.
4.
5.
6.
7.
8.
other Advisory Client, or engage in any manipulative practice with respect to Securities, including price
manipulation.
Except with the prior approval of a Compliance Officer, in consultation with a Supervised Person’s supervisor
and/or Senior Management, a Supervised Person may not act as a director, officer, general partner, managing
member, principal, proprietor, consultant, agent, representative, trustee or employee of any unaffiliated public or
private entity or business other than an OFS Fund, OFS Adviser, or an Affiliate of OFS Adviser. (See Section IV)
All Supervised Persons must disclose to OFS Adviser and their respective OFS Fund any interests they may have
in any entity that is not affiliated with OFS Adviser or any OFS Fund and that has a known business relationship
with OFS Adviser, an Affiliate of OFS Adviser or any OFS Fund.
Except with the prior approval of a Compliance Officer, and as specifically permitted by law, Supervised Persons
may not have a material direct or indirect interest (e.g., as principal, co-principal, agent, member, partner, or
material shareholder or beneficiary) in any transaction that conflicts with the interests of OFS Adviser or its
Advisory Clients.
Except with the prior approval of a Compliance Officer, Access Persons may not invest in any Initial Public
Offering (“IPO”) or Private Placement (including hedge funds and other private investment vehicles). (See
Section II.C.2) This requirement also applies to Private Placements that are Advisory Clients of OFS Adviser,
such as Hancock Park Corporate Income, Inc.
4
No Supervised Person, except in the course of the rightful exercise of his or her job responsibilities, shall reveal to
any other person, information regarding any Advisory Client or any investment or Security transaction being
considered, recommended or executed on behalf of any Advisory Client. (See Section III.)
No OFS Fund Director, except in the course of the rightful exercise of his or her board responsibilities, shall reveal
to any other person information regarding any OFS Fund or any “Portfolio Company”, defined as any legal entity
in which an OFS Fund or another Advisory Client holds an investment regardless of whether or not the investment
is a Security, or any investment or Security transaction being considered, recommended, or executed on behalf of
any other Advisory Client. (See Section III.)
No Supervised Person shall make any recommendation concerning the purchase or sale of any Security by an
Advisory Client without disclosing, to the extent known, the interest of the Firm or any Supervised Person, if any,
in such Security or the issuer thereof, including, without limitation (a) any direct or indirect beneficial ownership
of any Security of such issuer; (b) any contemplated transaction by such person in such Security; and (c) any
present or proposed relationship with respect to such Security, issuer or its affiliates.
4. Private Placement is defined as an offering that is exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant
to section 4(2) or section 4(5) or pursuant to rule 504, rule 505 or rule 506 thereunder.
4
9.
10.
11.
12.
13.
14.
Subject to certain exceptions permitted by applicable law, each OFS Fund shall not, directly or indirectly extend,
maintain or arrange for the extension of credit or the renewal of an extension of credit, in the form of a personal
loan to any officer or director of the Fund. Any Supervised Person or person who serves as a director on the board
of directors of any OFS Fund (“OFS Fund Director”) who becomes aware that their respective OFS Fund may be
extending or arranging for the extension of credit to a director or officer, or person serving an equivalent function,
should notify and consult with a Compliance Officer to ensure that the proposed extension of credit complies with
this Code and the applicable law.
No Supervised Person shall engage in insider trading (as described in the “Inside Information Policy” in Section
III.) whether for his or her own benefit or for the benefit of others.
No Supervised Person may communicate material, nonpublic information concerning any Security, or its issuer, or
Portfolio Company to anyone unless it is properly within his or her duties to do so. No OFS Fund Director may
communicate material, nonpublic information concerning any Security of an issuer in which the OFS Fund
Director knows, or, in the course of his or her duties as a director, should have known, OFS Fund has a current
investment, or with respect to which an investment or Security is Being Considered for Purchase or Sale by any
OFS Fund (“OFS Fund Portfolio Security”) or Portfolio Company of their respective OFS Fund to anyone unless
it is properly within his or her duties to do so. A Security is “Being Considered for Purchase or Sale” when a
recommendation to purchase or sell the Security has been made and communicated and, with respect to the person
making the recommendation, when such person seriously considers making such a recommendation. In all cases, a
Security which has been recommended for purchase or sale pursuant to an Investment Committee memorandum,
presentation, due diligence package or other formal Investment Committee recommendation shall be deemed to be
a Security Being Considered for Purchase or Sale.
Each Supervised Person shall complete a compliance questionnaire (the “Regulatory Compliance Disclosure”)
prior to employment and annually thereafter, within the prescribed deadline, as provided by the Compliance
Department, (“Compliance Due Date”) through the Firm’s automated compliance system. Each Supervised Person
shall supplement the Regulatory Compliance Disclosure, as necessary, to reflect any material changes between
annual disclosures filings, and must immediately notify Compliance if any of the conditions addressed in the
Regulatory Compliance Disclosure become applicable to such Supervised Person.
Every Supervised Person must avoid any activity that might give rise to a question as to whether the Firm’s
objectivity as a fiduciary has been compromised. (See Section V)
Access Persons are required to disclose to a Compliance Officer the existence of any account that has the ability to
hold any Reportable Securities (e.g., brokerage or trading accounts and IRAs), as well the account’s holdings
(immediately upon commencement of employment (which shall include the accounts and holdings of the Access
Person’s Related Persons), and in no case later than ten (10) calendar days beyond the Access Person’s start date.
Such Accounts must be disclosed even if they contain a zero balance or non-
5
Reportable Securities. Access Persons are required to disclose accounts that are Managed Accounts; however,
disclosing the holdings of such Managed Accounts is not required. With limited exceptions provided herein,
Access Persons are also required to maintain Non-Managed Accounts capable of holding Reportable Securities
with Approved Brokers, which have contracted to provide holdings and transaction reporting to the Compliance
Department on the Firm’s automated compliance system. Access Persons must confirm the accuracy and
completeness of the information so provided to the Firm on a quarterly and annual basis by the Compliance Due
Date. Initial and quarterly reports must disclose the existence of all accounts, even if none of those accounts at the
time hold a Reportable Security. (See Section II).
15.
The intentional creation, transmission or use of false rumors is inconsistent with the Firm’s commitment to high
ethical standards and may violate the antifraud provisions of the Advisers Act, among other securities laws of the
United States. Accordingly, no Supervised Person may maliciously create, disseminate or use false rumors. This
prohibition covers oral and written communications, including the use of electronic communication media such as
e-mail, PIN messages, instant messages, tweets, text messages, blogs and chat rooms. Because of the difficulty
identifying “false” rumors, the Firm discourages Supervised Persons from creating, passing or using any rumor.
C.
PERIODIC COMPLIANCE REPORTING AND TRAINING
Each Supervised Person is required to complete all assigned compliance certifications and disclosures by the Compliance
Due Date. Absent an exemption granted to you by a Compliance Officer, failure to complete such items by the Compliance Due
Date will likely constitute a violation of this Code and may result in the imposition of sanctions.
The Compliance Department also presents and/or coordinates mandatory training on this Code at least biennially, and
may assign mandatory or voluntary training on the Code or other Firm policies at such other times as the Compliance Department
deems appropriate. Failure to attend or complete mandatory training sessions, unless excused in writing by a Compliance Officer,
will likely constitute a violation of this Code and may lead to the imposition of sanctions. The Compliance Department maintains
an attendance or completion list, as appropriate, of all Supervised Persons assigned to such training sessions.
D.
ACKNOWLEDGMENT
Each Supervised Person must certify upon commencement of employment, at least annually thereafter, and at such other
times as a Compliance Officer may determine, that he or she has read, understands, is subject to and has complied with the Code.
Any Supervised Person who has any questions about the applicability of the Code to a particular situation should promptly
consult with a Compliance Officer.
E.
REPORTING AND SANCTIONS
While compliance with the provisions of the Code is anticipated, Supervised Persons should be aware that, in response to
any violations, the Firm (or any OFS Fund, as applicable) shall take any action deemed necessary under the circumstances
including, but without limitation, the imposition of appropriate sanctions. These sanctions may include, among others, verbal or
written warnings, the reversal of trades, reallocation of trades to client accounts, disgorgement of profits, suspension or
termination of personal
6
trading or investment privileges, reduction in bonus or bonus opportunity, payment of a monetary fine payable to a recognized
charitable organization of the Supervised Person’s choice or, in more serious cases, suspension or termination of employment
and/or the making of any civil or criminal referral to the appropriate governmental authorities.
Moreover, Supervised Persons are required to promptly report any violation(s) of this Code, any other compliance
policies adopted by OFS Adviser or the Rule 38a-1 Manual adopted by any OFS Fund (collectively “Compliance Policies”), or
any activity that may adversely affect the Firm’s or any OFS Fund’s business or reputation, to a Compliance Officer. The
Compliance Department shall maintain a record of all violations of the Code and any corrective actions taken. Supervised
Persons are encouraged to identify themselves when reporting such conduct, but they may also report anonymously. Reporting
should be made through a letter to a Compliance Officer or via the telephonic and electronic reporting procedures detailed in the
Firm’s “Whistleblower Hotline Information” attached hereto as Attachment A. Further, all activities reported by Supervised
Persons will be treated anonymously and confidentially (to the extent reasonably practicable) in order to encourage Supervised
Persons to come forward with perceived problems. The Firm and each OFS Fund are committed to a full, unbiased review of any
matter(s) raised.
The Firm and OFS Fund prohibit retaliation against any such personnel who, in good faith, seeks help or reports known or
suspected violations (even if the reported event is determined not to be a violation), including personnel who assist in making a
report or who cooperate in an investigation. Any Supervised Person who engages in retaliatory conduct will be subject to
disciplinary action, up to and including termination of employment.
F.
ADDITIONAL RESTRICTIONS AND WAIVERS BY OFS ADVISER AND THE OFS FUNDS
From time to time, a Compliance Officer may determine that it is in the best interests of the Firm to subject certain
Supervised Persons or other persons (i.e., consultants and third party service providers) to restrictions or requirements in addition
to those set forth in the Code. In such cases, the affected persons will be notified of the additional restrictions or requirements and
will be required to abide by them as if they were included in the Code. In addition, under extraordinary circumstances, the
Compliance Officer may grant a waiver of certain of these restrictions or requirements contained in the Code on a case by case
basis. In order for a Supervised Person to rely on any such waiver, it must be granted in writing.
Any waiver of the requirements of the Code for executive officers of any OFS Fund or any OFS Fund Director may be
made only by the respective OFS Fund’s board of directors or a committee of the board, and must be promptly disclosed to
shareholders of the OFS Fund as required by law or relevant exchange rule or regulation.
The Compliance Department maintains a log of all requests for exceptions and waivers and the determinations made with
respect to such requests.
G.
REVIEW BY THE BOARD OF DIRECTORS OF EACH OFS FUND
The CCO will prepare a written report to be considered by the board of directors of each OFS Fund (1) quarterly, that
identifies any violations of the Code with respect to each OFS Fund requiring significant remedial action during the past quarter
and the nature of that remedial action; and (2) annually, that (a) describes any issues arising under the Code since the last written
report to the Board, including, but not limited to, information about material violations of the Code and sanctions imposed in
response to
7
such violations, and (b) identifies any recommended changes in existing restrictions or procedures based upon each OFS Fund’s
and/or OFS Adviser’s experience under the Code, then-prevailing industry practices, or developments in applicable laws or
regulations, and (c) certifies that each OFS Fund and OFS Adviser have each adopted procedures reasonably designed to prevent
violations of the Code, and of the federal securities laws in accordance with the requirements of the Advisers Act and the
Company Act.
The board of directors of each OFS Fund will also be asked to approve any material changes to the Code within six (6)
months after the adoption of such change, based on a determination that the Code, as amended, contains policies and procedures
reasonably designed to prevent violations of the federal securities laws.
H.
CCO REPORTING
The CCO will prepare a written report to be considered by Senior Management no less than annually, that (a) describes
any issues arising under the Code since the last written report, including, but not limited to, information about material
violations of the Code and sanctions imposed in response to such violations, and (b) identifies any recommended changes in
existing restrictions or procedures based upon OFS Adviser’s experience under the Code, then-prevailing industry practices, or
developments in applicable laws or regulations.
The CCO of each OFS Fund, as applicable, prepares a written report to be considered by the relevant OFS Fund
Directors no less than annually, that (a) describes any issues arising under the Compliance Policies since the last written report,
including, but not limited to, information about material violations of the Compliance Policies and sanctions imposed in
response to such violations, and (b) identifies any recommended changes in existing restrictions or procedures based upon each
OFS Fund’s and/or OFS Adviser’s experience under the Compliance Policies, then-prevailing industry practices, or
developments in applicable laws or regulations.
I.
CCO AND COMPLIANCE OVERSIGHT
All requirements and prohibitions under this Code are likewise applicable to the CCO and all Compliance Department
employees. For the purpose of addressing actual and perceived conflicts of interest and potential self-dealing, any report and
pre-approval request submitted by such employees is to be reviewed, and approved as applicable, by the employee’s supervisor
or the CCO. Reports and pre-approval requests from the CCO will be reviewed, and approved as applicable, by CIM’s Chief
Legal Counsel (“CLC). Under no circumstances should the CCO or any Compliance Department employee review his/her own
report or approve his/her own pre-approval request.
Potential Code violations by the CCO must be reviewed by the CLC. Potential Code violations by a Compliance
Department employee must be reviewed by the CCO. If it is determined that a violation occurred, the CCO or employee will be
subject to the applicable sanction(s) under the Code.
J.
CONFIDENTIALITY
Personnel will be given access to and become acquainted with highly confidential information about the Firm such as its
financial information, business plans and strategies, investment strategies and opportunities, affiliated companies and internal
policies and practices, as well as information relating to past, current and prospective Advisory Clients and Portfolio Companies.
Such information must not be
8
disclosed or discussed with anyone other than the Firm’s employees under any circumstances, and only on a “need to know”
basis, unless otherwise permitted by the Legal or Compliance Departments.
K.
CONFLICT WITH EMPLOYEE HANDBOOK
Where this Code addresses policies that are also addressed in other corporate policies or in the Employee Handbook of
Orchard First Source Capital, Inc. or another Affiliate by which a Supervised Person is employed, the policies herein are intended
to augment, and not to supersede or replace, the relevant corporate or Employee Handbook policies. In the event of any conflict
that would prohibit a Supervised Person from complying with both sets of policies, the Supervised Person should address the
conflict to a Compliance Officer.
9
II. PERSONAL INVESTMENT POLICY
A.
INTRODUCTION AND DEFINITIONS
The Advisers Act, specifically Rule 204A-1, requires “Access Persons” of a registered investment adviser, such as OFS
Adviser, to provide periodic reports regarding transactions and holdings in Reportable Securities beneficially owned by Access
Persons. Rule 17j-1 under the Company Act requires similar reports for “Access Persons” to a Fund, such as each of the OFS
Funds.
The purpose of this Personal Investment Policy and related procedures is to advise Access Persons of their ethical and
legal responsibilities with respect to Securities transactions that may involve (i) possible conflicts of interest with Advisory
Clients, including the OFS Funds, and (ii) the possession and use of material, nonpublic information (“MNPI”). It is a violation
of the Code for any Access Person of OFS Adviser or any OFS Fund to use their knowledge concerning a trade, pending trade, or
contemplated trade or investment by an OFS Fund or any other Advisory Client to profit personally, directly or indirectly, as a
result of such transaction, including by purchasing or selling such Securities.
The following definitions are utilized within this Personal Investments Policy and more broadly within the rest of the
Code.
“Access Person” with respect to OFS Adviser means (a) any Supervised Person who (i) has access to nonpublic
information regarding any Advisory Client’s purchase or sale of Securities, or nonpublic information regarding the portfolio
holdings of any Advisory Client (including any OFS Fund); or (ii) is involved in making Securities recommendations to Advisory
Clients (including any OFS Fund), or has access to such recommendations that are nonpublic; and (b) all directors, officers and
partners of OFS Adviser.
5
For purposes of the Code, all Supervised Persons are generally considered to be Access Persons of OFS Adviser, and all
Access Persons of OFS Adviser are considered to be Access Persons of each OFS Fund. OFS Fund Directors are also considered
Access Persons of each OFS Fund but are generally exempt from Recordkeeping, Reporting and Statement of Restrictions
requirements of Access Persons included in this Code, except as described in Section II.D below.
“Affiliate Account” means: (i) the personal Securities account of an Access Person or the account of any Related Person
in which Reportable Securities may be held or transacted; (ii) any such Securities account for which any Access Person serves as
custodian, trustee, or otherwise acts in a fiduciary capacity or with respect to which an Access Person either has authority to
make investment decisions or from time to time makes investment recommendations, except with respect to Advisory Clients;
(iii) any such Securities account of any person, partnership, joint venture, trust or other entity in which an Access Person or his or
her Related Person has Beneficial Ownership or other Beneficial Interest; and (iv) and accounts containing Reportable Funds of
which an Access Person or his or her Related Person has Beneficial Ownership or Beneficial Interest.
5 The Chief Compliance Officer or his/her designee may consider any director, officer, principal, member or employee, including, but not limited to, intern and temporary employees,
of an Affiliate of OFS Adviser to be a Supervised Person, and Access Person if appropriate, of OFS Adviser if the Chief Compliance Officer determines that such person performs services for
OFS Adviser, through any staffing or similar agreement, such that the person would constitute a Supervised Person or Access Person if such person was a director, officer, member, principal or
employee, including an intern or temporary employee, of OFS Adviser. The Compliance Department will maintain a list of all such persons and whether each person is (1) a Supervised Person
and (2) an Access Person and will notify each person of relevant requirements. The majority of OFS Adviser’s personnel are employees of Orchard First Source Capital, Inc., an Affiliate of OFS
Adviser.
10
“Beneficial Interest” means an interest whereby a person can, directly or indirectly, control the disposition of a Security or
a Reportable Fund or derive a monetary, pecuniary or other right or benefit from the purchase, sale or ownership of a Security or
a Reportable Fund (e.g., interest payments or dividends).
“Beneficial Ownership” of a Security, Reportable Fund or account means, consistent with Section 16 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 16a-1(a)(2) thereunder, ownership of Securities, Securities
accounts, or Reportable Funds by or for the benefit of a person or his or her Related Person. Beneficial Ownership specifically
includes any Security or account in which the Access Person or any Related Persons holds a direct or indirect Beneficial Interest
or retains voting power (or the ability to direct such a vote) or investment power (which includes the power to acquire or dispose
of, or the ability to direct the acquisition or disposition of, a Security, Securities accounts or Reportable Funds), directly or
indirectly (e.g., by exercising a power of attorney or otherwise).
“Exempt Security” is any Security that falls into any of the following categories: (i) shares issued by open-end mutual
funds (excluding exchange traded funds (“ETFs”), except Reportable Funds, if any; (ii) shares issued by money market funds;
(iii) Security purchases or sales that are part of an automatic dividend reinvestment plan (e.g., DRIP accounts, etc.); (iv) College
Direct Savings Plans (e.g., 529 College Savings Program, etc.); (v) shares issued by unit investment trusts that are invested
exclusively in one or more open-end funds (so long as such funds are not Reportable Funds); (vi) bankers’ acceptances, bank
certificates of deposit or time deposits, commercial paper and other short term high quality debt instruments with one year or less
to maturity; and (vii) treasury obligations (e.g., T-bills, notes and bonds) or other Securities issued/guaranteed by the U.S.
Government, its agencies, or instrumentalities (e.g., FNMA, GNMA).
“Related Person” means the spouse, domestic partner, child or stepchild, parent or stepparent, grandchild, grandparent,
sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law (including adoptive relationships)
of an Access Person, who either resides with, or is financially dependent upon, the Access Person, or whose investments are
controlled by the Access Person.
“Reportable Fund” means any Fund for which OFS Advisor or any Affiliate acts as investment adviser, sub-adviser or
underwriter.
“Reportable Security” means every Security and Reportable Fund in which an Access Person or a Related Person has a
Beneficial Ownership or other Beneficial Interest, except for an Exempt Security.
“Security” means any note, stock, treasury stock, bond, debenture, evidence of indebtedness , certificate of interest or
participation in any profit-sharing agreement, collateral-trust certificate, reorganization certificate or subscription, transferable
share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or
other mineral rights, any put, call, straddle, option or privilege on any security (including a certificate of deposit) or on any group
or index of securities (including any interest therein or based on the value thereof), or a put, call, straddle, option or privilege,
entered into on a national securities exchange relating to foreign currency, or in general, any interest or instrument commonly
known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee
of, or warrant or right to subscribe to or purchase, any of the foregoing.
6
6 Note that, for most purposes, evidences of indebtedness are treated as “Securities” for securities law purposes; insider trading prohibitions are an exception to this general rule.
11
Note that Security has a different definition for purposes of the Inside Information Policy of the Code.
B.
RECORDKEEPING AND REPORTING REQUIREMENTS
Under the Advisers Act and the Company Act, OFS Adviser and each OFS Fund are required to keep records of
transactions in Reportable Securities in which Access Persons have Beneficial Ownership or a direct or indirect Beneficial
Interest.
1.
Reports
The following personal Securities holdings and transaction reporting requirements have been adopted to enable each of
OFS Adviser and each OFS Fund to satisfy their legal and regulatory requirements:
In all cases, within ten (10) calendar days from the date of commencement of employment (or other engagement or
arrangement) with the Firm, every new Access Person shall submit to the Compliance Department, through the
Firm’s automated compliance system, the required information about any Affiliated Accounts (such information
must be current as of a date no more than forty-five (45) calendar days prior to the date the person becomes an
Access Person);
Within sixty (60) calendar days of becoming an Access Person, every new Access Person must transfer all Affiliated
Accounts in which the Access Person or his or her Related Persons have direct influence or control in the
investment decisions (“Non-Managed Accounts”) and in which Reportable Securities are held or are capable of
being held to a broker-dealer to which the Compliance Department has access via the Firm’s automated
compliance system (an “Approved Broker”). Subsequently, any new Non-Managed Accounts opened on behalf of
such Access Person or his or her Related Person in which Reportable Securities will be held or transacted must be
established with an Approved Broker. The Compliance Department maintains a list of Approved Brokers, which
can be found on the Firm’s automated compliance system site. Holdings and transactions in Reportable Securities
in these accounts are electronically reported to the Compliance Department by the Approved Brokers through the
automated compliance system.
Any exception to the Approved Broker policy above must be approved in writing by a Compliance Officer.
By the Compliance Due Date and no later than thirty (30) calendar days after each quarter end, every Access Person is
required to certify all Affiliated Accounts via the Firm’s automated compliance system. Any updates to an Access
Person’s accounts must be reported via the Firm’s automated compliance system within thirty (30) calendar days
of opening or closing of such Affiliated Account.
By the Compliance Due Date and no later than thirty (30) calendar days after each quarter end, every Access Person is
required to certify via the Firm’s automated compliance system, all transactions in Reportable Securities in Non-
Managed Accounts, as recorded by the system during the quarter. Any transactions in Reportable Securities in a
Non-Managed
12
Account not included within the Firm’s automated compliance system should be reported separately by the Access
Person.
•
By the Compliance Due Date and no later than forty-five (45) calendar days following the end of each calendar
year (i.e., February 14), every Access Person is required to certify, via the Firm’s automated compliance system,
such Access Person’s Affiliated Accounts and Reportable Securities holdings in all Non-Managed Accounts as of
year-end. Any holdings in Reportable Securities in a Non-Managed Account not included within the Firm’s
automated compliance system should be reported separately by the Access Person.
2.
Determining Whether an Account is an Affiliated Account
In most cases, determining whether an Access Person or his or her Related Person has Beneficial Ownership of or a
Beneficial Interest in the Reportable Securities held in an account (which would make such account an Affiliated Account for
purposes hereof) is a straight-forward process. It is, however, important to note that, in some cases, an owner of an equity interest
in an entity may be considered to have Beneficial Ownership of the assets of that entity. In general, equity holders are not deemed
to have Beneficial Ownership of Securities held by an entity that is not “controlled” by the equity holders or in which the equity
holders do not have or share investment control over the entity’s portfolio. Because the determination of whether an equity holder
controls an entity or its investment decisions can be complicated, Access Persons are encouraged to seek guidance from a
Compliance Officer. To the extent such guidance is not sought, any failure by an Access Person to properly identify all Affiliated
Accounts will be treated as a violation of the Code.
3.
Managed Accounts
The Firm recognizes that it may be impossible or impractical for accounts that are controlled or invested by a third party,
such as an investment adviser or broker (“Managed Accounts”), to comply with the Reporting and Restricted List procedures of
the Code. Therefore, Managed Accounts are exempted from such procedures, provided that the Access Person cedes any and all
control over investment decisions for the account (other than general asset class and objectives guidelines) to such third party and
does not communicate with such person with respect to individual transactions for the account. Special rules apply with respect to
whether an Access Person “controls” the investment decisions of an entity in which he or she invests; guidance from a
Compliance Officer should be sought in such instances.
The Firm requires that general information regarding Managed Accounts, including broker, account title, account number,
and the status of the account, be reported through the Firm’s automated compliance system. In order to properly establish a
Managed Account, the Access Persons is required to provide to the Compliance Department evidence that full investment
discretion has been provided to the third-party investment adviser or broker (e.g., provide the investment management
agreement). Upon establishing a Managed Account in the Firm’s automated compliance system and quarterly thereafter, the
Access Person is required to certify within the Firm’s automated compliance system that he or she does not participate, directly or
indirectly in individual investment decisions in the Managed Account or be made aware of such decisions before transactions are
executed.
4.
Non-Transferable Accounts
The Firm recognizes that it may be impossible or impracticable for certain types of Non-Managed Accounts (e.g. 401(k)
accounts) of Access Persons or their Related Persons with other employers, an
13
account pledged to secure a personal loan, etc. to be transferred to an Approved Broker. A Compliance Officer may exempt any
such Non-Managed Account from the Approved Broker procedures set forth above provided that the Access Person shall be
responsible for reporting transactions and holdings of Reportable Securities (e.g. employer shares) in such account as set forth
above and complying with the Restricted List procedures with respect to such Non-Managed Accounts.
The Firm requires that all such “non-transferable” Non-Managed Accounts be reported to the Compliance Department so
that an exemption may properly be granted. General information regarding such accounts must be reported through the Firm’s
automated compliance system. A Compliance Officer may, as a condition to exempting such Affiliated Accounts, require,
initially and periodically thereafter, copies of account statements, a certification from the Access Person, or such other
information as such Compliance Officer deems prudent.
5.
Transactions Subject to Review
Transactions and holding information reported via the Firm’s automated compliance system will be reviewed by a
Compliance Officer and compared against the investments made or considered by each of the Advisory Clients. Such review and
comparison are designed to evaluate compliance with the Code and further, to determine whether there have been any violations
of applicable law. Reporting made by a Compliance Officer is reviewed by a different Compliance Officer so that no Compliance
Officer is reviewing his or her own reporting.
C.
STATEMENT OF RESTRICTIONS
1.
Restricted List
No Access Person or Related Person may make a trade Personal Securities Trade in the Securities of an issuer
listed on the Firm’s Restricted List. Before an Access Person or his/her Related Person makes a Personal Securities Trade, the
Access Person must review the Restricted List and confirm that neither the Security to be traded nor the relevant issuer are listed
thereon. The information that a particular issuer or Security has been placed on the Restricted List is itself sensitive and
confidential. The contents of the Restricted List should never be communicated to persons outside of the Firm except in the
limited circumstances in which a Compliance Officer has determined that it is necessary and appropriate to disclose such
information for bona fide business purposes. The Firm may place an issuer on the Restricted List at any time without prior notice
to Access Persons. Therefore, Access Persons who obtain Securities of an issuer that is later placed on the Restricted List may be
“frozen in,” or prohibited from disposing of such Securities, until the issuer has been removed from the Restricted List. Because
Access Persons are already required to obtain pre-approval for the purchase or sale of any Private Placement (see below), the
Restricted List is limited to the Securities of issuers with a class of publicly-traded Securities.
(a)
Securities
The name of an issuer or Security could be placed on the Restricted List for many reasons, including when:
•
•
the Firm, any investment adviser Affiliate, or an Advisory Client purchases a Security of a particular issuer or
such Security is Being Considered for Purchase or Sale;
the Firm or any investment adviser Affiliate executes a confidentiality agreement with or relating to an issuer;
14
•
•
•
•
•
the Firm, any investment adviser Affiliate, or an Advisory Client has declared itself “Private” with respect to
an issuer in an electronic workspace;
the Firm becomes bound by a fiduciary obligation or other duty (for example, because an Access Person has
become a board member of an issuer);
an Access Person becomes a member of an issuer’s board on behalf of the Firm or a Portfolio Company;
an Access Person becomes aware of (or is likely to become aware of) MNPI about a Security or issuer; or
the Firm, as determined by a Compliance Officer, has determined to include an issuer to avoid the appearance
of impropriety and protect the Firm’s reputation for integrity and ethical conduct.
(b)
Procedures
The Compliance Department maintains and updates the Firm’s Restricted List. It is the responsibility of Access Persons,
however, to ensure that the Firm’s Restricted List is accurate. Please refer to the Confidentiality Policy for further information on
the relevant procedures.
• Additions: Access Persons who become aware of any of the circumstances set forth in subsection 1.a) above,
or who for any other reason believe an issuer or Security should be added to the Restricted List, should
immediately notify a Compliance Officer in order to ensure that the Restricted List is updated.
• Deletions: When the circumstances set forth in subsection 1.a) above no longer exist, or the Firm is no longer
bound by the obligations giving rise to the inclusion of an issuer or Security on the Restricted List, Access
Persons should notify a Compliance Officer so that the proposed removal can be assessed and the name of the
issuer or Security can be promptly removed, as necessary, from the Restricted List.
• Changes: From time to time, the Compliance Department will update the Restricted List as contemplated by
this Personal Investment Policy and the Confidentiality Policy. Access Persons are responsible for checking
the Restricted List in all cases before engaging in any Personal Securities Trade.
Generally, Securities that are on the Restricted List because OFS Adviser or an investment adviser Affiliate has entered into a
confidentiality agreement, declared itself “private” or otherwise accessed MNPI with respect to an issuer, must stay on the list for
at least one hundred eighty (180) calendar days after the applicable Advisory Client(s) have liquidated the holding or last
accessed MNPI on the relevant Security or issuer of such Security. A Compliance Officer may determine that a longer or shorter
“stay” period is appropriate for issuers or Securities in such Compliance Officer’s sole discretion.
2.
Private Placements and Initial Public Offerings
No IPO or Private Placement may be purchased or sold for any Affiliated Account, except with the prior, express written
approval of (i) the CCO or designee; or (ii) where such Access Person is the CCO, the prior written approval of the Chief Legal
Officer. Requests to make such investments shall be made through the Firm’s automated compliance system. A record of such
approval (or denial), and a brief description of the reasoning supporting such decision will be maintained in accordance with the
recordkeeping requirements of the Advisers Act and the Company Act.
15
3.
Trades by OFS Funds Directors
OFS Funds Directors are prohibited from trading any OFS Funds Portfolio Security.
4.
Trades of OFS Funds Securities, CMCT, or other Affiliated Securities
Access Persons and their Related Person’s are prohibited from buying or selling, or buying or selling options on, futures
or other derivatives related to, shares issued by OFS Funds, CIM Commercial Trust Corporation (“CMCT”), the Cole/CCO
Capital REITs and any affiliated securities (“Affiliated Securities”), except with prior, express written approval of the CCO or
designee.
Access Persons may engage in transactions on Affiliated Securities upon approval by the CCO or designee, which
generally may be granted only during an open trading window. All approved transactions must be completed within three (3)
business days from the date of approval, but before the close of any applicable trading window. If the approved transaction is
not completed within three (3) business days, the Access Person must seek a new preapproval from the CCO or designee.
5.
Trades by Access Persons Serving on Company Boards
Companies for which Access Persons serve on the board of directors may permit members of its board of directors to
purchase or sell stock based on a predetermined schedule (such as a Rule 10b5-1 Plan that is approved by the company
(“Predetermined Schedule”). Personal Securities Trades made in accordance with a Predetermined Schedule by Access Persons
who serve on the board of directors of such companies are exempt from the restriction against trading in Securities added to the
Restricted List after the adoption of the Predetermined Schedule, however such Predetermined Schedules must be disclosed to a
Compliance Officer prior to making the trade and are subject to the reporting requirements set forth in the section above. Further,
purchases and sales of Securities by such company’s directors during an established trading window may be permitted with prior
notice to, and at the discretion of, a Compliance Officer.
7)
6.
No Personal Trades Through OFS Adviser’s Traders
No Personal Securities Trades may be effected through OFS Adviser’s trading personnel.
7.
Use of Brokerage for Personal or Family Benefit
No Access Person may, for direct or indirect personal or a Related Person’s benefit, execute a trade with a broker by using
the influence (actual or implied) of OFS Adviser or any Access Person’s influence (actual or implied) with OFS Adviser.
8.
No “Front Running”
While the Code contains policies and procedures designed to promote ethical conduct with respect to Personal Securities
Trades, irrespective of the application of any particular trading policy or restriction, no Personal Securities Trades may be
effected by any Access Person who is aware or should be aware that (i) there is a pending buy or sell order in the Securities of
that same issuer for any Advisory Client of OFS Adviser, or (ii) a purchase or sale of the Securities of that same issuer can
reasonably be anticipated for an OFS Adviser Advisory Client in the next five (5) calendar days. No Personal Securities Trade
may be executed with a view toward making a profit from a change in price of such Security resulting from anticipated
transactions by or for OFS Adviser’s Advisory Clients.
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9.
No Short Sale Transactions
No Access Person or Related Person may enter into a short sale transaction or any transaction that has the same
economic effect (e.g., short common stock, purchase a put option or sell a naked call option) on any Security of an issuer for
which a position is held long by an Advisory Client.
10. Acquiring Five (5) Percent or more of a Publicly Traded Company
Access Persons are required to report to a Compliance Officer any ownership exceeding five (5) percent of a class of
equity securities of a publicly traded company that they or their Related Persons or Family Members have a beneficial interest
in.
D.
REQUIREMENTS OF DISINTERESTED DIRECTORS
The Recordkeeping, Reporting, and Statement of Restrictions provisions listed above (except those in Section II(C)(3-4)
do not apply to any OFS Fund Director who is not an interested person of any OFS Fund within the meaning of Section 2(a)(19)
of the Company Act (“Disinterested Directors”) of each of the OFS Funds, except as the following describes. A Disinterested
Director need only report a transaction if, at the time of a Personal Securities Trade in a Reportable Security, the Disinterested
Director knew, or, in the ordinary course of fulfilling his or her duties as a director, should have known that during the fifteen
(15) day period immediately preceding or after the date of the transaction, their OFS Fund purchased or sold the Security or the
Security was Being Considered for Purchase or Sale by their OFS Fund or OFS Adviser.
7 A Rule 10b5-1 plan is a written plan for trading Securities that is designed in accordance with Rule 105-1(c). Any person executing pre-planned transactions pursuant to a Rule
10b5-1 plan that was established in good faith at a time when that person was unaware of material nonpublic information has an affirmative defense against accusations of insider trading, even if
actual trades made pursuant to the plan are executed at a time when the individual may be aware of material nonpublic information.)
17
III. INSIDE INFORMATION POLICY
A.
INTRODUCTION
The prohibitions against insider trading set forth in the federal securities laws play an essential role in maintaining the
fairness, health and integrity of our markets. These laws also establish fundamental standards of business conduct that govern our
daily activities and help to ensure that Advisory Client’s trust and confidence are not compromised in any way. Consistent with
these principles, OFS Adviser forbids any Supervised Person from (i) trading Securities for the Firm, any Advisory Client or any
account in which a Supervised Person has a Beneficial Interest, if that Supervised Person is “aware” of material and nonpublic
information (“MNPI” or “Inside Information”) concerning an issuer; or (ii) communicating MNPI to others in violation of the
law. This conduct is frequently referred to as “insider trading.” This policy applies to all Supervised Persons, and extends to
activities within and outside of each Supervised Person’s duties at OFS Adviser or with any OFS Fund.
The term “insider trading” is not specifically defined under the federal securities laws (most guidance in this area can be
found under case law and related judicial decisions), but generally is used to refer to improper trading in Securities on the basis
of MNPI (whether or not the person trading is an insider). A person is generally deemed to trade “on the basis of MNPI if that
person is aware of MNPI when making the purchase or sale, regardless of whether the person specifically relied on the
information in making an investment decision. It is generally understood that the law prohibits trading by an insider on the basis
of MNPI about the Security or issuer. To be held liable under the law, the person trading generally must violate a duty of trust or
confidence owed directly, indirectly or derivatively to the issuer of that Security or the shareholders of that issuer, or to any other
person who is the source of the material nonpublic information (e.g., an employer). The law also prohibits the communication of
inside information to others and provides for penalties and punitive damages against the “tipper” even if he or she does not gain
personally from the improper trading.
8
8 OFS Adviser often transacts in syndicated or other loan interests on the basis of information that is not available to other members of the syndicate, or to the public in general;
however, for the limited purpose of this policy, “Securities” (as defined in the Exchange Act) do not include such loan interests or other “evidences of indebtedness.” If you are uncertain as to
whether a particular investment is a “security” for purposes of this policy, contact the Legal/Compliance Department.
18
B.
KEY TERMS
1. What is a “Security”?
9
11
10
The Exchange Act, which covers insider trading, defines “Security” very broadly to include most types of financial
instruments, except bank debt. There may be instances where Supervised Persons receive information about such investments
that is not generally known by other institutional investors - even those institutional investors who may be similarly situated (e.g.,
lenders that are privy to nonpublic information and have access to bank-level information or primary lender meetings). Although
trading in “non-security” investments on the basis of nonpublic information is not prohibited by federal securities laws, such
trading may be prohibited by fiduciary obligations, other federal or state statutes, or contractual obligations such as
confidentiality agreements . In situations where OFS Adviser has access
to which other potential
investors/counterparties may not have access, Supervised Persons should consult with a Compliance Officer or Senior
Management, as appropriate, as to whether a proposed purchase or sale of an investment should be made, and, if made, should
include the use of a “Big Boy” letter (see the Firm’s Confidentiality Policy), a confidentiality agreement (see the Firm’s
Confidentiality Policy), or, if the investment is a syndicated loan, the execution by OFS Adviser of the standard LSTA form,
which includes disclosure concerning the possibility of access to such information. In addition, even if trading in a “non-security”
investment is permissible because the above standards are met, Supervised Persons are still prohibited from trading in any
Securities issued by the relevant borrower, either for an Advisory Client or themselves, if the information obtained would be
material with respect to the Securities transaction. This would also include indirect participation in such a transaction; for
example, by participating in an Investment Committee meeting in which a decision regarding such Securities was being
considered.
to MNPI
2. Who is an Insider?
The concept of an “insider” is broad. It includes officers, directors and employees of a company. In addition, a person can
be a “temporary insider” if he or she enters into a special confidential relationship in the conduct of a company’s affairs and as a
result is given access to information solely for the company’s purposes. A temporary insider can include, among others, a
company’s attorneys, accountants, consultants, bank lending officers, investment advisers (such as OFS Adviser) and the
employees of such organizations. OFS Adviser may become a temporary insider by signing a confidentiality agreement or by
accessing material nonpublic information on a private electronic workspace.
9 For purposes of the Inside Information Policy, “Security” means any note, stock, treasury stock, security feature, security-based swap, bond, debenture, certificate of interest or
participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share,
investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities
(including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general,
any instrument commonly known as a “security”; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase,
any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months,
exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.
10 Note that, for most purposes, evidences of indebtedness are treated as “securities” for securities law purposes; insider trading prohibitions are an exception to this general rule.
11 The Compliance Department maintains the Private Company List and Advisory Clients may not transact in these investments unless an exception to the prohibition from trading a
security on the Private Company List has been granted by the CCO or his or her designee. Please refer to the Confidentiality Policy for more information..
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3. What is Material Information?
Trading on inside information is not a basis for liability unless the information is material. “Material” information
generally is defined as information with respect to which there is a substantial likelihood that a reasonable investor would
consider it important in making his or her investment decisions, or information that is reasonably certain to have a substantial
effect on the price of a company’s Securities.
Among other things, the following types of information are generally regarded as “material”:
dividend or earnings announcements
additions to reserves for bad debts or contingent liabilities
expansion or curtailment of company or major division operations
new product/service/marketing announcements
new supplier/manufacturing/production announcements
•
• write-downs or write-offs of assets
•
•
• merger, joint venture announcements
•
•
• material charge/impairment announcements
•
•
• material restatement of previously issued financial statements
•
•
•
•
•
•
•
discovery or research developments
criminal indictments and civil and government investigations, litigations and/or settlements
pending labor disputes
debt service or liquidity problems
bankruptcy or insolvency problems
tender offers, stock repurchase plans, etc.
recapitalizations
senior management changes
changes in control
Material information does not have to relate to a company’s business. For example, in Carpenter v. U.S., 18 U.S. 316
(1987), the Supreme Court considered as material certain information about the contents of a forthcoming newspaper column that
was expected to affect the market price of a Security. In that case, a Wall Street Journal reporter was found criminally liable for
disclosing to others the dates that reports on various companies would appear in the Journal and whether those reports would be
favorable or not.
4. What is Nonpublic Information?
Information is nonpublic until it has been effectively communicated to the marketplace. One must be able to point to
some fact to show that the information is generally public. For example, information found in a report filed with the SEC, or
appearing in Dow Jones, Reuters Economic Services, The Wall Street Journal, Bloomberg or other publications of general
circulation would be considered public. Supervised Persons should seek specific guidance from a Compliance Officer in
situations where information concerning an issuer or its affiliated entities (e.g., subsidiaries) may not have been made available to
the investment community generally but was made available to a group of institutional investors.
20
5.
Contacts with Companies
From time to time, Supervised Persons may meet with members of senior management at publicly-traded companies
associated with an investment, or a prospective investment. OFS Adviser may make investment decisions on the basis of the
Firm’s conclusions formed through such contacts and analysis of publicly-available information regarding foreign and U.S.
companies. Difficult legal issues arise when, during these contacts, a Supervised Person becomes aware of MNPI about those
companies. This could happen, for example, if a company’s chief financial officer prematurely discloses quarterly results to a
Supervised Person, a broker or a securities analyst, or if an investor relations representative makes a selective disclosure of
adverse news to a handful of investors. In such situations, Supervised Persons should immediately contact a Compliance Officer
if he or she believes that he or she may have received MNPI about a publicly traded company.
6.
Tender Offers
Tender offers raise heightened concerns in the law of insider trading for two reasons. First, tender offer activity often
produces gyrations in the price of the target company’s Securities. Trading during this period is more likely to attract regulatory
attention (and produces a disproportionate percentage of insider trading cases). Second, the SEC has adopted a rule which
expressly forbids trading and “tipping” while in possession of MNPI regarding a tender offer received from the tender offeror, the
target company or anyone acting on behalf of either. Supervised Persons should exercise caution any time they become aware of
nonpublic information relating to a tender offer.
7.
Penalties for Insider Trading
Penalties for trading on or inappropriately communicating MNPI are severe, both for the individuals involved and their
employers. A person can be subject to some or all of the penalties below, even if he or she does not personally benefit from the
violations. Penalties include:
•
•
•
•
•
civil injunctions;
disgorgement of profits;
punitive damages (i.e., fines for the person who committed the violation of up to three (3) times the profit
gained or loss avoided, irrespective of whether the person actually benefited personally);
felony convictions which include possible jail sentences; and
fines and sanctions against the employer or other controlling person.
C.
INSIDER TRADING PROCEDURES
The following procedures have been established to assist Supervised Persons in avoiding insider trading, and to aid OFS
Adviser in preventing, detecting and imposing sanctions for insider trading. The following procedures should be read in
conjunction with other policies set forth in this Code, and in the Compliance Policies.
1.
Identifying MNPI
Before trading in the Securities of a company about which they may have potential MNPI, Supervised Persons should ask
themselves the following questions:
21
•
•
Is the information material? Is this information that an investor would consider important in making his or her
investment decisions (e.g., whether the investor should buy, sell or hold a Security)? Is this information that
would substantially affect the market price of the Securities if generally disclosed?
Is the information nonpublic? To whom has this information been provided? Has the information been
effectively communicated to the marketplace by being published in Reuters, The Wall Street Journal,
Bloomberg or other publications of general circulation? Remember that information that has been
communicated to a relatively large group of sophisticated investors does not by itself mean that the
information is public (e.g., large group of potential bank debt investors during an invitation only meeting).
2.
Restricting Access to MNPI
Care should be taken so that MNPI is secure. For example, files containing MNPI should be sealed or locked; access to
computer files containing MNPI should be restricted. As a general matter, materials containing such information should not be
removed from the Firm’s premises and, if they are, appropriate measures should be maintained to protect the materials from loss
or disclosure. Among other things, Supervised Persons should:
•
•
•
•
distribute materials containing MNPI only on a need-to-know” basis;
take care so that telephone conversations cannot be overheard when discussing matters involving MNPI (e.g.,
speaker telephones should generally be used in a way so that outsiders who might be in OFS Advisers’ offices
are not inadvertently exposed to this information);
limit access to offices and conference rooms when these rooms contain MNPI; and
not leave materials containing MNPI displayed on the computer viewing screen when they leave their
computers unattended.
3.
Review and Dissemination of Certain Investment Related Information
As part of its consideration of certain investments, including in certain types of “non-Securities” (e.g., bank debt
instruments), the Firm may enter into confidentiality agreements with third parties (e.g., issuers, sponsors, syndicate members or
other lenders) that could have implications for the Firm’s compliance with federal securities laws. Those agreements may
sometimes contain so-called “stand-still” provisions, which specifically restrict the Firm’s activity in Securities of identified
issuers, but more typically simply raise the possibility that nonpublic information may be disclosed to the recipient and seek the
receiving party’s acknowledgment of that understanding and agreement not to disclose any MNPI transmitted. The procedures for
executing confidentiality agreements are set forth in the Firm’s Confidentiality Policy. Many potential counterparties or their
agents specifically require that potential investors sign a confidentiality agreement before they will be provided access to
investment-related information. Because of the importance of our policies regarding access to and use of confidential
information, confidentiality agreements may only be reviewed, negotiated and executed as set forth in the Firm’s Confidentiality
Policy.
4.
Determination of Materiality
Given the unique asset classes in which OFS Adviser typically invests, Supervised Persons may receive detailed
information about a Security that may not be otherwise readily available to the investing
22
public. The issue of “materiality” and the ultimate determination as to whether the information provided rises to the level of
MNPI should not be made independently by a Supervised Person. Rather, the individual should contact a Compliance Officer so
that an analysis may be performed and an informed determination may be made. Unless otherwise determined by a Compliance
Officer, in consultation with investment staff and outside legal counsel, as appropriate, information received about a publicly-
traded Security that is not readily available to the investing public shall be deemed to be and treated as material.
Policies and Procedures Relating to Paid Research Consultants and Expert Network Firms Regarding
5.
Securities
While it is permissible to utilize consultants who may provide information relating to Securities as part of the research
process, OFS Adviser must be particularly sensitive about the information that these consultants provide. Accordingly, OFS
Adviser has adopted the following procedures with which all Supervised Persons must comply in connection with their contact
and interaction with paid consultants who provide information relating to Securities or their issuers:
• The Supervised Person must obtain the prior written approval of a Compliance Officer before engaging a paid
consultant if; (1) substantive information related to a Security or its issuer will be discussed as part of the
engagement; and/or (2) the consultant is either employed with an issuer of Securities at the time of the engagement
or was employed with such an issuer within six months of the engagement. The Compliance Department will
maintain a log of all such engagements.
•
Prior to the commencement of a phone call or meeting with a paid consultant where (i) it is anticipated that
substantive information related to a Security or its issuer will be discussed, and/or (ii) the consultant is either
employed with an issuer of Securities at the time of the call or was employed with such an issuer within six
months of the call, the Supervised Person must inform such consultant that:
(i)
the Firm may invest in the public and non-public Securities and private debt markets,
(ii)
the Firm does not wish to receive MNPI,
(iii)
(iv)
the purpose of speaking with such consultant is to obtain his/her independent insight as it relates to a
particular industry, sector or company, and
such consultant should not share any MNPI or confidential information that he/she may have a duty to
keep confidential or that he/she otherwise should not disclose.
• The Supervised Person should also confirm with such consultant that he/she will not be violating any agreement,
duty or obligation such consultant may have with any employer or other institution.
•
Supervised Persons must keep and maintain logs of all call or conversations with such consultants, which should
include the date/time of the conversation, the name of the consultant and a summary of the information discussed
on the call.
23
•
In the event that a Supervised Person learns or has reason to suspect that he or she has been provided with
confidential or MNPI relating to a Security from a consultant, the Supervised Person must immediately contact a
Compliance Officer prior to either communicating such confidential or material nonpublic information to anyone
else, or making any investment or trading decisions.
Agreements with paid research consultants and expert network firms who provide information relating to Securities must
be pre-approved by a Compliance Officer and may be signed only by (i) Bilal Rashid on behalf of Senior Management in the case
of Advisory Clients, after consultation with, and approval by, a Compliance Officer. Depending on the facts and circumstances,
the CCO may impose other conditions on the engagement of consultants or on the conduct of the engagement, including, but not
limited to, the participation of a Compliance Officer on any phone calls or in any correspondence between the consultant and the
Firm.
24
IV. GIFTS, ENTERTAINMENT AND POLITICAL ACTIVITIES
A.
INTRODUCTION
OFS Adviser attempts to minimize any activity that might give rise to a question as to whether the Firm’s objectivity as a
fiduciary has been compromised.
B.
GIFTS AND ENTERTAINMENT POLICY
One possible area of fiduciary concern relates to providing or receiving meals, gifts or entertainment from third parties
with which OFS Adviser or its Advisory Clients, including each OFS Fund, joint business partners, service providers and current
and prospective clients (collectively “Outside Parties” and each an “Outside Party”), do business.
Supervised Persons are prohibited from soliciting anything of value from Outside Parties. Further, no Supervised Person
may give or receive any gift, meal or entertainment that could or is intended to influence decision-making or to make a person
beholden, in any way, to another person or company that seeks to do or is currently doing business with the Firm or its Advisory
Clients. Lavish or luxurious gifts and entertainment, and gifts and entertainment that are received or provided on a frequent basis,
are generally deemed to meet this standard and, unless a Compliance Officer indicates otherwise, are prohibited. In addition,
depending upon a Supervised Person’s responsibilities, specific regulatory requirements may dictate the types and extent of gifts
and entertainment that Supervised Persons may give or receive. The Firm is committed to competing solely on the merit of its
products and services, and Supervised Persons should avoid any actions that create a perception that favorable treatment of
Outside Parties by the Firm was sought, received or given in exchange for gifts or entertainment.
1.
Business Meals
Generally, Supervised Persons may share meals with Outside Parties in the ordinary course of business. Meals received
by Supervised Persons from Outside Parties should not exceed $250 per person per meal. Meals provided by Supervised
Persons to Outside Parties are generally permissible and should also not exceed $250 per person per meal, subject to
certain pre-approval requirements applicable to providing meals to Public Officials. A “Public Official” means any person who
is employed full- or part-time by a government, or by regional subdivisions of governments, including states, provinces,
districts, counties, cities, towns and villages or by independent agencies, state-owned businesses, state-controlled businesses or
public academic institutions. This would include, for example, employees of sovereign wealth funds, government-sponsored
pension plans (i.e. pension plans for the benefit of government employees), heads of state, lower level employees of state-
controlled businesses and government-sponsored university endowments. “Public Official” also includes political party
officials and candidates for political office.
2.
Providing Business Gifts
Any Supervised Person who offers a gift to an Outside Party must be sure that it cannot reasonably be interpreted as an
attempt to gain an unfair business advantage or otherwise reflect negatively upon the Firm. In addition, a Supervised Person may
never use personal funds or resources to do something that cannot be done with Firm resources. A gift may include any services
or merchandise of any kind or
25
discounts on merchandise or services and other items of value. Supervised Persons are prohibited from giving gifts of cash,
cash equivalents (such as gift cards and gift certificates) and securities to Outside Parties. This policy does not prohibit the
provision of occasional or nominal non-cash gift items, such as holiday gifts, to Outside Parties so long as the value of the gift(s)
provided by a Supervised Person to any one recipient over a calendar year does not exceed $250. Once the aggregate amount
proposed to be provided by a Supervised Person to any one recipient during one calendar year exceeds $250, that
Supervised Person must obtain pre-approval from a Compliance Officer. Such request should be submitted via the Firm’s
automated compliance system. Further, anything of value (e.g., meals, beverages, gifts and entertainment) to be provided to
Public Officials requires pre-approval from a Compliance Officer. Such requests should be submitted via the Firm’s
automated compliance system.
The Compliance Department shall periodically review gifts provided for compliance with this Code as part of quarterly
expense reimbursement review process.
If you are unsure of OFS Adviser’s policy with respect to providing gifts in any circumstance, you should consult with a
Compliance Officer.
3.
Receiving Gifts
No Supervised Person should obtain any material personal benefits or favors because of his or her position with the Firm.
Each Supervised Person’s decisions on behalf of the Firm must be free from undue influence. Soliciting gifts from Outside
Parties is strictly prohibited. A gift may include any services or merchandise of any kind or discounts on merchandise or services
and other items of value. Supervised Persons are prohibited from receiving gifts of cash, cash equivalents (such as gift cards and
gift certificates) and securities from Outside Parties. This policy does not prohibit the receipt of occasional or nominal non-cash
gift items, such as holiday gifts, so long as the value of the gift(s) received by a Supervised Person from any one source over a
calendar year does not exceed $250. Any gift that will cause the total received by that Supervised Person from a single source to
exceed $250 for the calendar year, and any additional gift thereafter received during the calendar year, requires pre-approval by a
Compliance Officer. Also, one of the following actions will generally be required: return the gift, donate the gift to charity or to
OFS for a corporate raffle or keep the gift and write a check to charity for the difference between the fair market value of the gift
and $250. Such requests should be submitted via the Firm’s automated compliance system.
Gifts in any amount received by a Supervised Person from an Outside Party, except for gifts of nominal value
(such as logo items, including pens, notepads, coffee mugs and baseball caps) must be disclosed in the Firm’s automated
compliance system at the time of receipt.
4.
Entertainment
The gift policies above are not intended to prohibit the acceptance or provision of non-extravagant entertainment that
facilitates the handling of the Firm’s business. Thus, normal and customary entertainment (e.g., concerts, exhibitions or games
featuring local sports teams, where the person providing the entertainment is present), that is not frequent or “lavish” and does
not influence the selection of vendors or other Outside Parties, is acceptable. Note, entertainment provided by or to a Supervised
Person where the person providing the entertainment does not attend should be treated as a “gift.” Also, if you bring a guest to an
entertainment event hosted by an Outside Party, your guest’s ticket is considered as a “gift” for purposes of this policy. Business
meals are not considered entertainment for purposes of this Policy (see Section IV.B. 1. “Business Meals” above for additional
information).
26
No Supervised Person may provide or accept extravagant or excessive entertainment to or from an Outside Party. Any
entertainment that a Supervised Person reasonably expects to exceed $1,000 in market value per person must be pre-
approved by a Compliance Officer. Such requests should be submitted via the Firm’s automated compliance system. Further,
entertainment of any value to be provided to Public Officials requires pre-approval from a Compliance Officer. Such requests
should be submitted via the Firm’s automated compliance system.
Entertainment in any amount received by a Supervised Person must be reported via the Firm’s automated
compliance system within a reasonable amount of time of participating in such entertainment and no later than 30
calendar days of participation in such event. Entertainment provided to Outside Parties is not required to be reported in the
Firm’s automated compliance system, as OFS Adviser shall track all entertainment expenses in the Firm’s corporate accounting
records. The Compliance Department periodically reviews entertainment provided by Supervised Persons for compliance with
this Code as part of its quarterly expense reimbursement review process.
5.
Travel and Lodging
You may occasionally be invited to conferences or other events by Outside Parties, which include an offer of travel and/or
lodging. In the event that you receive such offers, you must obtain approval from the Compliance Department prior to accepting
the travel and/or lodging. Requests to accept travel or lodging that appear to be exorbitant in price and/or luxurious in nature will
generally be denied. All travel and lodging received from Outside Parties must be disclosed. Requests and disclosures should be
submitted via the Firm’s automated compliance system.
6.
Providing Meals, Gifts and Entertainment to Public Officials and Union Employees
Specific requirements and restrictions apply regarding the offering of meals, gifts and entertainment to Public Officials
and can vary depending on the governmental branch/body, state or other jurisdiction. For example, many government pension
plans place strict limits on the value of any meal provided by a service provider, such as the Firm, to the pension plans’
employees. Certain jurisdictions even ban service providers from providing anything of value to their public employees,
including promotional items of nominal value. Penalties for violating these gift laws can range from monetary fines to
disqualification from RFP participation and rescindment of existing investment mandates. Private unions are subject to
Department of Labor gift rules and regulations and service providers, such as the Firm, must comply with prescribed limits and
reporting requirements when providing gifts and meals to union employees. Accordingly, it is against Firm policy to offer or
give meals, gifts, entertainment or anything of value to Public Officials or union officials or employees unless the regulations
applicable to that individual permit acceptance of such items. Further, Supervised Persons are prohibited from offering or
giving anything of value, including nominal items or snacks, to Public Officials or union officials or employees without
first obtaining the approval of a Compliance Officer. Such requests for prior approval should be submitted via the Firm’s
automated compliance system.
If you are unsure of applicable laws, rules and regulations with respect to providing gifts, meals and entertainment to
Public Officials and union employees or officials in any circumstance, you should consult with a Compliance Officer.
27
7.
Receipt of Meals, Gifts or Entertainment by Traders from Brokers/Agent Bank Employees
Traders or other investment professionals with the ability to influence the selection of brokers/agent banks with respect to
trading in Securities and broadly syndicated loans are prohibited from receiving meals, gifts or entertainment in any value from
an employee of such broker/agent bank without preapproval from a Compliance Officer. Such request for pre-approval should be
submitted via the Firm’s automated compliance system.
Charitable Contributions
8.
Certain charitable contributions require preapproval by a Compliance Officer. Charitable contributions by an employee, at
the request or for the benefit of a Public Official or a Public Official’s immediate family member or close associate may be
permissible only if the Compliance Officer can reasonably conclude that the contribution is lawful, ethical and in compliance
with the policies and standards under this Code.
In all cases, the Compliance Officer shall ensure that the beneficiary of the contribution is an organization formed under
section 501(c)(3) of the U.S. Internal Revenue Code or is otherwise operating exclusively as a non-profit civic charity that is
not involved in any political or lobbying activity.
C.
POLITICAL ACTIVITY POLICY
1.
Introduction
12
The SEC, along with certain states, municipalities and public pension plans, have adopted regulations limiting or
completely disqualifying investment advisers from providing services to, or accepting placements from, a government entity if
certain political contributions are made or solicited by the Firm, certain of its Supervised Persons, or, in some instances, a
Supervised Person’s Related Persons. Under these “pay to play” regulations, a single prohibited political contribution to a
candidate or officeholder, political party, political action committee or other political organization at practically every level of
government (including local, state and federal) may preclude the Firm from providing services to, or accepting placements from,
the applicable government entity and may compel the firm to repay compensation received by the Firm in connection with such
services or placements.
13
OFS Adviser and its Affiliates (other than natural persons, as provided below) generally do not make or solicit
contributions in any amount to any federal, state, county or local political campaign, candidate or officeholder, or any
political organization (e.g., political party committee and political action committee (“PAC”)). As such, Supervised
Persons are prohibited from making or soliciting contributions in the name of or on behalf of OFS Advisers and/or its
Affiliates unless otherwise approved by the Compliance Department and a member of Senior Management.
No Supervised Person of the Firm or his/her Related Persons may engage in any Political Activity for any federal,
state, county, or local political campaign, candidate or officeholder, or any political organizations (e.g., political party
committee, political action committee), without the prior written approval of a Compliance Officer. Such requests should
be submitted via the Firm’s automated compliance system. “Political Activity” is defined as monetary or in-kind campaign
contributions to, or for the benefit of, any government official, candidate running for office, political party or legislative
leadership, politically active non-profit, ballot measure committee or PAC as well as the
28
solicitation and coordination of campaign contributions. Volunteering for a campaign that does not include solicitation or
coordination of campaign contributions does not require pre-approval.
A Supervised Person must submit a Political Activity pre-approval request on behalf of the Supervised Person (or his or her
Related Person) through the Firm’s automated compliance system prior to engaging in Political Activity, and such submission
must include all pertinent information related to the proposed activity, including, but not limited to, the individual wishing to
contribute, amount of the contribution, the name of the intended recipient, the nature of the recipient’s candidacy, whether the
proposed recipient holds an existing political office (whether local, state or federal), and whether the Supervised Person (or his or
her Related Person, where applicable) is legally entitled to vote for the proposed recipient. Because of the serious nature of the
sanctions applicable to a pay to play violation, requests to engage in Political Activity for candidates seeking election to state and
local offices will generally be limited and/or declined, depending on whether a Supervised Person is legally entitled to vote for
the candidate. As such, requests to donate to state or local candidates and officials may be approved up to $350, where the
Supervised Person is legally entitled to vote for the candidate, and is limited to $150 or less, where a Supervised Person is not
legally entitled to vote for the candidate or where the relevant jurisdiction imposes more restrictive limits.
The Firm expects that every Supervised Person will explain the importance of compliance with this policy to his/her
Related Persons, and ensure their clear understanding of the obligation to follow these requirements. Moreover, the applicable
laws in this area are complex and a trap for the unwary -- no Supervised Person should attempt to decide for himself or herself
whether a Political Activity is prohibited or permissible. Supervised Persons are responsible for complying with and tracking
their own Political Activity limits.
2.
Indirect Violations
The pay to play laws also prohibit actions taken indirectly that the Firm or its Supervised Persons could not take directly
without violating the law. For example, it is improper and unlawful to provide funds to a third party (such as a consultant or
attorney) with the understanding that the third party will use such funds to make an otherwise prohibited contribution. Such
indirect violations may result in a prohibition on the Firm from receiving compensation and result in other sanctions, including
possible criminal penalties. If any Supervised Person learns of facts and circumstances suggesting a possible indirect violation,
that Supervised Person must report such facts and circumstances to a Compliance Officer immediately.
3.
Periodic Disclosure
In order to ensure compliance with this policy, every Supervised Person must submit via the Firm’s automated compliance
system, a disclosure and certification setting forth all Political Activity by the Supervised Person and his/her Related Persons for
the previous two (2) years or confirming that no such contributions have been made, prior to and at commencement of
employment. Supervised Persons are also required to disclose and certify all Political Activity in which they or their Related
Persons have engaged on a quarterly basis.
29
12 Contributions include cash, checks, gifts, subscriptions, loans, advances, deposits of money, “in kind” contributions (e.g., the provision of free professional services) or anything else of value
provided for the purpose of influencing an election for a federal, state or local office, including any payments for debts incurred in such an election.
13 Solicitation of contributions encompasses any fundraising activity on behalf of a candidate, campaign or political organization, including direct solicitation, hosting of events and/or
aggregating, coordinating or “bundling” the contributions of others.
30
V. OUTSIDE AFFILIATIONS POLICY
A.
OUTSIDE BUSINESS ACTIVITIES
From time to time, Supervised Persons may be asked and/or desire to own, work for or serve as a general partner,
managing member, principal, proprietor, consultant, agent, representative, or employees of an outside organization, all of which
are considered “Outside Business Activities”. These organizations may include public or private corporations, limited and general
partnerships, businesses, family trusts, endowments and foundations.
Outside Business Activities may, however, create potential conflicts of interest and/or provide access to MNPI. So that
the Compliance Department can address these potential issues, Supervised Persons must obtain prior approval from their
supervisor and a Compliance Officer to engage in Outside Business Activities. Approval should be requested through the
Firm’s automated compliance system.
Prior approval is generally not required to assume positions with charitable and other non-profit organizations or civic
and trade associations. However, if your responsibilities include the provision of investment advice, such as participation on the
investment committee of a non-profit organization, or the organization is a client or business partner of the Firm or its Affiliates,
you must obtain pre-approval from a Compliance Officer.
B.
DIRECTOR AND OFFICER POSITIONS
In other instances, Supervised Persons may be asked or desire to serve as a director, trustee or officer for organizations
unaffiliated with the Firm and its Affiliates (“Outside Director and Officer Positions”) or for organizations that are affiliated with
the Firm, such as a Portfolio Company (“Affiliated Director and Officer Positions”).
As a prospective board member, trustee or officer, it is critical that you coordinate with the Compliance Department to
ensure that potential conflicts of interest are addressed and special measures are taken to handle and maintain the
confidentiality of any information that you may obtain in your new position. As such, in the event that you wish to assume an
Outside Director and Officer Position, you must obtain prior approval from your supervisor and a Compliance Officer.
However, if you are assuming an Affiliated Director and Officer Position, you must only disclose your new position to the
Compliance Department and in a timely manner. Such disclosures and requests for pre-approval should be made through the
Firm’s automated compliance system.
You are prohibited from engaging in any outside activity previously described, without the prior approval or disclosure
required for such activity. Outside Director and Officer Positions will be approved only if any associated conflicts of interest
and insider trading risks, actual or apparent, can be satisfactorily mitigated or resolved. Please note, however, you are not
required to seek pre-approval or provide disclosure to serve as a board member or officer of a personal residential organization,
such as a homeowner’s association or coop board, or an entity formed for personal estate planning purposes.
31
C.
EMPLOYEE RELATIONSHIPS
The Firm needs to be aware of relationships maintained by Supervised Persons with third parties that may create the
potential for conflicts of interest. The Firm uses this information to assess the need to prohibit certain Supervised Persons from
handling matters where such a conflict exists or institute mitigating controls surrounding the levels of business activity or
contract negotiations where a relationship posing a conflict has been identified. This may include situations where a Supervised
Person’s Related Person or Family Member is: 1) a director, an owner of more than 5% of or a senior management executive of
a public company, 2) employed or engaged by a company with which the Firm is conducting or may conduct business, and such
Related Person or Family Member is in a position to make decisions with respect to such business or is directly involved with
the relationship with the Firm (e.g. a law firm, real estate broker or general contractor), or 3) employed with or serving in an
office of a state or local government entity (e.g., city retirement system, state office, public university), in which the Related
Person or Family Member has the authority, directly or indirectly, to affect the entity’s current or prospective relationship with
the Firm. Such relationships should be disclosed using the Firm’s automated compliance system.
For purposes of this Code, “Family Member” means the parents, children, brothers, sisters, aunts, uncles and in-laws of
the Supervised Person regardless of residence, financial dependence or investment control.
32
VI.
ANTI-CORRUPTION POLICY
The purpose of the OFS Adviser’s Anti-Corruption Policy is to ensure compliance by the Firm and its employees with
applicable anti-bribery laws. As such, the Policy prohibits OFS Adviser employees from offering, promising, paying or
providing, or authorizing the promising, paying or providing (in each case, directly or indirectly, including through third parties)
of any amount of money or anything of value to any Public Official or Private Sector Counterparty (defined below), including a
person actually known to be an immediate family member of such parties, in order to improperly influence or reward any action
or decision by such person for the Firm’s benefit.
Neither funds from the Firm nor funds from any other source may be used to make any such payment or gift on behalf
of or for the Firm’s benefit.
(a)
Requirements for Interaction with Public Officials
The U.S. Foreign Corrupt Practices Act (also referred to as the “FCPA”) is a U.S. federal law that generally prohibits the
bribery of foreign officials (also referred to as “Public Officials”), directly or indirectly, by any individual, business entity or
employee of any such entity for the purpose of obtaining or retaining business and/or gaining an unfair advantage.
“Public Official”, for purposes of this Policy, includes any person who is employed full- or part-time by a government,
or by regional subdivisions of governments, including states, provinces, districts, counties, cities, towns and villages or by
independent agencies, state-owned businesses, state-controlled businesses or public academic institutions. This would include,
for example, employees of sovereign wealth funds, government-sponsored pension plans (i.e. pension plans for the benefit of
government employees), heads of state, lower level employees of state-controlled businesses and government-sponsored
university endowments. “Public Official” also includes political party officials and candidates for political office. For example, a
campaign contribution is the equivalent of a payment to a Public Official under the FCPA. In certain cases, providing a payment
or thing of value to a person actually known to be an immediate family member of a Public Official or a charity associated with
a Public Official may be the equivalent of providing a thing of value to the Public Official directly.
Under the FCPA, the employees of public international organizations, such as the African and Asian Development
Banks, the European Union, the International Monetary Fund, the United Nations and the Organization of American States, are
considered Public Officials.
In April 2010, the United Kingdom, passed its own anti-bribery law, the Bribery Act 2010 (the “Bribery Act”).
However, the law went further than the FCPA, prohibiting not only bribery of “foreign public officials” but also the bribery of
private parties. Further, the Bribery Act, unlike the FCPA, prohibits “passive” bribery or the acceptance of bribes, in addition to
“active” bribery, or giving a bribe.
The OFS Adviser Anti-Corruption Policy is applicable to all OFS Adviser employees, regardless of their country of
citizenship or residency. Although the FCPA and the Bribery Act are the principal anti-bribery statutes applicable to OFS
Adviser and its employees worldwide, OFS Adviser and its employees are also subject to the applicable anti-bribery laws of all
jurisdictions in which they do business and any jurisdictions involved in OFS Adviser’s cross-border transactions. OFS Adviser
33
employees who are not U.S. or U.K. citizens or residents may also be subject to anti- bribery laws of their countries of
citizenship or residency, as applicable.
Prior to transacting business (including merger and acquisition transactions and the retention of certain third parties)
outside the U.S. or U.K., you should consult with the CCO or Legal Department or local counsel to obtain the applicable
policies, requirements and procedures pertinent to complying with the applicable anti-bribery laws of such jurisdictions.
(b)
Requirements for Interaction with Private Sector Counterparty Representatives
OFS employees should be sensitive to anti-corruption issues in their dealings directly or indirectly, with Private Sector
Counterparty Representatives. A Private Sector Counterparty Representative is an owner, employee or representative of a
private entity, such as a partnership or corporation, with which OFS Adviser is conducting or seeking to conduct business.
Individuals affiliated with current and prospective clients, service providers and other third parties in such a capacity are all
“Private Sector Counterparty Representatives”.
Bribery concerns may arise in connection with your day-to-day interactions with Private Sector Counterparty
Representatives, regarding, for example, the offering of investment opportunities or the solicitation of OFS Adviser business by
service providers. It is important to be mindful of the anti-bribery laws and to avoid any action that may give the appearance of
bribery in your dealings with such individuals. While you may engage in the exchange of gifts, meals and entertainment with
Private Sector Counterparty Representatives in the normal and routine course of business, it is important that you adhere to this
Policy and to the Gifts, Meals and Entertainment Policy of this Code to avoid running afoul of the anti-corruption laws.
(c)
Requirements for Retention of Certain Third Parties
Payments by OFS Adviser to Third Parties raise special concerns under the FCPA, Bribery Act and any other applicable
anti-bribery laws. A “Third Party” is defined as any consultant, investor, joint venture partner, local partner, broker, agent or
other third party retained or to be retained by OFS Adviser for purposes of dealing with a Public Official or a Private Sector
Counterparty Representative on behalf of OFS Adviser or where the contemplated services are likely to involve business-related
interactions with a Public Official or Private Sector Counterparty Representative on behalf of OFS Adviser. Because of the risk
that a Third Party may seek to secure business for OFS Adviser or its Advisory Clients through violations of the FCPA or
Bribery Act and that OFS Adviser or its Advisory Client’s Portfolio Companies may be subject to liability under the FCPA or
Bribery Act as a result, any agreement with a Third Party that is engaged to do business with OFS Adviser is subject to specific
due diligence and contractual requirements to assure compliance with the Firm’s Anti-Corruption Policy.
(d)
Pre-Approval Reporting, Due Diligence and Contractual Requirements
Unless otherwise authorized by the CCO or a Compliance Officer, you are required to adhere to the following policies
and procedures, designed to facilitate your compliance with applicable anti-bribery laws.
You must obtain pre-approval for the following types of expenses, donations and contributions:
34
•
•
•
•
gifts, meals, entertainment, travel or lodging provided to a Public Official or a person actually known to be an
immediate family member or guest of a Public Official;
charitable donations made on behalf of OFS Adviser at the request of a Private Sector Counterparty
Representative;
charitable donations made in an individual capacity or on behalf of OFS Adviser at the request of or for the
benefit of a Public Official; and
any political contributions.
Pre-approval requests should be submitted via the Firm’s automated compliance system.
(e) Reporting Obligations
On a quarterly basis, you must certify to all previously approved and/or disclosed political contributions, charitable
donations, items to Public Officials and all gifts and entertainment received, as specified above. Certification must be made via
the Firm’s automated compliance system.
35
VII. IT ACCEPTABLE USE POLICY
The OFS IT Acceptable Use Policy is hereby incorporated into this Code by reference. Supervised Persons are required
to fully comply with all policies and procedures and certification and training requirements associated with the OFS IT
Acceptable Use Policy, and any instance of non-compliance will likely constitute a violation of this Code. The OFS IT
Acceptable Use Policy is available to all Supervised Persons on the Firm’s public network drive and automated compliance
system.
36
VIII. PERSONAL USE OF FIRM RESOURCES AND RELATIONSHIP POLICY
OFS email and other OFS-sponsored communication mediums (e.g., Skype for Business) (collectively, “OFS
communication platforms”) should generally only be used for conducting OFS business. While occasional use of OFS email for
personal communications is permissible, Supervised Persons are prohibited from using OFS communication platforms to
conduct personal outside business activities (including those involving political, civic or charitable solicitations), which may
imply OFS’s sponsorship or endorsement of such activities. Use of OFS stationary for personal correspondence or other personal
purposes is strictly prohibited. All communications made via OFS communication platforms are the property of OFS and use of
such platforms must comply with the OFS Computer Acceptable Use Policy.
Absent an exemption granted by Human Resources or Compliance, Supervised Persons are prohibited from assigning
tasks associated with personal business activities to staff or soliciting assistance for such personal endeavors from staff in a
junior role to the requestor.
Further, Supervised Persons are prohibited from leveraging relationships with OFS clients, vendors and other business
contacts (“OFS Contacts”) gained over the course of their employment for personal purposes. Personal purposes include, but are
not limited to, charitable and political activities, including solicitation of donations, and the conduct of personal business
activities.
OFS reserves the right to search and monitor the computer files of and OFS communication platforms used by any Supervised
Persons, without advance notice, for purposes of monitoring compliance with this policy.
37
Whistleblower Information.....................................................................................Attachment A
ATTACHMENTS
The listed attachment is also available on OFS Adviser’s public network drive and automated compliance system, or from the
Compliance Department.
1
Whistleblower Hotline Information
ATTACHMENT A
As part of our Whistleblower Policy, we have established an anonymous hotline where you will be able to report any suspected
violation(s) of our various codes of conduct, any activity that may adversely affect the Firm’s business or reputation, or any other
inappropriate conduct of which you may become aware. Although we encourage you to report any concerns or problems you may
have to your supervisor, there may be times where you may not feel comfortable voicing these concerns or problems to them.
Due to this, we have set up an anonymous hotline with Report It Systems. Through Report It, you can report any situations or
concerns without having any adverse ramifications for you. If you desire or need to report a violation or misconduct, you can do
so by either calling the Report It hotline or by logging into their website. The OFS Report It username and password information
is listed below.
•
•
Username: OFS Management
Password: OFS Management
1. Toll free hotline number: 1-877-778-5463 (1 -877-RPT-LINE)
2. Website address: www.reportit.net
a. Click on the Report It Online link
b. Click on the Report It Now button
c. Type the Username/Password under the “Create Report” column
d. Click on the Report It Now button
You will be able to anonymously file a wide variety of reports from questionable accounting or auditing matters to harassment or
hostile work environment through either the website or the toll free hotline number. Any report that you submit will be handled
anonymously by Report It and your name will not be provided by Report It to any OFS contact. We hope that by implementing
this hotline service, you will be able to keep our organization free from fraudulent and unethical accounting/auditing activity
while achieving our goal to maintain and conduct our business at the utmost level of professional standards and best practices.
2
LIST OF SUBSIDIARIES
OFSCC-FS Holdings, LLC, a Delaware limited liability company.
OFSCC-MB, LLC, a Delaware limited liability company.
OFS SBIC I GP, LLC, a Delaware limited liability company.
OFS SBIC I, LP, a Delaware limited liability company.
Exhibit 21.1
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
OFS Capital Corporation:
We consent to the incorporation by reference in the registration statement on Form N-2 of OFS Capital Corporation of our report dated
March 5, 2021, with respect to the consolidated statement of assets and liabilities of OFS Capital Corporation and subsidiaries, including the
consolidated schedule of investments, as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in net
assets, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes, which report appears in
the December 31, 2020 annual report on Form 10-K of OFS Capital Corporation, and the report dated March 5, 2021 on the senior securities
table attached as an exhibit to the Form 10-K. We also consent to the reference to our firm under the heading “Senior Securities” in the Form
10-K.
/s/ KPMG LLP
Chicago, Illinois
March 5, 2021
Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
OFS Capital Corporation
Chicago, Illinois
We hereby consent to the incorporation by reference in the Registration Statement on Form N-2 (No. 333-236517) of OFS Capital
Corporation of our report dated March 15, 2019, relating to the consolidated financial statements which appears in this Form 10-K and our
report dated March 15, 2019, except for the additions related to the total senior securities and related information reflected in the senior
securities table, as to which the date is June 21, 2019 on the senior securities table attached as an exhibit to this Form 10-K.
/s/ BDO USA, LLP
Chicago, Illinois
March 5, 2021
Exhibit 31.1
I, Bilal Rashid, Chief Executive Officer of OFS Capital Corporation certify that:
1. I have reviewed this annual report on Form 10-K of OFS Capital Corporation;
Certification of Chief Executive Officer
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Dated this 5th day of March 2021.
By:
/s/ Bilal Rashid
Bilal Rashid
Chief Executive Officer
Exhibit 31.2
I, Jeffrey A. Cerny, Chief Financial Officer of OFS Capital Corporation certify that:
1. I have reviewed this annual report on Form 10-K of OFS Capital Corporation;
Certification of Chief Financial Officer
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Dated this 5th day of March 2021.
By:
/s/ Jeffrey A. Cerny
Jeffrey A. Cerny
Chief Financial Officer
Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K for the year ended December 31, 2020 (the “Report”) of OFS Capital Corporation (the
“Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Bilal Rashid, the Chief Executive Officer of the Registrant,
hereby certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Registrant.
Name:
Date:
/s/ Bilal Rashid
Bilal Rashid
March 5, 2021
Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K for the year ended December 31, 2020 (the “Report”) of OFS Capital Corporation (the
“Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Jeffrey A. Cerny, the Chief Financial Officer of the Registrant,
hereby certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Registrant.
Name:
Date:
/s/ Jeffrey A. Cerny
Jeffrey A. Cerny
March 5, 2021
Report of Independent Registered Public Accounting Firm on Supplemental Information
Exhibit 99.1
To the Stockholders and Board of Directors
OFS Capital Corporation:
We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
statements of assets and liabilities of OFS Capital Corporation and subsidiaries (the Company), including the consolidated schedules of
investments, as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in net assets, and cash flows for
each of the years in the two-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements),
and our report dated March 5, 2021 expressed an unqualified opinion on those consolidated financial statements.
The senior securities information as of December 31, 2020 and 2019 included in Part II, Item 5 of the Annual Report on Form 10-K of the
Company under the caption “Senior Securities” (the senior securities table) has been subjected to audit procedures performed in conjunction
with the audits of the Company’s consolidated financial statements. The senior securities table is the responsibility of the Company’s
management. Our audit procedures included determining whether the senior securities table reconciles to the consolidated financial
statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of
the information presented in the senior securities table. In forming our opinion on the senior securities table, we evaluated whether the senior
securities table, including its form and content, is presented in conformity with the instructions to Form N-2. In our opinion, the senior
securities table as of December 31, 2020 and 2019 is fairly stated, in all material respects, in relation to the consolidated financial statements
as a whole.
/s/ KPMG LLP
Chicago, Illinois
March 5, 2021
Report of Independent Registered Public Accounting Firm on Supplemental Information
Exhibit 99.2
To the Board of Directors and Stockholders
OFS Capital Corporation
Chicago, Illinois
We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
financial statements of OFS Capital Corporation (the “Company”) for the year ended December 31, 2018, included in the Annual Report on
Form 10-K, and have expressed an unqualified opinion therein dated March 15, 2019. We have also previously audited the consolidated
financial statements of the Company as of and for the years ended December 31, 2017, 2016, 2015 and 2014 (not presented herein), and we
expressed an unqualified opinion on those consolidated financial statements.
The senior securities table included in Part II, Item 5 of the Annual Report on Form 10-K of the Company under the caption “Senior
Securities” (the “Senior Securities Table”) has been subjected to audit procedures performed in conjunction with the audit of the Company’s
consolidated financial statements for the aforementioned years. The Senior Securities Table is the responsibility of the Company’s
management. Our audit procedures included determining whether the Senior Securities Table reconciles to the consolidated financial
statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of
the information presented in the Senior Securities Table. In forming our opinion on the Senior Securities Table, we evaluated whether the
Senior Securities Table, including its form and content, is presented in conformity with Item 4.3 and the Instructions to Item 4.3 of Form N-2.
In our opinion, the Senior Securities Table for each of the five years in the period ended December 31, 2018 is fairly stated, in all material
respects, in relation to the consolidated financial statements as a whole.
/s/ BDO USA, LLP
Chicago, Illinois
March 15, 2019, except for the additions related to Total Senior Securities and related information reflected in the Senior Securities Table, as
to which the date is June 21, 2019.