作爲OFSAm的全資子公司，OFS Capital Management，LLC，根據1940年修正的投資顧問法的註冊投資顧問，主要專注於投資於中市場貸款和廣泛銀團貸款，CLOs和其他結構化信貸投資中的債務和權益頭寸
Term
Explanation or Definition
OFS Services
OFS Capital Services, LLC, a wholly owned subsidiary of OFSAM and affiliate of OFS Advisor
OFSAM
Orchard First Source Asset Management, LLC, a subsidiary of OFSAM Holdings and a full-service provider of capital and leveraged finance solutions to U.S. corporations
OFSAM Holdings
Orchard First Source Asset Management Holdings, LLC, a holding company consisting of asset management businesses, including OFS Advisor, a registered investment adviser focusing primarily on investments in middle market loans and broadly syndicated loans, debt and equity positions in CLOs and other structured credit investments, and OFS CLO Management, LLC, OFS CLO Management II, LLC and OFS CLO Management III, LLC, each a registered investment adviser focusing primarily on investments in broadly syndicated loans
OFSCC-FS
OFSCC-FS, LLC, an indirect wholly owned subsidiary of the Company
OFSCC-FS Assets
Assets held by the Company through OFSCC-FS
OFSCC-MB
OFSCC-MB, Inc., 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
OID
Original issue discount
Order
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
Parent
OFS Capital Corporation
PIK
Payment-in-kind, non-cash interest or dividends payable as an addition to the loan or equity security producing the income
Portfolio Company Investment
A debt or equity investment in a portfolio company. Portfolio Company Investments exclude Structured Finance Securities
Prime Rate
United States Prime interest rate
RIC
Regulated investment company under the Code
SBA
United States Small Business Administration
SBIC
A fund licensed under the SBA Small Business Investment Company Program
SBIC I LP
OFS SBIC I, LP, a wholly owned subsidiary of the Company and former SBIC
SEC
United States Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
SOFR
Secured Overnight Financing Rate
Stock Repurchase Program
The open market stock repurchase program for shares of the Company’s common stock under Rule 10b-18 of the Exchange Act
The Unsecured Notes Due February 2026 and the Unsecured Notes Due October 2028
Unsecured Notes Due February 2026
The Company’s $125.0 million aggregate principal amount of 4.75% notes due February 10, 2026
Unsecured Notes Due October 2028
The Company’s $55.0 million aggregate principal amount of 4.95% notes due October 31, 2028
Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 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, cash equivalents, 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 Holdings;
•constraint on investment due to access to material nonpublic information;
•restrictions on our ability to enter into transactions with our affiliates;
•the use of borrowed money to finance a portion of our investments;
•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;
•the belief that the seniority of our debt investments in a borrower’s capital structure may provide greater downside protection against adverse economic changes, including those caused by the impacts of interest rate changes and elevated inflation rates, the ongoing war between Russia and Ukraine, the escalated armed conflict in the Middle East, instability in the U.S. and international banking systems, uncertainties related to the 2024 U.S. presidential election, the risk of recession or a shutdown of U.S. government services and related market volatility on our business, our portfolio companies, our industry and the global economy;
•the percentage of investments that will bear interest on a floating rate or fixed rate basis;
•the holding period of our investments;
•the impact of alternative reference rates on our business, including potential additional interest rate reductions approved by the U.S. Federal Reserve, which may impact our investment income, cost of funding and the valuation of our investments;
•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;
•the general economy and its impact on the industries in which we invest;
•the impact of current political, economic and industry conditions, including changes in the interest rate environment, inflation, significant market volatility, supply chain and labor market disruptions, including those as a result of strikes, work stoppages or accidents, resource shortages and other conditions affecting the financial and capital markets, which, in turn, impacts our business prospects and the prospects of our portfolio companies;
•the impact of the ongoing war between Russia and Ukraine, the escalated armed conflict in the Middle East and general uncertainty surrounding the financial and political stability of the United States, the United Kingdom, the European Union and China;
1
•our ability to consummate credit facilities in the future on commercially reasonable terms, if at all;
•the impact of information technology system failures, data security breaches, data privacy compliance, network disruptions, and cybersecurity attacks;
•the belief that we have sufficient levels of liquidity to support our existing portfolio companies;
•the belief that our cash and cash equivalent balances are not exposed to any significant credit risk as a result of the previous banking failures;
•the fluctuation of the fair value of our investments due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value; 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, those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include, among others, those described or identified in “Part I—Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed on March 5, 2024. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.
We have based the forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by Section 21E of the Exchange Act.
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Assets and Liabilities (unaudited)
(Dollar amounts in thousands, except per share data)
September 30, 2024
December 31, 2023
Assets
Investments, at fair value:
Non-control/non-affiliate investments (amortized cost of $361,429 and $384,339, respectively)
$
308,866
$
333,456
Affiliate investments (amortized cost of $11,172 and $19,191, respectively)
85,868
86,831
Total investments, at fair value (amortized cost of $372,601 and $403,530, respectively)
394,734
420,287
Cash and cash equivalents
20,278
45,349
Interest receivable
1,464
2,217
Receivable for investments sold
795
—
Prepaid expenses and other assets
1,267
1,965
Total assets
$
418,538
$
469,818
Liabilities
Revolving lines of credit
$
69,100
$
90,500
Unsecured Notes (net of deferred debt issuance costs of $1,933 and $2,667, respectively)
178,067
177,333
SBA debentures (net of deferred debt issuance costs of $0 and $20, respectively)
—
31,900
Interest payable
1,739
3,712
Payable to adviser and affiliates (Note 3)
2,936
3,556
Payable for investments purchased
14,680
—
Other liabilities
711
813
Total liabilities
$
267,233
$
307,814
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 September 30, 2024 and December 31, 2023, respectively
$
—
$
—
Common stock, par value of $0.01 per share, 100,000,000 shares authorized, 13,398,078 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively
134
134
Paid-in capital in excess of par
184,841
184,841
Total accumulated losses
(33,670)
(22,971)
Total net assets
151,305
162,004
Total liabilities and net assets
$
418,538
$
469,818
Number of common shares outstanding
13,398,078
13,398,078
Net asset value per share
$
11.29
$
12.09
See Notes to Consolidated Financial Statements (unaudited).
3
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Operations (unaudited)
(Dollar amounts in thousands, except per share data)
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Investment income
Interest income:
Non-control/non-affiliate investments
$
10,264
$
14,121
$
31,677
$
41,175
Payment-in-kind interest and dividend income:
Non-control/non-affiliate investments
349
170
1,183
610
Affiliate investments
279
324
812
804
Total payment-in-kind interest and dividend income
628
494
1,995
1,414
Dividend income:
Non-control/non-affiliate investments
11
10
32
19
Affiliate investments
—
—
2,437
630
Total dividend income
11
10
2,469
649
Fee income:
Non-control/non-affiliate investments
15
26
175
222
Total investment income
10,918
14,651
36,316
43,460
Expenses
Interest expense
4,022
4,913
12,711
14,798
Base management fee
1,472
1,796
4,473
5,573
Income Incentive Fee
901
1,348
3,159
3,866
Professional fees
391
397
1,219
1,262
Administration fee
337
380
1,184
1,302
Other expenses
192
427
934
1,196
Total expenses
7,315
9,261
23,680
27,997
Net investment income
3,603
5,390
12,636
15,463
Net realized and unrealized gain (loss) on investments
Net realized gain (loss) on non-control/non-affiliate investments
(3,221)
—
(8,106)
275
Net realized loss on affiliate investments
(7,885)
—
(6,506)
—
Net realized loss on control investments
—
—
—
(10,516)
Income tax (expense) benefit on net realized gains on investments
(10)
117
(10)
(54)
Net unrealized appreciation (depreciation) on non-control/non-affiliate investments
(1,794)
1,405
(1,681)
(4,328)
Net unrealized appreciation (depreciation) on affiliate investments
11,217
(4,917)
7,057
(6,040)
Net unrealized appreciation on control investment
—
—
—
9,056
Deferred tax expense on net unrealized appreciation
(222)
—
(423)
—
Net loss on investments
(1,915)
(3,395)
(9,669)
(11,607)
Loss on extinguishment of debt
—
(194)
—
(213)
Net increase in net assets resulting from operations
$
1,688
$
1,801
$
2,967
$
3,643
Net investment income per common share – basic and diluted
$
0.27
$
0.40
$
0.94
$
1.15
Net increase in net assets resulting from operations per common share – basic and diluted
$
0.12
$
0.14
$
0.22
$
0.27
Distributions declared per common share
$
0.34
$
0.34
$
1.02
$
1.00
Basic and diluted weighted-average common shares outstanding
13,398,078
13,398,078
13,398,078
13,398,078
See Notes to Consolidated Financial Statements (unaudited).
4
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets (unaudited)
(Dollar amounts in thousands, except per share data)
Preferred Stock
Common Stock
Paid-in capital in excess of par
Total accumulated losses
Total net assets
Number of shares
Par value
Number of shares
Par value
Balances at December 31, 2022
—
$
—
13,398,078
$
134
$
184,841
$
(4,552)
$
180,423
Net increase in net assets resulting from operations:
Net investment income
—
—
—
—
—
15,463
15,463
Net realized loss on investments, net of taxes
—
—
—
—
—
(10,295)
(10,295)
Net unrealized depreciation on investments, net of taxes
—
—
—
—
—
(1,312)
(1,312)
Loss on extinguishment of debt
—
—
—
—
—
(213)
(213)
Dividends declared
—
—
—
—
—
(13,398)
(13,398)
Net decrease for the nine month period ended September 30, 2023
—
—
—
—
—
(9,755)
(9,755)
Balances at September 30, 2023
—
$
—
13,398,078
$
134
$
184,841
$
(14,307)
$
170,668
Balances at June 30, 2023
—
$
—
13,398,078
$
134
$
184,841
$
(11,553)
$
173,422
Net decrease in net assets resulting from operations:
Net investment income
—
—
—
—
—
5,390
5,390
Income tax benefit on net realized investment gains
—
—
—
—
—
117
117
Loss on extinguishment of debt
—
—
—
—
—
(194)
(194)
Net unrealized depreciation on investments, net of taxes
—
—
—
—
—
(3,512)
(3,512)
Dividend declared
—
—
—
—
—
(4,555)
(4,555)
Net decrease for the three month period ended September 30, 2023
—
—
—
—
—
(2,754)
(2,754)
Balances at September 30, 2023
—
$
—
13,398,078
$
134
$
184,841
$
(14,307)
$
170,668
5
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets (unaudited)
(Dollar amounts in thousands, except per share data)
Preferred Stock
Common Stock
Paid-in capital in excess of par
Total accumulated losses
Total net assets
Number of shares
Par value
Number of shares
Par value
Balances at December 31, 2023
—
$
—
13,398,078
$
134
$
184,841
$
(22,971)
$
162,004
Net increase in net assets resulting from operations:
Net investment income
—
—
—
—
—
12,636
12,636
Net realized loss on investments, net of taxes
—
—
—
—
—
(14,622)
(14,622)
Net unrealized appreciation on investments, net of taxes
—
—
—
—
—
4,953
4,953
Dividends declared
—
—
—
—
—
(13,666)
(13,666)
Net decrease for the nine month period ended September 30, 2024
—
—
—
—
—
(10,699)
(10,699)
Balances at September 30, 2024
—
$
—
13,398,078
$
134
$
184,841
$
(33,670)
$
151,305
Balances at June 30, 2024
—
$
—
13,398,078
$
134
$
184,841
$
(30,803)
$
154,172
Net increase in net assets resulting from operations:
Net investment income
—
—
—
—
—
3,603
3,603
Net realized loss on investments, net of taxes
—
—
—
—
—
(11,116)
(11,116)
Net unrealized appreciation on investments, net of taxes
—
—
—
—
—
9,201
9,201
Dividend declared
—
—
—
—
—
(4,555)
(4,555)
Net decrease for the three month period ended September 30, 2024
—
—
—
—
—
(2,867)
(2,867)
Balances at September 30, 2024
—
$
—
13,398,078
$
134
$
184,841
$
(33,670)
$
151,305
See Notes to Consolidated Financial Statements (unaudited).
6
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows(unaudited)
(Dollar amounts in thousands)
Nine Months Ended September 30,
2024
2023
Cash flows from operating activities
Net increase in net assets resulting from operations
$
2,967
$
3,643
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:
Net realized loss on investments
14,612
10,241
Income tax expense on net realized investment gains
10
54
Loss on extinguishment of debt
—
213
Net unrealized (appreciation) depreciation on investments, net of taxes
(4,953)
1,312
Amortization of Net Loan Fees
(1,296)
(1,238)
Amendment fees collected
246
166
Payment-in-kind interest and dividend income
(1,995)
(1,491)
Accretion of interest income on Structured Finance Securities
(6,039)
(8,534)
Amortization of deferred debt issuance costs
1,134
1,153
Amortization of intangible asset
69
306
Purchase and origination of portfolio investments
(60,748)
(34,721)
Proceeds from principal payments on portfolio investments
52,707
48,207
Proceeds from sale or redemption of portfolio investments
22,242
18,803
Proceeds from distributions received from portfolio investments
11,053
10,610
Changes in operating assets and liabilities:
Interest receivable
753
423
Interest payable
(1,973)
(1,957)
Payable to adviser and affiliates
(620)
(112)
Receivable for investments sold
(795)
—
Payable for investments purchased
14,680
—
Other assets and liabilities
(139)
(75)
Net cash provided by operating activities
41,915
47,003
Cash flows from financing activities
Distributions paid to common stockholders
(13,666)
(13,398)
Borrowings under revolving lines of credit
3,000
24,650
Repayments under revolving lines of credit
(24,400)
(38,250)
Repayments of SBA debentures
(31,920)
(19,000)
Net cash used in financing activities
(66,986)
(45,998)
Net increase (decrease) in cash and cash equivalents
(25,071)
1,005
Cash and cash equivalents
Beginning of period
45,349
14,937
End of period
$
20,278
$
15,942
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest
$
13,550
$
15,602
See Notes to Consolidated Financial Statements (unaudited).
Supermarkets and Other Grocery (except Convenience) Stores
First Lien Debt
11.45%
SOFR+
6.75%
7/20/2022
8/1/2029
9,870
9,654
9,763
6.6
10
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2024
(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
Honor HN Buyer Inc.
Services for the Elderly and Persons with Disabilities
First Lien Debt (15)
10.50%
SOFR+
5.75%
10/15/2021
10/15/2027
$
6,417
$
6,352
$
6,417
4.2
%
First Lien Debt (15)
10.50%
SOFR+
5.75%
10/15/2021
10/15/2027
4,058
4,010
4,058
2.7
First Lien Debt (Revolver) (5)
12.75%
Prime+
4.75%
10/15/2021
10/15/2027
95
87
95
0.1
First Lien Debt (Delayed Draw) (5) (15)
10.50%
SOFR+
5.75%
3/31/2023
10/15/2027
3,350
3,324
3,350
2.2
13,920
13,773
13,920
9.2
Idera Inc.
Computer and Computer Peripheral Equipment and Software Merchant Wholesalers
Second Lien Debt
12.15%
SOFR+
6.75%
1/27/2022
3/2/2029
2,683
2,683
2,683
1.8
Inergex Holdings, LLC (11)
Other Computer Related Services
First Lien Debt
11.75% cash / 2.00% PIK
SOFR+
7.00%
10/1/2018
10/1/2026
14,826
14,682
14,752
9.7
First Lien Debt (Revolver)
11.75% cash / 2.00% PIK
SOFR+
7.00%
10/1/2018
10/1/2026
2,344
2,344
2,332
1.5
17,170
17,026
17,084
11.2
Ivanti Software, Inc. (14) (15)
Software Publishers
First Lien Debt
9.83%
SOFR+
4.25%
3/26/2021
12/1/2027
2,910
2,916
2,481
1.6
JP Intermediate B, LLC (6) (15)
Drugs and Druggists' Sundries Merchant Wholesalers
First Lien Debt
11.01%
SOFR+
5.50%
1/14/2021
11/20/2027
4,638
4,491
2,390
1.6
Kreg LLC
Other Ambulatory Health Care Services
First Lien Debt (11) (15)
9.00% cash / 2.50% PIK
SOFR+
4.25%
12/20/2021
12/20/2026
17,470
17,415
16,160
10.7
First Lien Debt (Revolver) (5)
n/m (18)
SOFR+
6.25%
12/20/2021
12/20/2026
—
(4)
(100)
(0.1)
17,470
17,411
16,060
10.6
Medrina LLC
All Other Outpatient Care Centers
First Lien Debt (15)
11.32%
SOFR+
6.00%
10/20/2023
10/20/2029
2,217
2,171
2,239
1.5
First Lien Debt (Delayed Draw) (5) (15)
n/m (18)
SOFR+
6.00%
10/20/2023
10/20/2029
—
(2)
4
—
First Lien Debt (Revolver) (5)
n/m (18)
SOFR+
6.00%
10/20/2023
10/20/2029
—
(7)
—
—
2,217
2,162
2,243
1.5
Metasource, LLC (15)
All Other Business Support Services
First Lien Debt
11.12% cash / 0.50% PIK
SOFR+
6.25%
5/17/2022
5/17/2027
2,744
2,719
2,629
1.7
11
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2024
(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
Nielsen Consumer Inc. (14)
Marketing Research and Public Opinion Polling
First Lien Debt
9.34%
SOFR+
4.75%
8/20/2024
3/6/2028
$
7,000
$
6,965
$
6,988
4.6
%
One GI LLC
Offices of Other Holding Companies
First Lien Debt (15)
11.70%
SOFR+
6.75%
12/13/2021
12/22/2025
7,375
7,329
7,161
4.7
First Lien Debt (15)
11.70%
SOFR+
6.75%
12/13/2021
12/22/2025
3,887
3,861
3,774
2.5
First Lien Debt (Revolver)
11.96%
SOFR+
6.75%
12/13/2021
12/22/2025
1,444
1,436
1,403
0.9
12,706
12,626
12,338
8.1
Planet Bingo, LLC (F/K/A 3rd Rock Gaming Holdings, LLC) (6)
Software Publishers
First Lien Debt
6.50%
N/A
3/13/2018
12/31/2025
16,648
14,113
6,210
4.1
PM Acquisition LLC (10) (20)
All Other General Merchandise Stores
Common Equity (499 units)
9/30/2017
499
925
0.6
Redstone Holdco 2 LP (F/K/A RSA Security) (15)
Computer and Computer Peripheral Equipment and Software Merchant Wholesalers
First Lien Debt (14)
10.26%
SOFR+
4.75%
4/16/2021
4/27/2028
1,715
1,710
1,320
0.9
Second Lien Debt
13.26%
SOFR+
7.75%
4/16/2021
4/27/2029
4,450
4,413
3,386
2.2
6,165
6,123
4,706
3.1
RPLF Holdings, LLC (10) (13)
Software Publishers
Common Equity (345,339 Class A units)
1/17/2018
—
1,720
1.1
RumbleOn, Inc. (15) (16)
Other Industrial Machinery Manufacturing
First Lien Debt (11)
14.27% cash / 1.50% PIK
SOFR+
8.75%
8/31/2021
8/31/2026
2,599
2,529
2,414
1.6
First Lien Debt (11)
14.27% cash / 1.50% PIK
SOFR+
8.75%
8/31/2021
8/31/2026
784
774
729
0.5
Warrants (warrants to purchase up to $218,000 in common stock) (10)
8/31/2021
8/14/2028 (12)
200
22
—
3,383
3,503
3,165
2.1
Sentry Centers Holdings, LLC (10) (13)
Convention and Trade Show Organizers
Preferred Equity (1,603 Series B units)
9/4/2020
160
1
—
12
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2024
(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
Signal Parent, Inc. (14) (15)
New Single-Family Housing Construction (except For-Sale Builders)
First Lien Debt
8.45%
SOFR+
3.50%
3/25/2021
4/3/2028
$
1,790
$
1,780
$
1,617
1.1
%
SSJA Bariatric Management LLC (10) (15)
Offices of Physicians and Mental Health Specialists
First Lien Debt (6)
10.00% PIK
SOFR+
5.25%
8/26/2019
4/30/2025
10,383
9,563
6,867
4.5
First Lien Debt (6)
10.00% PIK
SOFR+
5.25%
12/31/2020
4/30/2025
1,122
1,033
742
0.5
First Lien Debt (6)
10.00% PIK
SOFR+
5.25%
12/8/2021
4/30/2025
2,827
2,600
1,869
1.2
First Lien Debt (Revolver) (6)
10.00% PIK
SOFR+
5.25%
8/26/2019
4/30/2025
290
266
192
0.1
Common Equity (867591 Class F units) (13)
4/10/2024
—
—
—
14,622
13,462
9,670
6.3
SS Acquisition, LLC (8) (15)
Sports and Recreation Instruction
First Lien Debt
12.31%
SOFR+
6.72%
12/30/2021
12/30/2026
3,042
3,028
3,042
2.0
First Lien Debt
13.00%
SOFR+
7.40%
12/30/2021
12/30/2026
1,460
1,452
1,460
1.0
4,502
4,480
4,502
3.0
Staples, Inc. (14) (15) (16)
Business to Business Electronic Markets
First Lien Debt
10.69%
SOFR+
5.75%
5/23/2024
9/4/2029
2,571
2,474
2,343
1.5
Tenneco Inc. (14)
Other Motor Vehicle Parts Manufacturing
First Lien Debt
10.23%
SOFR+
5.00%
8/21/2024
11/17/2028
3,000
2,883
2,857
1.9
Tolemar Acquisition, Inc.
Motorcycle, Bicycle, and Parts Manufacturing
First Lien Debt (15)
10.95% cash / 1.00% PIK
SOFR+
6.00%
10/14/2021
10/14/2026
15,302
15,240
14,537
9.6
First Lien Debt (Revolver) (5)
11.20%
SOFR+
6.00%
10/14/2021
10/14/2026
875
869
798
0.5
16,177
16,109
15,335
10.1
TruGreen Limited Partnership
Landscaping Services
Second Lien Debt
14.01%
SOFR+
8.50%
5/13/2021
11/2/2028
4,500
4,577
4,334
2.9
United Biologics Holdings, LLC (10) (13)
Medical Laboratories
Preferred Equity (151,787 units)
4/16/2013
9
—
—
13
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2024
(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
Wellful Inc. (F/K/A KNS Acquisition Corp.) (14) (15)
Electronic Shopping and Mail-Order Houses
First Lien Debt
11.21%
SOFR+
6.25%
4/16/2021
4/21/2027
$
6,475
$
6,456
$
4,071
2.7
%
Total Debt and Equity Investments - Non-control/Non-affiliate Investments
$
270,908
$
273,893
$
235,038
155.3
%
Structured Finance Securities (16)
Apex Credit CLO 2020 Ltd. (7) (9)
Subordinated Notes
17.92%
N/A
11/16/2020
10/20/2031
$
11,080
$
9,870
$
8,027
5.3
%
Apex Credit CLO 2021 Ltd (7) (9)
Subordinated Notes
20.93%
N/A
5/28/2021
7/18/2034
8,630
6,547
5,475
3.6
Apex Credit CLO 2022-1 Ltd. (7) (9)
Subordinated Notes
13.10%
N/A
4/28/2022
4/22/2033
10,726
8,896
6,594
4.4
Battalion CLO XI, Ltd.
Mezzanine Debt - Class E
12.39%
SOFR+
6.85%
4/25/2022
4/24/2034
6,000
5,965
5,594
3.7
Brightwood Capital MM CLO 2023-1A, Ltd.
Mezzanine Debt - Class D
11.76%
SOFR+
6.46%
9/28/2023
10/15/2035
915
892
936
0.6
Mezzanine Debt - Class E
15.66%
SOFR+
10.36%
9/28/2023
10/15/2035
2,133
1,956
2,184
1.4
Subordinated Notes (7) (9)
13.26%
N/A
9/28/2023
10/15/2035
5,494
4,951
4,472
3.0
8,542
7,799
7,592
5.0
Canyon CLO 2019-1, Ltd. (7) (9)
Subordinated Notes
20.29%
N/A
8/22/2024
7/15/2037
18,453
9,332
9,563
6.3
Dryden 76 CLO, Ltd. (7) (9)
Subordinated Notes
11.65%
N/A
9/27/2019
10/20/2034
5,352
3,203
2,384
1.6
ICG US CLO 2021-3, Ltd. (7) (9)
Subordinated Notes
28.39%
N/A
8/8/2024
10/20/2034
16,750
8,319
8,466
5.6
Madison Park Funding XXIII, Ltd. (7) (9)
Subordinated Notes
12.97%
N/A
1/8/2020
7/27/2047
10,000
4,772
4,607
3.0
14
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2024
(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
Madison Park Funding XXIX, Ltd. (7) (9)
Subordinated Notes
8.09%
N/A
12/22/2020
10/18/2047
$
9,500
$
5,125
$
4,118
2.7
%
Monroe Capital MML CLO X, Ltd.
Mezzanine Debt - Class E-R
13.88%
SOFR+
8.75%
4/22/2022
5/20/2034
1,000
973
1,004
0.7
Octagon Investment Partners 39, Ltd. (4) (7) (9)
Subordinated Notes
0.00%
N/A
1/23/2020
10/20/2030
7,000
3,193
1,224
0.8
Park Avenue Institutional Advisers CLO Ltd 2021-1
Mezzanine Debt - Class E
12.84%
SOFR+
7.30%
1/26/2021
1/20/2034
1,000
985
998
0.7
Regatta XXII Funding Ltd
Mezzanine Debt - Class E
12.47%
SOFR+
7.19%
5/6/2022
7/20/2035
3,000
2,980
3,014
2.0
THL Credit Wind River 2019‐3 CLO Ltd (7) (9)
Subordinated Notes
0.46%
N/A
4/5/2019
4/15/2031
7,000
4,163
1,782
1.2
Trinitas CLO VIII, Ltd. (4) (7) (9)
Subordinated Notes
0.00%
N/A
3/4/2021
7/20/2117
5,200
2,464
724
0.5
Venture 45 CLO Ltd.
Mezzanine Debt - Class E
12.98%
SOFR+
7.70%
4/18/2022
7/20/2035
3,000
2,950
2,662
1.8
Total Structured Finance Securities
$
132,233
$
87,536
$
73,828
48.9
%
Total Non-control/Non-affiliate Investments
$
403,141
$
361,429
$
308,866
204.2
%
Affiliate Investments
Contract Datascan Holdings, Inc. (20)
Office Machinery and Equipment Rental and Leasing
Preferred Equity (3,061 Series A shares) 10% PIK
8/5/2015
$
8,121
$
9,652
6.4
%
Common Equity (11,273 shares) (10)
6/28/2016
104
—
—
8,225
9,652
6.4
DRS Imaging Services, LLC (10) (13) (20)
Data Processing, Hosting, and Related Services
Common Equity (1,135 units)
3/8/2018
1,135
969
0.6
15
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2024
(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
Pfanstiehl Holdings, Inc. (20) (21)
Pharmaceutical Preparation Manufacturing
Common Equity (400 Class A shares)
1/1/2014
$
217
$
73,666
48.7
%
TalentSmart Holdings, LLC (10) (13) (20)
Professional and Management Development Training
Common Equity (1,595,238 Class A shares)
10/11/2019
1,595
1,581
1.0
Total Affiliate Investments
$
11,172
$
85,868
56.7
%
Total Investments
$
403,141
$
372,601
$
394,734
260.9
%
(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)As of September 30, 2024, the Company held loans with an aggregate fair value of $210,465, or 91% of the total loan portfolio, that bore interest at a variable rate indexed to SOFR or Prime, and reset monthly, quarterly, or semi-annually. For each variable-rate investment, the Company has provided the spread over the reference rate and current interest rate in effect as of September 30, 2024. 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 in 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.
(4)As of September 30, 2024, the effective accretable yield was estimated to be 0%, as the aggregate amount of projected distributions, including projected distributions related to liquidation of the underlying portfolio upon the security's anticipated optional redemption, was less than current amortized cost. Projected distributions are periodically monitored and re-evaluated. All actual distributions were recognized as reductions to amortized cost until such time, if and when occurring, a future aggregate amount of then-projected distributions exceeds the security's then-current amortized cost.
(5)Subject to unfunded commitments. See Note 6.
(6)Investment was on non-accrual status as of September 30, 2024, meaning the Company suspended recognition of all or a portion of income on the investment. See Note 4 for further details.
(7)Amortized cost reflects accretion of effective yield less any cash distributions received or entitled to be received from CLO subordinated note investments. CLO subordinated note positions are entitled to recurring distributions, which are generally equal to the residual cash flow of payments received on underlying securities less contractual payments to debt holders and fund expenses.
(8)The Company entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, it 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 September 30, 2024:
Portfolio Company
Reported Interest Rate
Interest Rate per Credit Agreement
Additional Interest per Annum
SS Acquisition, LLC
12.31%
11.83%
0.48%
SS Acquisition, LLC
13.00%
11.83%
1.17%
(9)The rate disclosed on subordinated note investments is the estimated effective yield, generally established at purchase, and reevaluated upon the receipt of the initial distribution and each subsequent quarter thereafter. The estimated effective yield is based upon projected amounts and timing of future distributions and the projected amounts and timing of terminal principal payments at the time of estimation. The estimated effective yield and investment cost may ultimately not be realized. Projected cash flows, including the amounts and timing of terminal principal payments, which generally are projected to occur prior to the contractual maturity date, were utilized in deriving the effective yield of the investments.
(10)Non-income producing.
16
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2024
(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 September 30, 2024:
Portfolio Company
Investment Type
Range of PIK Option
Range of Cash Option
Maximum PIK Rate Allowed
Inergex Holdings, LLC
First Lien Debt
0% to 2.00%
11.75% to 13.75%
2.00%
Inergex Holdings, LLC
First Lien Debt (Revolver)
0% to 2.00%
11.75% to 13.75%
2.00%
Kreg, LLC
First Lien Debt
0% to 2.00%
9.00% to 11.00%
2.00%
RumbleOn, Inc.
First Lien Debt
0% to 1.50%
14.27% to 15.77%
1.50%
RumbleOn, Inc.
First Lien Debt
0% to 1.50%
14.27% to 15.77%
1.50%
(12)Represents expiration date of the warrants.
(13)All or a 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 a portion thereof) held by OFSCC-FS. These assets are pledged as collateral of the BNP Facility and cannot be pledged under any debt obligation of the Parent.
(16)Non-qualifying assets under Section 55(a) of the 1940 Act. Qualifying assets as defined in Section 55 of the 1940 Act must represent at least 70% of the Company’s assets immediately following the acquisition of any additional non-qualifying assets. As of September 30, 2024, approximately 81% of the Company's assets were qualifying assets.
(17)Equity participation rights issued by an unaffiliated third party fully covered with underlying positions in the portfolio company.
(18)Not meaningful as there is no outstanding balance on the revolver or delayed draw facility. 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 as of September 30, 2024.
See Notes to Consolidated Financial Statements (unaudited).
Supermarkets and Other Grocery (except Convenience) Stores
First Lien Debt
12.20%
SOFR+
6.75%
7/20/2022
8/1/2029
5,925
5,641
5,925
3.7
Honor HN Buyer Inc
Services for the Elderly and Persons with Disabilities
First Lien Debt (15)
11.25%
SOFR+
5.75%
10/15/2021
10/15/2027
6,466
6,385
6,466
4.0
First Lien Debt (15)
11.25%
SOFR+
5.75%
10/15/2021
10/15/2027
4,089
4,029
4,089
2.5
First Lien Debt (Revolver) (5)
13.25%
Prime+
4.75%
10/15/2021
10/15/2027
95
85
95
0.1
First Lien Debt (Delayed Draw) (5) (15)
11.50%
SOFR+
6.00%
3/31/2023
10/15/2027
2,706
2,682
2,706
1.7
13,356
13,181
13,356
8.3
Idera Inc.
Computer and Computer Peripheral Equipment and Software Merchant Wholesalers
Second Lien Debt
12.28%
SOFR+
6.75%
1/27/2022
3/2/2029
4,000
4,000
3,850
2.4
20
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2023
(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
Inergex Holdings, LLC (11)
Other Computer Related Services
First Lien Debt
12.58% cash / 1.00% PIK
SOFR+
7.00%
10/1/2018
10/1/2024
$
14,868
$
14,783
$
14,868
9.2
%
First Lien Debt (Revolver)
12.58% cash / 1.00% PIK
SOFR+
7.00%
10/1/2018
10/1/2024
2,344
2,312
2,344
1.4
17,212
17,095
17,212
10.6
Ivanti Software, Inc. (14) (15)
Software Publishers
First Lien Debt
9.91%
SOFR+
4.25%
3/26/2021
12/1/2027
2,933
2,940
2,792
1.7
JP Intermediate B, LLC (15)
Drugs and Druggists' Sundries Merchant Wholesalers
First Lien Debt
11.14%
SOFR+
5.50%
1/14/2021
11/20/2027
4,697
4,513
3,368
2.1
Kreg LLC
Other Ambulatory Health Care Services
First Lien Debt (11) (15)
9.75% cash / 2.50% PIK
SOFR+
4.25%
12/20/2021
12/20/2026
17,139
17,066
15,989
9.9
First Lien Debt (Revolver) (5)
n/m (18)
SOFR+
6.25%
12/20/2021
12/20/2026
—
(6)
(90)
(0.1)
17,139
17,060
15,899
9.8
Medrina LLC
All Other Outpatient Care Centers
First Lien Debt (15)
11.74%
SOFR+
6.25%
10/20/2023
10/20/2029
2,234
2,180
2,180
1.3
First Lien Debt (Delayed Draw) (5) (15)
n/m (18)
SOFR+
6.25%
10/20/2023
10/20/2029
—
(5)
(5)
—
First Lien Debt (Revolver) (5)
n/m (18)
SOFR+
6.25%
10/20/2023
10/20/2029
—
(8)
(8)
—
2,234
2,167
2,167
1.3
Metasource, LLC (15)
All Other Business Support Services
First Lien Debt
11.72% cash / 0.50% PIK
SOFR+
6.25%
5/17/2022
5/17/2027
2,755
2,733
2,597
1.6
First Lien Debt (Delayed Draw) (5)
n/m (18)
SOFR+
6.25%
5/17/2022
5/17/2027
—
(4)
(69)
—
2,755
2,729
2,528
1.6
One GI LLC
Offices of Other Holding Companies
First Lien Debt (15)
12.21%
SOFR+
6.75%
12/13/2021
12/22/2025
7,432
7,358
7,066
4.4
First Lien Debt (15)
12.21%
SOFR+
6.75%
12/13/2021
12/22/2025
3,916
3,876
3,723
2.3
First Lien Debt (Revolver) (5)
n/m (18)
SOFR+
6.75%
12/13/2021
12/22/2025
—
(14)
(71)
—
11,348
11,220
10,718
6.7
21
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2023
(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
Planet Bingo, LLC (F/K/A 3rd Rock Gaming Holdings, LLC) (6)
Software Publishers
First Lien Debt
6.50%
N/A
3/13/2018
12/31/2025
$
16,648
$
14,113
$
6,858
4.2
%
PM Acquisition LLC
All Other General Merchandise Stores
Common Equity (499 units) (10)
9/30/2017
499
551
0.3
Reception Purchaser LLC (15)
Transportation and Warehousing
First Lien Debt
11.50%
SOFR+
6.00%
4/28/2022
3/24/2028
2,523
2,495
2,257
1.4
Redstone Holdco 2 LP (F/K/A RSA Security) (15)
Computer and Computer Peripheral Equipment and Software Merchant Wholesalers
First Lien Debt (14)
10.22%
SOFR+
4.75%
4/16/2021
4/27/2028
1,715
1,708
1,307
0.8
Second Lien Debt
13.22%
SOFR+
7.75%
4/16/2021
4/27/2029
4,450
4,407
3,272
2.0
6,165
6,115
4,579
2.8
RPLF Holdings, LLC (10) (13)
Software Publishers
Common Equity (345,339 Class A units)
1/17/2018
—
1,182
0.7
RumbleOn, Inc. (15) (21)
Other Industrial Machinery Manufacturing
First Lien Debt (11)
14.36% Cash / 0.50% PIK
SOFR+
8.75%
8/31/2021
8/31/2026
2,858
2,769
2,633
1.6
First Lien Debt (11)
14.36% Cash / 0.50% PIK
SOFR+
8.75%
8/31/2021
8/31/2026
862
854
795
0.5
Warrants (warrants to purchase up to $218,000 in common stock)
8/31/2021
8/14/2028 (12)
200
72
—
3,720
3,823
3,500
2.1
Sentry Centers Holdings, LLC (10) (13)
Other Professional, Scientific, and Technical Services
Preferred Equity (1,603 Series B units)
9/4/2020
160
77
—
Signal Parent, Inc. (14) (15)
New Single-Family Housing Construction (except For-Sale Builders)
First Lien Debt
8.96%
SOFR+
3.50%
3/25/2021
4/3/2028
1,803
1,791
1,616
1.0
22
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2023
(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
Spear Education Holdings, LLC (15)
First Lien Debt
Professional and Management Development Training
13.00%
SOFR+
7.50%
2/10/2023
12/15/2027
$
1,485
$
1,455
$
1,484
0.9
%
SSJA Bariatric Management LLC (15)
Offices of Physicians, Mental Health Specialists
First Lien Debt
10.75%
SOFR+
5.25%
8/26/2019
8/26/2024
9,575
9,563
9,186
5.7
First Lien Debt
10.75%
SOFR+
5.25%
12/31/2020
8/26/2024
1,035
1,033
993
0.6
First Lien Debt
10.75%
SOFR+
5.25%
12/8/2021
8/26/2024
2,607
2,600
2,501
1.5
First Lien Debt (Revolver) (5)
10.75%
SOFR+
5.25%
8/26/2019
8/26/2024
200
199
173
0.1
13,417
13,395
12,853
7.9
SS Acquisition, LLC (8) (15)
Sports and Recreation Instruction
First Lien Debt
12.41%
SOFR+
6.75%
12/30/2021
12/30/2026
3,042
3,023
3,042
1.9
First Lien Debt
13.10%
SOFR+
7.45%
12/30/2021
12/30/2026
1,460
1,449
1,460
0.9
4,502
4,472
4,502
2.8
Staples, Inc. (14) (15) (21)
Business to Business Electronic Markets
First Lien Debt
10.46%
L+
5.00%
6/24/2019
4/16/2026
2,870
2,841
2,728
1.7
STS Operating, Inc.
Industrial Machinery and Equipment Merchant Wholesalers
Second Lien Debt
13.46%
SOFR+
8.00%
5/15/2018
4/30/2026
9,073
9,072
9,073
5.6
Tolemar Acquisition, Inc.
Motorcycle, Bicycle, and Parts Manufacturing
First Lien Debt (15)
11.75%
SOFR+
6.00%
10/14/2021
10/14/2026
15,347
15,304
14,334
8.8
First Lien Debt (Revolver) (5)
11.75%
SOFR+
6.00%
10/14/2021
10/14/2026
592
585
422
0.3
15,939
15,889
14,756
9.1
TruGreen Limited Partnership
Landscaping Services
Second Lien Debt
14.14%
SOFR+
8.50%
5/13/2021
11/2/2028
4,500
4,592
4,287
2.6
United Biologics Holdings, LLC (4) (10)
Medical Laboratories
Preferred Equity (4,701 units)
4/16/2013
9
—
—
23
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2023
(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
Wellful Inc. (F/K/A KNS Acquisition Corp.) (15)
Electronic Shopping and Mail-Order Houses
First Lien Debt
11.72%
SOFR+
6.25%
4/16/2021
4/21/2027
$
6,606
$
6,581
$
6,313
3.9
%
Total Debt and Equity Investments
$
285,417
$
287,218
$
254,411
157.0
%
Structured Finance Securities (21)
Apex Credit CLO 2020 Ltd. (9) (16)
Subordinated Notes
14.89%
N/A
11/16/2020
10/20/2031
$
11,080
$
10,191
$
7,031
4.3
%
Apex Credit CLO 2021 Ltd (9) (16)
Subordinated Notes
21.61%
N/A
5/28/2021
7/18/2034
8,630
6,977
5,711
3.5
Apex Credit CLO 2022-1 Ltd. (9) (16)
Subordinated Notes
17.30%
N/A
4/28/2022
4/22/2033
10,726
8,858
6,961
4.3
Ares L CLO Ltd.
Mezzanine Debt - Class E
11.31%
SOFR+
5.65%
2/17/2022
1/15/2032
6,000
5,832
5,474
3.4
Barings CLO 2019-I Ltd.
Mezzanine Debt - Class E
12.52%
SOFR+
6.86%
2/23/2022
4/15/2035
8,000
7,918
7,725
4.8
Battalion CLO XI, Ltd.
Mezzanine Debt - Class E
12.51%
SOFR+
6.85%
4/24/2022
4/24/2034
6,000
5,918
5,511
3.4
Brightwood Capital MM CLO 2023-1A, Ltd.
Mezzanine Debt - Class D
11.85%
SOFR+
6.46%
9/28/2023
10/15/2035
915
888
888
0.5
Mezzanine Debt - Class E
15.75%
SOFR+
10.36%
9/28/2023
10/15/2035
2,133
1,929
1,929
1.2
Subordinated Notes (9) (16)
14.56%
N/A
9/28/2023
10/15/2035
5,494
5,018
5,018
3.1
8,542
7,835
7,835
4.8
Dryden 53 CLO, LTD. (9) (16)
Subordinated Notes - Income
8.04%
N/A
10/26/2020
1/15/2031
2,700
1,280
622
0.3
Subordinated Notes
7.00%
N/A
10/26/2020
1/15/2031
2,159
1,046
497
0.3
4,859
2,326
1,119
0.7
24
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2023
(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
Dryden 76 CLO, Ltd. (9) (16)
Subordinated Notes
16.12%
N/A
9/27/2019
10/20/2032
$
2,750
$
2,332
$
1,779
1.1
%
Flatiron CLO 18, Ltd. (9) (16)
Subordinated Notes
7.62%
N/A
1/2/2019
4/17/2031
9,680
6,314
4,989
3.1
Madison Park Funding XXIII, Ltd. (9) (16)
Subordinated Notes
16.45%
N/A
1/8/2020
7/27/2047
10,000
5,558
4,744
2.9
Madison Park Funding XXIX, Ltd. (9) (16)
Subordinated Notes
13.78%
N/A
12/22/2020
10/18/2047
9,500
5,927
5,355
3.3
Monroe Capital MML CLO X, Ltd.
Mezzanine Debt - Class E-R
14.12%
SOFR+
8.75%
4/22/2022
5/20/2034
1,000
961
967
0.6
Octagon Investment Partners 39, Ltd. (9) (16)
Subordinated Notes
4.98%
N/A
1/23/2020
10/20/2030
7,000
3,962
2,171
1.3
Park Avenue Institutional Advisers CLO Ltd 2021-1
Mezzanine Debt - Class E
12.98%
SOFR+
7.30%
1/26/2021
1/20/2034
1,000
982
982
0.6
Redding Ridge 4 Ltd. (9) (16)
Subordinated Notes
7.46%
N/A
3/4/2021
4/15/2030
1,300
910
544
0.3
Regatta XXII Funding Ltd
Mezzanine Debt - Class E
12.61%
SOFR+
7.19%
5/6/2022
7/20/2035
3,000
2,977
3,007
1.9
THL Credit Wind River 2019‐3 CLO Ltd. (9) (16)
Subordinated Notes
10.59%
N/A
4/5/2019
4/15/2031
7,000
4,883
2,941
1.8
Trinitas CLO VIII, Ltd. (9) (16)
Subordinated Notes
3.95%
N/A
3/4/2021
7/20/2117
5,200
2,891
1,352
0.8
25
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2023
(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
Venture 45 CLO Ltd.
Mezzanine Debt - Class E
13.12%
SOFR+
7.70%
4/18/2022
7/20/2035
$
3,000
$
2,942
$
2,579
1.6
%
Wellfleet CLO 2018-2 Ltd. (9) (16)
Subordinated Notes
9.99%
N/A
3/4/2021
10/20/2031
1,000
627
270
0.2
Total Structured Finance Securities
$
125,267
$
97,121
$
79,045
48.8
%
Total Non-control/Non-affiliate Investments
$
410,684
$
384,339
$
333,456
205.8
%
Affiliate Investments
Contract Datascan Holdings, Inc. (4) (19)
Office Machinery and Equipment Rental and Leasing
Preferred Equity (3,061 Series A shares) 10.0% PIK
8/5/2015
$
7,309
$
10,312
6.4
%
Common Equity (11,273 shares) (10)
6/28/2016
104
271
0.2
7,412
10,583
6.6
DRS Imaging Services, LLC (13) (19)
Data Processing, Hosting, and Related Services
Common Equity (1,135 units)
3/8/2018
1,135
393
0.2
Master Cutlery, LLC (4) (10) (19)
Sporting and Recreational Goods and Supplies Merchant Wholesalers
Subordinated Debt (6) (11)
13.00% PIK
N/A
4/17/2015
5/25/2024
9,749
4,680
—
—
Preferred Equity (3,723 Series A units), 8.0% PIK
4/17/2015
3,483
—
—
Common Equity (15,564 units)
4/17/2015
—
—
—
9,749
8,163
—
—
Pfanstiehl Holdings, Inc. (4) (19) (20)
Pharmaceutical Preparation Manufacturing
Common Equity (400 Class A shares)
1/1/2014
217
70,927
43.8
TalentSmart Holdings, LLC (10) (13) (19)
Professional and Management Development Training
Common Equity (1,595,238 Class A shares)
10/11/2019
1,595
1,136
0.7
26
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2023
(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
TRS Services, LLC (4) (19)
Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance
Preferred Equity (1,937,191 Class A units), 11.0% PIK
12/10/2014
$
97
$
2,507
1.5
%
Common Equity (3,000,000 units) (10)
12/10/2014
572
1,285
0.8
669
3,792
2.3
Total Affiliate Investments
$
9,749
$
19,191
$
86,831
53.6
%
Total Investments
$
420,432
$
403,530
$
420,287
259.4
%
(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)As of December 31, 2023, the Company held loans with an aggregate fair value of $230,185, or 92% of the total loan portfolio, that bore interest at a variable rate indexed to LIBOR (L), Prime or SOFR, and reset monthly, quarterly, or semi-annually. For each variable-rate investment, the Company has provided the spread over the reference rate and current interest rate in effect as of December 31, 2023. 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.
(4)Investments (or portion thereof) held by SBIC I LP. These assets were pledged as collateral of the SBA debentures and could not be pledged under any debt obligation of the Company.
(5)Subject to unfunded commitments. See Note 6.
(6)Investment was on non-accrual status as of December 31, 2023, meaning the Company suspended recognition of all or a portion of income on the investment. See Note 4 for further details.
(7)Equity participation rights issued by unaffiliated third party fully covered with underlying positions in the portfolio company.
(8)The Company entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, it 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, 2023:
Portfolio Company
Reported Interest Rate
Interest Rate per Credit Agreement
Additional Interest per Annum
SS Acquisition, LLC
12.41%
11.89%
0.51%
SS Acquisition, LLC
13.10%
11.89%
1.21%
(9)The rate disclosed on subordinated note investments is the estimated effective yield, generally established at purchase, and reevaluated upon the receipt of the initial distribution and each subsequent quarter thereafter. The estimated effective yield is based upon projected amounts and timing of future distributions and the projected amounts and timing of terminal principal payments at the time of estimation. The estimated effective yield and investment cost may ultimately not be realized. Projected cash flows, including the amounts and timing of terminal principal payments, which generally are projected to occur prior to the contractual maturity date, were utilized in deriving the effective yield of the investments.
(10)Non-income producing.
27
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2023
(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, 2023:
Portfolio Company
Investment Type
Range of PIK Option
Range of Cash Option
Maximum PIK Rate Allowed
Inergex Holdings, LLC
First Lien Debt
0% to 1.00%
12.58% to 13.58%
1.00%
Inergex Holdings, LLC
First Lien Debt (Revolver)
0% to 1.00%
12.58% to 13.58%
1.00%
Kreg LLC
First Lien Debt
0% to 2.00%
9.75% to 11.75%
2.00%
Master Cutlery, LLC
Subordinated Debt
0% to 13.00%
0% to 13.00%
13.00%
RumbleOn, Inc.
First Lien Debt
0% to 0.50%
14.36% to 14.86%
0.50%
(12)Represents expiration date of the warrants.
(13)All or a 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 a 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 note investments. CLO subordinated note positions are entitled to recurring distributions, which are generally equal to the residual cash flow of payments received on underlying securities less contractual payments to debt holders and fund expenses.
(17)The Company holds at least one seat on the portfolio company’s board of directors.
(18)Not meaningful as there is no outstanding balance on the revolver or delayed draw loan. The Company earns unfunded commitment fees on undrawn revolving lines of credit balances, which are reported in fee income.
(19)The Company has an observer seat on the portfolio company’s board of directors.
(20)Portfolio company at fair value represents greater than 5% of total assets at December 31, 2023.
(21)Non-qualifying assets under Section 55(a) of the 1940 Act. Qualifying assets as defined in Section 55 of the 1940 Act must represent at least 70% of the Company's assets immediately following the acquisition of any additional non-qualifying assets. As of December 31, 2023, approximately 81% of the Company's assets were qualifying assets.
See Notes to Consolidated Financial Statements.
28
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
Note 1. Organization
OFS Capital Corporation, a Delaware corporation, is an externally managed, closed-end, non-diversified management investment company. The Company has elected to be regulated as a BDC under the 1940 Act. In addition, for income tax purposes, the Company has elected to be treated, and intends to qualify annually, as a RIC under Subchapter M of the Code.
The Company’s investment objective is to provide stockholders with both current income and capital appreciation primarily through debt investments and, to a lesser extent, equity investments.
OFS Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company. In addition, OFS Advisor serves as the investment adviser to HPCI, a non-traded BDC with an investment strategy and objective similar to that of the Company. OFS Advisor also serves as the investment adviser to OCCI, a non-diversified, externally managed, closed-end management investment company that is registered as an investment company under the 1940 Act and that primarily invests in Structured Finance Securities. Additionally, OFS Advisor serves as the investment adviser to separately-managed accounts and sub-advisor to investment companies managed by an affiliate.
The Company may make investments directly or through one or more of its subsidiaries: OFSCC-FS, SBIC I LP or OFSCC-MB.
OFSCC-FS, an indirect wholly owned and consolidated subsidiary of the Company, is a special-purpose vehicle formed in April 2019 for the purpose of acquiring senior secured loan investments. OFSCC-FS has debt financing through its BNP Facility, which provides OFSCC-FS with borrowing capacity of up to $150,000, subject to a borrowing base and other covenants.
SBIC I LP is an investment company subsidiary previously licensed under the SBA’s small business investment company program that was subject to SBA regulations and policies. On March 1, 2024, SBIC I LP fully repaid its outstanding SBA debentures and, on April 17, 2024, surrendered its license to operate as a SBIC.
OFSCC-MB is a wholly owned and consolidated subsidiary taxed under subchapter C of the Code that generally holds the Company’s equity investments in portfolio companies that are taxed as pass-through entities.
Note 2. Summary of Significant Accounting Policies
Basis of presentation: The Company is an investment company as defined in the accounting and reporting guidance under ASC Topic 946, Financial Services–Investment Companies. The accompanying interim consolidated financial statements of the Company and related financial information have been prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q, and Articles 6, 10 and 12 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. However, in the opinion of management, the consolidated financial statements include all adjustments, consisting only of normal and recurring accruals and adjustments, necessary for fair presentation as of, and for, the periods presented. These consolidated financial statements and notes hereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, filed on March 5, 2024. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
Significant Accounting Policies: The following information supplements the description of significant accounting policies contained in Note 2 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
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 (decrease) 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.
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 revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Concentration of credit risk: Aside from the Company’s investments, 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 exceeds the federally insured limits. The Company places cash deposits only with high credit quality
29
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
institutions which OFS Advisor believes will mitigate the risk of loss due to credit risk. If borrowers completely fail to perform according to the terms of the contracts, the amount of loss due to credit risk from the Company’s investments is equal to the sum of the Company’s recorded investments and the unfunded commitments disclosed in Note 6.
Cash and cash equivalents:The Company’s cash and cash equivalent balances are maintained with a member bank of the FDIC, and at times, such balances exceed the FDIC insurance limit. The Company does not believe its cash and cash equivalent balances are exposed to any significant credit risk. Cash and cash equivalent balances are held in US Bank Trust Company, National Association and Citibank N.A. money market deposit accounts. In addition, the Company’s use of cash and cash equivalents held by OFSCC-FS is limited by the terms and conditions of the BNP Facility, including but not limited to, the payment of interest expense and principal on the outstanding borrowings.
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 the Investment Advisory Agreement. The continuation of the Investment Advisory Agreement was most recently approved by the Board on April 3, 2024. 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’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 funds affiliated with OFS Advisor, so long as its services to the Company are not impaired. OFS Advisor also serves as the investment adviser or sub-adviser to various clients, including HPCI and OCCI.
OFS Advisor receives fees for providing services to the Company, 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 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.
For the years ended December 31, 2024 and 2023, OFS Advisor agreed to reduce its base management fee attributable to all of the OFSCC-FS Assets to 0.25% per quarter (1.00% annualized) of the average value of the OFSCC-FS Assets (other than cash and cash equivalents but including assets purchased with borrowed amounts) at the end of the two most recently completed calendar quarters. OFS Advisor’s base management fee reduction is renewable on an annual basis, and OFS Advisor is not entitled to recoup the amount of the base management fee reduced with respect to the OFSCC-FS Assets. OFS Advisor most recently renewed the agreement to reduce its base management fee for the 2024 calendar year on January 8, 2024.
The incentive fee has two parts. The first part of the incentive fee (“Income Incentive Fee”) 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 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.
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% hurdle rate (which is 8.0% annualized) 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
30
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
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 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 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, losses on extinguishment of debt, income taxes from realized capital gains and unrealized capital depreciation through the end of such year, less all previous amounts paid in respect of the Capital Gains Fee. Since inception through September 30, 2024, the Company has not made a Capital Gains Fee payment.
The Company accrues the Capital Gains Fee if, on a cumulative basis, the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation) is positive. An accrued Capital Gains Fee relating to net unrealized appreciation is deferred, and not due to OFS Advisor, until the close of the year in which such gains are realized. 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 Gains 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). As of September 30, 2024 and December 31, 2023, there were no accrued Capital Gains Fees.
License Agreement: The Company entered into a license agreement with OFSAM under which OFSAM has granted 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 the Administration Agreement. The continuation of the Administration Agreement was most recently approved by the Board on April 3, 2024. 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 September 30, 2024, affiliates of OFS Advisor held approximately 3,022,183 shares of common stock, which is approximately 22.6% of the Company’s outstanding shares of common stock.
31
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
Expenses recognized under agreements with OFS Advisor and OFS Services and distributions paid to affiliates for the three and nine months ended September 30, 2024 and 2023 are presented below:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Base management fee
$
1,472
$
1,796
$
4,473
$
5,573
Income Incentive Fee
901
1,348
3,159
3,866
Administration fee
337
380
1,184
1,302
Distributions paid to affiliates
1,028
1,027
3,083
3,021
Note 4. Investments
As of September 30, 2024, the Company had loans to 42 portfolio companies, of which approximately 82% were first lien debt investments and 18% were second lien debt investments, at fair value. The Company also had equity investments in 15 portfolio companies and 17 investments in Structured Finance Securities. As of September 30, 2024, the Company’s investments consisted of the following:
Percentage of Total
Percentage of Total
Amortized Cost
Amortized Cost
Net Assets
Fair Value
Fair Value
Net Assets
First lien debt investments(1)
$
212,280
56.9
%
140.3
%
$
189,516
48.1
%
125.2
%
Second lien debt investments
50,516
13.6
33.4
41,571
10.5
27.5
Preferred equity
9,904
2.7
6.5
10,009
2.5
6.6
Common equity, warrants and other(2)
12,365
3.3
8.2
79,810
20.2
52.7
Total Portfolio Company Investments
285,065
76.5
188.4
320,906
81.3
212.0
Structured Finance Securities
87,536
23.5
57.9
73,828
18.7
48.9
Total investments
$
372,601
100.0
%
246.3
%
$
394,734
100.0
%
260.9
%
(1) Includes unitranche investments (which are loans that combine both senior and subordinated debt, in a first lien position) with an amortized cost and fair value of $119,680 and $109,405, respectively.
(2) Includes the Company’s investment in Pfanstiehl Holdings, Inc. See “Note 4—Portfolio Concentration” for additional information.
Geographic composition is determined by the location of the corporate headquarters of the portfolio company. All international investments are denominated in US dollars. As of September 30, 2024 and December 31, 2023, the Company’s investment portfolio was domiciled as follows:
September 30, 2024
December 31, 2023
Amortized Cost
Fair Value
Amortized Cost
Fair Value
United States
$
280,374
$
319,516
$
301,749
$
339,964
Canada(1)
4,691
1,390
4,660
1,278
Cayman Islands(1)(2)
79,737
66,236
89,286
71,210
Jersey(1)(2)
7,799
7,592
7,835
7,835
Total investments
$
372,601
$
394,734
$
403,530
$
420,287
(1) Represents non-qualifying assets under Section 55(a) of the 1940 Act.
(2) Investments domiciled in the Cayman Islands and Jersey represent certain Structured Finance Securities held by the Company. These investments generally represent beneficial interests in underlying portfolios of debt investments in companies domiciled in the United States.
32
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
As of September 30, 2024, the industry composition of the Company’s investment portfolio was as follows:
Percentage of Total
Percentage of Total
Industry
Amortized Cost
Amortized Cost
Net Assets
Fair Value
Fair Value
Net Assets
Administrative and Support and Waste Management and Remediation Services
$
22,050
5.8
%
14.6
%
$
21,055
5.3
%
13.8
%
Construction
24,311
6.6
16.1
15,535
3.9
10.3
Education Services
6,075
1.6
4.1
6,083
1.5
4.0
Finance and Insurance
3,092
0.8
2.0
3,136
0.8
2.1
Health Care and Social Assistance
72,714
19.6
48.1
65,645
16.6
43.4
Information
26,030
7.0
17.2
15,063
3.8
10.0
Management of Companies and Enterprises
12,626
3.4
8.3
12,338
3.1
8.2
Manufacturing
35,377
9.4
23.2
107,202
27.3
70.9
Other Services (except Public Administration)
6,581
1.8
4.3
6,591
1.7
4.4
Professional, Scientific, and Technical Services
28,195
7.6
18.7
28,260
7.2
18.6
Public Administration
703
0.2
0.5
64
—
—
Real Estate and Rental and Leasing
12,916
3.5
8.5
11,042
2.8
7.3
Retail Trade
16,609
4.4
11.0
14,759
3.7
9.8
Wholesale Trade
17,786
4.8
11.8
14,133
3.6
9.2
Total Portfolio Company Investments
$
285,065
76.5
%
188.4
%
$
320,906
81.3
%
212.0
%
Structured Finance Securities
87,536
23.5
57.9
73,828
18.7
48.9
Total investments
$
372,601
100.0
%
246.3
%
$
394,734
100.0
%
260.9
%
As of December 31, 2023, the Company had loans to 44 portfolio companies, of which 81% were first lien debt investments and 19% were second lien debt investments, at fair value. The Company also held equity investments in 15 portfolio companies and 21 investments in Structured Finance Securities. At December 31, 2023, the Company’s investments consisted of the following:
Percentage of Total
Percentage of Total
Amortized Cost
Amortized Cost
Net Assets
Fair Value
Fair Value
Net Assets
First lien debt investments(1)
$
220,941
54.7
%
136.4
%
$
202,792
48.3
%
125.1
%
Second lien debt investments
57,848
14.3
35.7
48,521
11.5
30.0
Subordinated debt investments
4,680
1.2
2.9
—
—
—
Preferred equity
11,403
2.8
7.0
13,240
3.2
8.2
Common equity, warrants and other(2)
11,537
2.9
7.1
76,689
18.2
47.3
Total debt and equity investments
$
306,409
75.9
%
189.1
%
$
341,242
81.2
%
210.6
%
Structured Finance Securities
97,121
24.1
59.9
79,045
18.8
48.8
Total
$
403,530
100.0
%
249.0
%
$
420,287
100.0
%
259.4
%
(1) Includes unitranche investments (which are loans that combine both senior and subordinated debt, in a first lien position) with an amortized cost and fair value of $141,291 and $131,271, respectively.
(2) Includes the Company’s investment in Pfanstiehl Holdings, Inc. See “Note 4—Portfolio Concentration” for additional information.
33
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
As of December 31, 2023, the industry compositions of the Company’s debt and equity investments were as follows:
Percentage of Total
Percentage of Total
Industry
Amortized Cost
Amortized Cost
Net Assets
Fair Value
Fair Value
Net Assets
Administrative and Support and Waste Management and Remediation Services
$
22,119
5.5
%
13.6
%
$
21,252
5.2
%
13.0
%
Construction
19,393
4.8
12.0
11,712
2.8
7.2
Education Services
7,523
1.9
4.7
7,122
1.7
4.4
Finance and Insurance
3,097
0.8
1.9
3,097
0.7
1.9
Health Care and Social Assistance
72,013
17.8
44.5
69,122
16.5
42.6
Information
26,763
6.6
16.5
16,586
4.0
10.4
Management of Companies and Enterprises
11,219
2.8
6.9
10,718
2.6
6.6
Manufacturing
29,402
7.3
18.1
97,924
23.2
60.5
Other Services (except Public Administration)
670
0.2
0.4
3,792
0.9
2.3
Professional, Scientific, and Technical Services
21,327
5.3
13.2
21,481
5.1
13.2
Public Administration
703
0.2
0.4
45
—
—
Real Estate and Rental and Leasing
12,072
3.0
7.5
11,861
2.8
7.3
Retail Trade
12,721
3.1
7.9
12,789
3.0
7.9
Transportation and Warehousing
2,495
0.7
1.5
2,257
0.5
1.6
Wholesale Trade
64,892
15.9
40.0
51,484
12.2
31.8
Total debt and equity investments
$
306,409
75.9
%
189.1
%
$
341,242
81.2
%
210.6
%
Structured Finance Securities
97,121
24.1
59.9
79,045
18.8
48.8
Total investments
$
403,530
100.0
%
249.0
%
$
420,287
100.0
%
259.4
%
Non-Accrual Loans: Management reviews, for placement on non-accrual status, all loans and CLO mezzanine debt investments that become past due on principal and interest, and/or when there is reasonable doubt that principal or interest will be collected. When a loan is placed on non-accrual status, accrued and unpaid cash interest is reversed. Additionally, Net Loan Fees are no longer recognized as of the date the loan is placed on non-accrual status. Depending upon management’s judgment, interest payments subsequently received on non-accrual investments may be recognized as interest income or applied as a reduction to amortized cost. Interest accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal and interest payments and, in the judgment of management, it is probable that the Company will collect all principal and interest from the investment. For the three months ended September 30, 2024, one loan with an amortized cost and fair value of $4,491 and $2,390, respectively, was placed on non-accrual status. The aggregate amortized cost and fair value of loans on non-accrual status as of September 30, 2024 was $41,068 and $21,125, respectively, and as of December 31, 2023 was $34,568 and $12,140, respectively.
Portfolio Concentration: The following table presents the Company’s portfolio companies based on fair value that comprise greater than 10% of the Company’s total net assets as of September 30, 2024:
Percentage of Total
Portfolio Company
Investment Type
Industry
Amortized Cost
Fair Value
Fair Value
Net Assets
Pfanstiehl Holdings, Inc.
Common Equity
Manufacturing
$
217
$
73,666
18.7
%
48.7
%
Inergex Holdings, LLC
First Lien Debt
Professional, Scientific, and Technical Services
17,026
17,084
4.3
11.3
Kreg LLC
First Lien Debt
Health Care and Social Assistance
17,411
16,060
4.1
10.6
Tolemar Acquisition, Inc.
First Lien Debt
Motorcycle, Bicycle, and Parts Manufacturing
16,109
15,335
3.9
10.1
As of September 30, 2024, approximately 5.1% and 13.3% of the Company’s total portfolio at fair value and net assets, respectively, were comprised of Structured Finance Securities managed by a single adviser.
34
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
Note 5. Fair Value of Financial Instruments
The Company’s investments are carried at fair value and determined in accordance with ASC 820 and a documented valuation policy that is applied in a consistent manner. Pursuant to Rule 2a-5 of the 1940 Act (“Rule 2a-5”), the Board designated OFS Advisor as the valuation designee to perform fair value determinations relating to the Company’s investments, and the Board maintains oversight of OFS Advisor in its capacity as valuation designee, as prescribed in Rule 2a-5.
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 that 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 fair values based on 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.
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 management to exercise significant 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 3, and to a lesser extent Level 2, 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. The following table presents the Company’s transfers of Level 2 and Level 3 debt investments for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Transfers from Level 2 to Level 3
$
—
$
—
$
—
$
—
Transfers from Level 3 to Level 2
—
5,957
19,435
7,491
Transfers between levels during the reporting periods were due to the availability of reliable Indicative Prices in those periods. The Company classifies loan investments as Level 2 when sufficient Indicative Prices are available, and the depth of the market is sufficient, in management's judgment, to transact at those prices in amounts approximating the Company’s investment position at the measurement date.
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 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 and incur a realized capital loss. The Company’s investments are subject to market risk as a result of economic and political developments, including impacts from interest rate changes and elevated inflation rates, the ongoing war between Russia and Ukraine, the escalated armed conflict in the Middle East, instability in the U.S. and international banking systems, uncertainties related to the 2024 U.S. presidential election, the risk of recession or a shutdown of U.S. government services and related market volatility. Market risk is directly impacted by the volatility and liquidity in the markets in which certain investments are traded and can affect the fair value of the Company’s investments. The Company’s investments are also subject to interest rate risk. Changes in interest rates, including potential additional interest rate reductions approved by the U.S. Federal Reserve, may impact our investment income, cost of funding and the valuation of our investment portfolio.
35
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
The following tables present the Company’s investment portfolio measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023:
Security
Level 1
Level 2
Level 3
Fair Value as of September 30, 2024
Debt investments
$
—
$
56,453
$
174,634
$
231,087
Equity investments
—
—
89,819
89,819
Structured Finance Securities
—
—
73,828
73,828
$
—
$
56,453
$
338,281
$
394,734
Security
Level 1
Level 2
Level 3
Fair Value as of December 31, 2023
Debt investments
$
—
$
16,053
$
235,260
$
251,313
Equity investments
—
—
89,929
89,929
Structured Finance Securities
—
—
79,045
79,045
$
—
$
16,053
$
404,234
$
420,287
36
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
The following tables provides the primary quantitative information about valuation techniques and the Company’s unobservable inputs to its Level 3 fair value measurements as of September 30, 2024 and December 31, 2023. The Company may make changes to the valuation techniques, among techniques otherwise commonly utilized in accordance with its valuation policies, and/or the weighting of techniques used for particular investments based on changes in facts-and-circumstances and depending on the availability of, or changes in, information in order to produce the best estimate of fair value as of the measurement date. In addition to the techniques and unobservable inputs noted in the tables below and in accordance with OFS Advisor’s valuation policy, OFS Advisor, as valuation designee, may also use other valuation techniques and methodologies when determining the fair value measurements of the Company’s investment assets. The tables are not intended to be all-inclusive and only present the most significant unobservable input(s) relevant to the valuation designee’s determination of fair value.
Fair Value as of September 30, 2024
Valuation technique
Unobservable inputs
Range (Weighted average)
Debt investments:
First lien
$
119,785
Discounted cash flow
Discount rates
8.55% - 17.91% (12.41%)
15,942
Market approach
EBITDA multiples
3.00x - 7.50x (5.75x)
9,552
Market approach
Revenue multiples
0.40x - 0.40x (0.40x)
Second lien
22,107
Discounted cash flow
Discount rates
13.07% - 19.50% (15.45%)
7,248
Market approach
Revenue multiples
0.40x - 0.93x (0.72x)
Structured Finance Securities(1):
Subordinated notes
57,437
Discounted cash flow
Discount rates
14.00% - 33.50% (23.08%)
Constant default rate
2.00% - 3.00% (2.08%)
Recovery rate
65.00% - 65.00% (65.00%)
Mezzanine debt
16,391
Discounted cash flow
Discount margin
6.00% - 10.10% (8.53%)
Constant default rate
2.00% - 3.00% (2.25%)
Recovery rate
65.00% - 65.00% (65.00%)
Equity investments:
Preferred equity
10,009
Market approach
EBITDA multiples
7.16x - 8.50x (8.46x)
Preferred equity
—
Market approach
Revenue multiples
0.40x - 0.40x - 0.40x
Common equity, warrants and other
79,810
Market approach
EBITDA multiples
6.00x - 15.75x (13.89x)
$
338,281
(1) The cash flows utilized in the discounted cash flow calculations assume: (i) liquidation of (a) certain distressed investments and (b) all investments currently in default held by the issuing CLO at their current market prices; and (ii) redeployment of proceeds at the issuing CLO’s assumed reinvestment rate.
37
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
Fair Value at December 31, 2023
Valuation technique
Unobservable inputs
Range (Weighted average)
Debt investments:
First lien
$
161,211
Discounted cash flow
Discount rates
9.55% - 24.40% (12.61%)
8,136
Market approach
EBITDA multiples
3.14x - 6.00x (3.59x)
6,295
Market approach
Revenue multiples
0.40x - 0.40x (0.40x)
11,189
Market approach
Transaction Price
Second lien
36,495
Discounted cash flow
Discount rates
10.45% - 21.68% (13.29%)
8,084
Market approach
Revenue multiples
0.40x - 1.20x (0.67x)
3,850
Market approach
Transaction Price
Subordinated
—
Market approach
NAV liquidation(2)
Structured Finance Securities(1):
Subordinated notes
44,965
Discounted cash flow
Discount rates
16.00% - 50.00% (28.64%)
Constant default rate
2.00% - 2.00% (2.00%)
Recovery rate
65.00% - 65.00% (65.00%)
Mezzanine debt
26,245
Discounted cash flow
Discount margin
7.15% - 10.60% (8.36%)
Constant default rate
2.00% - 3.00% (2.04%)
Recovery rate
65.00% - 65.00% (65.00%)
Subordinated notes
5,018
Market Approach
Transaction Price
Mezzanine debt
2,817
Market Approach
Transaction Price
Equity investments:
Preferred equity
13,163
Market approach
EBITDA multiples
7.50x - 8.00x (7.60x)
Preferred equity
77
Market approach
Revenue multiples
0.13x - 3.25x (3.25x)
Common equity, warrants and other(3)
70,927
Discounted cash flow
Discount rates
11.50% - 11.50% (11.50%)
Market approach
EBITDA multiples
12.00x - 13.25x (12.63x)
Common equity, warrants and other
5,369
Market approach
EBITDA multiples
5.75x - 16.50x (9.57x)
Common equity, warrants and other
393
Market approach
Revenue multiples
0.40x - 0.70x (0.70x)
$
404,234
(1) The cash flows utilized in the discounted cash flow calculations assume: (i) liquidation of (a) certain distressed investments and (b) all investments currently in default held by the issuing CLO at their current market prices; and (ii) redeployment of proceeds at the issuing CLO’s assumed reinvestment rate.
(2) NAV liquidation represents the fair value, or estimated expected residual value, of the investment.
(3) Two valuation techniques were weighted to determinate the fair value.
Averages in the preceding two tables were weighted by the fair value of the related instruments.
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 enterprise value 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 enterprise value 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 enterprise value and/or EBITDA multiples, and in inverse relation to changes in the discount rate. Due to the wide range of approaches in 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.
38
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(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 nine months ended September 30, 2024 and 2023:
Nine Months Ended September 30, 2024
First Lien Debt Investments
Second Lien Debt Investments
Subordinated Debt Investments
Preferred Equity
Common Equity, Warrants and Other
Structured Finance Securities
Total
Level 3 assets, December 31, 2023
$
186,831
$
48,429
$
—
$
13,240
$
76,689
$
79,045
$
404,234
Net realized gain (loss) on investments
(1,680)
(2,391)
(4,376)
(2,911)
807
(3,537)
(14,088)
Net unrealized appreciation (depreciation) on investments
(3,398)
440
4,680
(1,731)
2,293
4,369
6,653
Amortization of Net Loan Fees
750
325
—
—
—
167
1,242
Accretion of interest income on Structured Finance Securities
—
—
—
—
—
6,039
6,039
Capitalized PIK interest and dividends
476
707
—
812
—
—
1,995
Amendment fees received
(246)
—
—
—
—
—
(246)
Purchase and origination of portfolio investments
15,210
1,720
—
—
—
17,982
34,912
Proceeds from principal payments on portfolio investments
(35,357)
(14,069)
(304)
—
—
—
(49,730)
Sale and redemption of portfolio investments
(804)
(205)
—
(670)
(1,379)
(19,184)
(22,242)
Conversion from debt investments to equity investments
(2,669)
—
—
1,269
1,400
—
—
Proceeds from distributions received from portfolio investments
—
—
—
—
—
(11,053)
(11,053)
Transfers from Level 3 to Level 2
(13,834)
(5,601)
—
—
—
—
(19,435)
Level 3 assets, September 30, 2024
$
145,279
$
29,355
$
—
$
10,009
$
79,810
$
73,828
$
338,281
39
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
Nine Months Ended September 30, 2023
First Lien Debt Investments
Second Lien Debt Investments
Subordinated Debt Investments
Preferred Equity
Common Equity, Warrants and Other
Structured Finance Securities
Total
Level 3 assets, December 31, 2022
$
224,614
$
56,199
$
1,226
$
8,196
$
91,000
$
88,518
$
469,753
Net realized loss on investments
(68)
(72)
(9,210)
—
(6,642)
—
(15,992)
Net unrealized appreciation (depreciation) on investments
(2,312)
(798)
8,084
2,461
(844)
(3,416)
3,175
Amortization of Net Loan Fees
781
213
—
—
—
170
1,164
Accretion of interest income on Structured Finance Securities
—
—
—
—
—
8,534
8,534
Capitalized PIK interest and dividends
649
38
—
804
—
—
1,491
Amendment fees received
(134)
(32)
—
—
—
—
(166)
Purchase and origination of portfolio investments
26,378
—
—
345
356
7,642
34,721
Proceeds from principal payments on portfolio investments
(37,777)
—
—
—
—
(8,511)
(46,288)
Sale and redemption of portfolio investments
(1,697)
(1,013)
—
—
—
—
(2,710)
Proceeds from distributions received from portfolio investments
—
—
—
—
(962)
(9,648)
(10,610)
Transfers from Level 3 to Level 2
(7,491)
—
—
—
—
—
(7,491)
Level 3 assets, September 30, 2023
$
202,943
$
54,535
$
100
$
11,806
$
82,908
$
83,289
$
435,581
The net unrealized appreciation (depreciation) reported in the Company’s consolidated statements of operations for the nine months ended September 30, 2024 and 2023, attributable to the Company’s Level 3 assets still held at those respective period ends, was as follows:
Nine Months Ended September 30,
2024
2023
Debt investments
$
(6,223)
$
(4,147)
Equity investments
200
(5,116)
Structured Finance Securities
562
(3,622)
Net unrealized depreciation on investments held
$
(5,461)
$
(12,885)
40
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
Other Financial Assets and Liabilities
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, cash equivalents, receivables and payables approximate the fair value of such items due to the short maturity of such financial instruments. The Banc of California Credit Facility and BNP Facility are variable rate instruments and fair value is estimated to approximate carrying value.
The following table sets forth carrying values and fair values of the Company’s debt as of September 30, 2024 and December 31, 2023:
September 30, 2024
December 31, 2023
Description
Carrying Value(1)
Fair Value
Carrying Value(1)
Fair Value
Banc of California Credit Facility(2)
$
—
$
—
$
—
$
—
BNP Facility
69,100
69,100
90,500
90,500
Unsecured Notes Due February 2026
123,903
120,473
123,322
116,688
Unsecured Notes Due October 2028
54,164
49,346
54,011
48,565
SBA debentures(3)
—
—
31,900
30,904
Total debt
$
247,167
$
238,919
$
299,733
$
286,657
(1) Carrying value is calculated as the outstanding principal amount less unamortized deferred debt issuance costs.
(2) As of September 30, 2024 and December 31, 2023, the Company had $-0- and $-0-, respectively, of outstanding debt under the Banc of California Credit Facility.
(3) On March 1, 2024, SBIC I LP fully repaid its outstanding SBA debentures totaling $31,920 that were contractually due March 1, 2025, and, on April 17, 2024, surrendered its license to operate as a SBIC.
The following tables present the fair value measurements of the Company's debt and the level within the fair value hierarchy of the significant unobservable inputs utilized by the Company to determine such fair values as of September 30, 2024 and December 31, 2023:
September 30, 2024
Description
Level 1(1)
Level 2
Level 3(2)
Total
Banc of California Credit Facility
$
—
$
—
$
—
$
—
BNP Facility
—
—
69,100
69,100
Unsecured Notes Due February 2026
—
—
120,473
120,473
Unsecured Notes Due October 2028
49,346
—
—
49,346
Total debt, at fair value
$
49,346
$
—
$
189,573
$
238,919
December 31, 2023
Description
Level 1(1)
Level 2
Level 3(2)
Total
Banc of California Credit Facility
$
—
$
—
$
—
$
—
BNP Facility
—
—
90,500
90,500
Unsecured Notes Due February 2026
—
—
116,688
116,688
Unsecured Notes Due October 2028
48,565
—
—
48,565
SBA debentures
—
—
30,904
30,904
Total debt, at fair value
$
48,565
$
—
$
238,092
$
286,657
(1) For Level 1 measurements, fair value is estimated by using the closing price of the security on the Nasdaq Global Select Market.
(2) 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.
41
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
Note 6. Commitments and Contingencies
The following table shows the Company’s outstanding commitments to fund investments to portfolio companies as of September 30, 2024:
Portfolio Company
Investment Type
Commitment
Boca Home Care Holdings, Inc.
First Lien Debt (Revolver)
$
1,290
Clevertech Bidco, LLC
First Lien Debt (Revolver)
294
Envocore Holding, LLC (F/K/A LRI Holding, LLC)
First Lien Debt (Revolver)
1,670
Flow Service Partners Management, LLC
First Lien Debt (Revolver)
636
Honor HN Buyer Inc.
First Lien Debt (Revolver)
664
Honor HN Buyer Inc.
First Lien Debt (Delayed Draw)
1,165
Kreg LLC
First Lien Debt (Revolver)
1,337
Medrina LLC
First Lien Debt (Revolver)
319
Medrina LLC
First Lien Debt (Delayed Draw)
447
Tolemar Acquisition, Inc.
First Lien Debt (Revolver)
669
$
8,491
As of September 30, 2024, the Company had cash and cash equivalents of $20,278 and unused commitments of $25,000 under its Banc of California Credit Facility and $80,900 under its BNP Facility, each of which is subject to a borrowing base and other covenants, to fund these outstanding commitments to portfolio companies.
Legal and regulatory proceedings: 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 September 30, 2024.
Additionally, the Company is subject to periodic inspection by regulators to assess compliance with applicable BDC regulations.
Indemnifications: In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide for general indemnification. 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 low.
Note 7. Borrowings
SBA Debentures:On March 1, 2024, SBIC I LP fully repaid its outstanding SBA debentures totaling $31,920 that were contractually due March 1, 2025, and, on April 17, 2024, surrendered its license to operate as a SBIC.
For the three and nine months ended September 30, 2024 and 2023, the components of interest expense, cash paid for interest, effective interest rates and average outstanding balances for the SBA debentures were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Stated interest expense
$
—
$
328
$
151
$
1,006
Amortization of debt issuance costs
—
43
20
133
Total interest and debt financing costs
$
—
$
371
$
171
$
1,139
Cash paid for interest expense
$
—
$
694
$
457
$
1,419
Effective interest rate
—
%
3.27
%
3.26
%
3.24
%
Average outstanding balance
$
—
$
45,311
$
6,990
$
46,795
BNP Facility: On June 20, 2019, OFSCC-FS entered into the BNP Facility, which provides for borrowings in an aggregate principal amount up to $150,000, subject to a borrowing base and other covenants. The BNP Facility bears interest at a variable rate of SOFR plus a variable margin (2.65% floor). The reinvestment period of the BNP Facility ends on June 20, 2025, upon
42
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
which the ability to access the unused commitment of the facility terminates, and the facility is scheduled to mature on June 20, 2027.
The BNP Facility is collateralized by all the assets held by OFSCC-FS. OFSCC-FS and the Company have each made customary representations and warranties and are required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities.
As of September 30, 2024 and December 31, 2023, OFSCC-FS had outstanding debt of $69,100 and $90,500, respectively. As of September 30, 2024, the unused commitment under the BNP Facility was $80,900.
For the three and nine months ended September 30, 2024 and 2023, the components of interest expense, cash paid for interest, average interest rates and average outstanding balances for the BNP Facility were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Stated interest expense(1)
$
1,486
$
2,012
$
4,932
$
6,008
Amortization of debt issuance costs
95
95
285
285
Total interest and debt financing costs
$
1,581
$
2,107
$
5,217
$
6,293
Cash paid for interest expense
$
1,511
$
2,101
$
5,114
$
6,069
Effective interest rate
9.15
%
8.61
%
8.91
%
8.12
%
Average outstanding balance
$
69,100
$
97,883
$
78,053
$
103,327
(1) Stated interest expense includes unused fees.
Banc of California Credit Facility: On March 7, 2018, the Company entered into the Banc of California Credit Facility. On December 15, 2023, the Company amended the Banc of California Credit Facility to: (i) extend the maturity date from February 28, 2024 to February 28, 2026; (ii) increase the interest rate floor from 4.00% to 5.00%; and (iii) eliminate the 0.50% unused line fee and replace it with an annual commitment fee of 0.50% of the maximum principal amount of the facility. Fees and legal costs incurred in connection with the Banc of California Credit Facility are amortized over the expected life of the facility.
The maximum availability of the Banc of California Credit Facility is equal to 50% of the aggregate outstanding principal amount of eligible loans included in the borrowing base as specified in the BLA. The Banc of California Credit Facility is guaranteed by OFSCC-MB and secured by all of our and OFSCC-MB’s current and future assets, excluding assets held by OFSCC-FS and SBIC I LP, and the Company’s partnership interests in SBIC I LP. The Company has made customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities.
As of September 30, 2024 and December 31, 2023, the Company had $-0- and $-0-, respectively, of outstanding debt under the Banc of California Credit Facility. As of September 30, 2024, the unused commitment under the Banc of California Credit Facility was $25,000.
For the three and nine months ended September 30, 2024 and 2023, the components of interest expense, cash paid for interest, average interest rates and average outstanding balances for the Banc of California Credit Facility were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Stated interest expense
$
—
$
25
$
—
$
136
Amortization of debt issuance costs
31
—
94
1
Total interest and debt financing costs
$
31
$
25
$
94
$
137
Cash paid for interest expense
$
—
$
24
$
—
$
135
Effective interest rate(1)
n/m
n/m
n/m
n/m
Average outstanding balance
$
—
$
587
$
—
$
1,669
(1) Not meaningful due to a minimal average outstanding balance relative to the size of the total commitment and the amount of unused or commitment fees incurred during the periods.
43
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
Unsecured Notes: As of September 30, 2024 and December 31, 2023, the Company had the following Unsecured Notes outstanding:
Unsecured Notes Due February 2026: On February 10, 2021 and March 18, 2021, the Company issued $125,000 in aggregate principal of unsecured notes. The Unsecured Notes Due February 2026 bear interest at a rate of 4.75% per year payable semi-annually and mature on February 10, 2026. The Company may redeem the Unsecured Notes Due February 2026 in whole or in part at any time, or from time to time, at its option at par plus a “make-whole” premium, if applicable.
Unsecured Notes Due October 2028: On October 28, 2021 and November 1, 2021, the Company issued $55,000 in aggregate principal of unsecured notes. The Unsecured Notes Due October 2028 bear interest at a rate of 4.95% per year payable semi-annually and mature on October 31, 2028. The Company may redeem the Unsecured Notes Due October 2028 in whole or in part at any time.
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 grants a security interest), to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under the Banc of California Credit Facility.
The indenture governing the Unsecured Notes contains certain covenants, including: (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 unless the Company’s asset coverage, as defined in the 1940 Act, is at least 150% at the time of such capital transaction and after deducting the amount of such transaction.
For the three and nine months ended September 30, 2024 and 2023, the components of interest expense, cash paid for interest, average interest rates and average outstanding balances for the Unsecured Notes were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Stated interest expense
$
2,165
$
2,165
$
6,495
$
6,495
Amortization of debt issuance costs
245
245
734
734
Total interest and debt financing costs
$
2,410
$
2,410
$
7,229
$
7,229
Cash paid for interest expense
$
3,649
$
3,649
$
7,979
$
7,979
Effective interest rate
5.35
%
5.35
%
5.35
%
5.35
%
Average outstanding balance
$
180,000
$
180,000
$
180,000
$
180,000
44
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
The following table shows the scheduled maturities of the principal balances of the Company’s outstanding borrowings as of September 30, 2024:
Payments due by period
Total
Less than 1 year
1 to 3 years
3 to 5 years
After 5 years
Banc of California Credit Facility(1)
$
—
$
—
$
—
$
—
$
—
Unsecured Notes
180,000
—
125,000
55,000
—
BNP Facility
69,100
—
69,100
—
—
Total
$
249,100
$
—
$
194,100
$
55,000
$
—
(1) As of September 30, 2024, the Banc of California Credit Facility had an outstanding balance of $-0- and is scheduled to mature on February 28, 2026.
For the three and nine months ended September 30, 2024 and 2023, the average dollar borrowings and weighted average effective interest rate on the Company’s outstanding borrowings were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Average dollar borrowings
$
249,100
$
323,781
$
265,043
$
331,792
Weighted average effective interest rate
6.46
%
6.07
%
6.39
%
5.95
%
45
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
Note 8. Financial Highlights
The following is a schedule of financial highlights for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Per share operating performance:
Net asset value per share at beginning of period
$
11.51
$
12.94
$
12.09
$
13.47
Net investment income(1)
0.27
0.40
0.94
1.15
Net realized gain (loss) on investments, net of taxes(1)
(0.83)
0.01
(1.09)
(0.77)
Net unrealized appreciation (depreciation) on investments, net of taxes(1)
0.68
(0.26)
0.37
(0.09)
Loss on extinguishment of debt(1)
—
(0.01)
—
(0.02)
Total net income from operations
0.12
0.14
0.22
0.27
Distributions declared
(0.34)
(0.34)
(1.02)
(1.00)
Net asset value per share at end of period
$
11.29
$
12.74
$
11.29
$
12.74
Per share market value, end of period
$
8.45
$
11.24
$
8.45
$
11.24
Total return based on market value(2)(3)
(0.9)
%
17.1
%
(19.3)
%
21.7
%
Total return based on net asset value(3)(4)
2.0
%
1.4
%
4.3
%
3.9
%
Shares outstanding at end of period
13,398,078
13,398,078
13,398,078
13,398,078
Weighted average shares outstanding
13,398,078
13,398,078
13,398,078
13,398,078
Ratio/Supplemental Data (dollar amounts in thousands)
Average net asset value(5)
$
152,739
$
172,045
$
153,970
$
176,080
Net asset value at end of period
$
151,305
$
170,668
$
151,305
$
170,668
Net investment income
$
3,603
$
5,390
$
12,636
$
15,463
Ratio of total expenses to average net assets(6)
19.2
%
21.5
%
20.5
%
21.2
%
Ratio of total expenses and loss on extinguishment of debt to average net assets(6)
19.2
%
21.6
%
20.5
%
21.3
%
Ratio of net investment income to average net assets(6)
9.4
%
12.5
%
10.9
%
11.7
%
Ratio of loss on extinguishment of debt to average net assets(3)
0.0%
0.1
%
0.0%
0.1
%
Portfolio turnover(7)
12.2
%
1.8
%
15.1
%
7.1
%
(1)Calculated on the average share method.
(2)Calculated as ending market value less beginning market value, adjusted for distributions reinvested at prices based on the Company’s DRIP for the respective distributions.
(3)Not annualized.
(4)Calculated as ending net asset value less beginning net asset value, adjusted for distributions reinvested at prices based on the Company’s DRIP for the respective distributions.
(5)Based on the average of the net asset value at the beginning and end of the indicated period and, if applicable, the preceding calendar quarters.
(6)Annualized.
(7)Portfolio turnover rate is calculated using the lesser of period-to-date sales, portfolio investment distributions and principal payments or period-to-date purchases over the average of the invested assets at fair value.
46
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
Note 9. Capital Transactions
Distributions: The Company intends to make quarterly distributions to stockholders, that represent over time, substantially all of its net investment income. In addition, although the Company may distribute at least annually net realized capital gains, net of taxes if any, out of assets legally available for such distribution, the Company may also retain such capital gains for investment through a deemed distribution. If the Company makes a deemed distribution, stockholders will be treated for U.S. federal income tax purposes as if they had received an actual distribution of the capital gains, net of taxes.
The Company may be limited in its ability to make distributions due to the BDC asset coverage requirements of the 1940 Act. In addition, distributions from OFSCC-FS to the Company are restricted by the terms and conditions of the BNP Facility.
The following table summarizes distributions declared and paid for the nine months ended September 30, 2024 and 2023:
Date Declared
Record Date
Payment Date
Amount Per Share
Cash Distribution
Nine Months Ended September 30, 2024
February 28, 2024
March 18, 2024
March 28, 2024
$
0.34
$
4,555
(1)
April 30, 2024
June 18, 2024
June 28, 2024
0.34
4,556
(1)
July 30, 2024
September 20, 2024
September 30, 2024
0.34
4,555
(1)
$
1.02
$
13,666
Nine Months Ended September 30, 2023
February 28, 2023
March 24, 2023
March 31, 2023
$
0.33
$
4,421
(1)
May 2, 2023
June 23, 2023
June 30, 2023
0.33
4,422
(1)
August 1, 2023
September 22, 2023
September 29, 2023
0.34
4,555
(1)
$
1.00
$
13,398
(1) During the nine months ended September 30, 2024 and 2023, the Company directed the DRIP plan administrator to purchase shares on the open market in order to satisfy the DRIP obligation to deliver shares of common stock. Accordingly, the Company purchased shares to satisfy the DRIP obligation as follows:
Number of Shares Purchased
Average Price Paid Per Share
Total Amount Paid
Nine Months Ended September 30, 2024
January 1, 2024 through March 31, 2024
8,530
$
10.04
$
86
April 1, 2024 through June 30, 2024
9,092
8.85
80
July 1, 2024 through September 30, 2024
10,568
8.45
89
Nine Months Ended September 30, 2023
January 1, 2023 through March 31, 2023
5,096
$
10.43
$
53
April 1, 2023 through June 30, 2023
5,823
10.06
59
July 1, 2023 through September 30, 2023
8,007
11.22
90
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 adjusted 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 estimated ICTI for the full year and distributions paid for the full year. Each year, a statement on Form 1099-DIV identifying the tax character of distributions is mailed to the Company’s stockholders.
Stock Repurchase Program:
The Company maintains a Stock Repurchase Program under which the Company may acquire up to $10,000 of its outstanding common stock. On April 30, 2024, the Board extended the Stock Repurchase Program for an additional two-year period ending May 22, 2026, 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.
During the nine months ended September 30, 2024 and 2023, no shares of common stock were repurchased under the Stock Repurchase Program.
47
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
Note 10. Consolidated Schedule of Investments In and Advances To Affiliates
Nine Months Ended September 30, 2024
Name of Portfolio Company
Investment Type (1)
Net Realized Gain (Loss)
Net Change in Unrealized Appreciation/(Depreciation)
Interest
Dividends
Fees
Total Income (2)
December 31, 2023, Fair Value
Gross Additions (3)
Gross Reductions (4)
September 30, 2024, Fair Value (5)
Affiliate Investments
Contract Datascan Holdings, Inc.
Preferred Equity (7)
$
—
$
(1,472)
$
—
$
812
$
—
$
812
$
10,312
$
812
$
(1,472)
$
9,652
Common Equity (6)
—
(271)
—
—
—
—
271
—
(271)
—
—
(1,743)
—
812
—
812
10,583
812
(1,743)
9,652
DRS Imaging Services, LLC
Common Equity (6)
—
576
—
—
—
—
393
576
—
969
Master Cutlery, LLC
Subordinated Loan (6)
(4,352)
4,680
—
—
—
—
—
4,680
(4,680)
—
Preferred Equity (6)
(3,483)
3,483
—
—
—
—
—
3,483
(3,483)
—
Common Equity (6)
—
—
—
—
—
—
—
—
—
—
(7,835)
8,163
—
—
—
—
—
8,163
(8,163)
—
Pfanstiehl Holdings, Inc
Common Equity
—
2,739
—
546
—
546
70,927
2,739
—
73,666
TalentSmart Holdings, LLC
Common Equity (6)
—
445
—
—
—
—
1,136
445
—
1,581
TRS Services, LLC
Preferred Equity
572
(2,410)
—
1,891
—
1,891
2,507
—
(2,507)
—
Common Equity (6)
757
(713)
—
—
—
—
1,285
—
(1,285)
—
1,329
(3,123)
—
1,891
—
1,891
3,792
—
(3,792)
—
Total Affiliate Investments
$
(6,506)
$
7,057
$
—
$
3,249
$
—
$
3,249
$
86,831
$
12,735
$
(13,698)
$
85,868
(1)Principal balance, interest rate and maturity of debt investments, and ownership detail for equity investments are presented 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 income for the nine months ended September 30, 2024.
(3)Gross additions include increases in cost basis of investments resulting from a new portfolio investment, PIK interest, fees and dividends, accretion of Net Loan Fees, and net increases in unrealized appreciation or decreases in net unrealized depreciation.
(4)Gross reductions include decreases in the cost basis of investments resulting from principal repayments and sales, 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 recognized as income include PIK dividends contractually earned but not declared.
48
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data)
Note 11. Subsequent Events
On October 29, 2024, the Board declared a distribution of $0.34 per share for the fourth quarter of 2024, payable on December 31, 2024 to stockholders of record as of December 20, 2024.
49
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 Quarterly Report on Form 10-Q. For additional overview information on the Company, see “Item 1. Business” in our Annual Report on Form 10-K for the year ended December 31, 2023.
Overview
Key performance metrics per common share are presented below:
September 30, 2024
June 30, 2024
Net asset value
$
11.29
$
11.51
Three Months Ended
Nine Months Ended
September 30, 2024
June 30, 2024
September 30, 2024
September 30, 2023
Net investment income
$
0.27
$
0.26
$
0.94
$
1.15
Net increase in net assets resulting from operations
0.12
0.77
0.22
0.27
Distributions paid
0.34
0.34
1.02
1.00
Our NAV per common share decreased to $11.29 at September 30, 2024 from $11.51 at June 30, 2024, due to a net loss on investments of $0.15 per common share and our quarterly distribution of $0.34 per common share exceeding our quarterly net investment income of $0.27 per common share.
For the quarter ended September 30, 2024, total investment income decreased to $10.9 million from $11.2 million in the prior quarter, primarily due to a decrease of $0.2 million in interest income. For the quarter ended September 30, 2024, interest income decreased to $10.6 million from $10.9 million in the prior quarter, primarily due to a smaller average investment portfolio at cost. See “—Results of Operations” for additional information.
As of September 30, 2024, our total outstanding debt was $249.1 million and remained unchanged compared to our total outstanding debt at June 30, 2024. For the quarter ended September 30, 2024, our weighted-average debt interest costs remained stable at 6.46% compared to 6.45% for the quarter ended June 30, 2024. As of September 30, 2024, approximately 50% of our outstanding debt matures in 2027 and beyond, and 72% of our outstanding debt carries fixed interest rates and is unsecured.
For the quarter ended September 30, 2024, we recognized a net loss on investments of $1.9 million, primarily due to net realized losses of $11.1 million, partially offset by net unrealized appreciation of $9.2 million. For the quarter ended September 30, 2024, our net realized loss of $11.1 million was primarily due to a $7.8 million loss upon the write-off of our debt and equity investments in Master Cutlery, LLC, which had no impact on our NAV during the quarter as the loss had been substantially recognized in prior fiscal periods. For the quarter ended September 30, 2024, our net unrealized appreciation of $9.2 million was primarily due to net unrealized appreciation of $2.8 million on our common equity in Pfanstiehl Holdings, Inc., as well as the reversal of previously recognized unrealized depreciation on exited investments. As of September 30, 2024, our loan portfolio had non-accrual loans with an aggregate fair value of $21.1 million, or 5.4% of our total investments at fair value. See “—Portfolio Composition and Investment Activity” for additional information.
As of September 30, 2024, our asset coverage ratio of 161% exceeded the minimum asset coverage requirement of 150% under the 1940 Act, and we remained in compliance with all applicable covenants under our outstanding debt facilities. As of September 30, 2024, we had unused commitments of $25.0 million under our Banc of California Credit Facility, as well as $80.9 million under our BNP Facility, each of which is subject to a borrowing base and other covenants. As of September 30, 2024, we had a payable for investments purchased of $14.7 million and unfunded commitments of $8.5 million to eight portfolio companies. See “—Liquidity and Capital Resources” for additional information.
On October 29, 2024, the Board declared a distribution of $0.34 per share for the fourth quarter of 2024, payable on December 31, 2024 to stockholders of record as of December 20, 2024.
Critical Accounting Policies and Significant Estimates
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 descriptions of our revenue recognition and fair value policies, see “Item 8. Financial Statements
50
—Notes to Consolidated Financial Statements—Note 2” and “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023.
The following table illustrates the impact of our fair value measures if we selected the low or high end of the range of values for all investments as of September 30, 2024 (dollar amounts in thousands):
Investment Type
Fair Value at September 30, 2024
Range of Fair Value
Low-end
High-end
Debt investments:
First lien
$
189,516
$
183,255
$
194,096
Second lien
41,571
40,076
43,292
Structured Finance Securities:
Subordinated notes
57,437
53,742
61,136
Mezzanine debt
16,391
16,086
16,696
Equity investments:
Preferred equity
10,009
8,368
11,642
Common equity, warrants and other
79,810
76,605
83,180
$
394,734
$
378,132
$
410,042
Related Party Transactions
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—Financial Statements—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—Financial Statements—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.
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 funds advised or sub-advised by OFS Advisor, so long as its services to us are not impaired. OFS Advisor also serves as the investment adviser to other funds, including HPCI and OCCI. Additionally, OFS Advisor provides sub-advisory services to various funds, including: (i) 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 (ii) CIM Real 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.
For the years ended December 31, 2024 and 2023, OFS Advisor agreed to reduce its base management fee attributable to all of the OFSCC-FS Assets to 0.25% per quarter (1.00% annualized) of the average value of the OFSCC-FS Assets (other than cash and cash equivalents but including assets purchased with borrowed amounts) at the end of the two most recently completed calendar quarters. OFS Advisor’s base management fee reduction is renewable on an annual basis and OFS Advisor is not entitled to recoup the amount of the base management fee reduced with respect to the OFSCC-FS Assets. OFS Advisor most recently renewed the agreement to reduce its base management fee for the 2024 calendar year on January 8, 2024.
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 our existing Order, which superseded a previous order that we received on October 12, 2016, and provides us with greater flexibility to enter into co-investment transactions with certain Affiliated Funds in a manner consistent with our investment objective, positions, policies, strategies
51
and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions. 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, we may file an application for an amendment to our existing Order to permit us to co-invest in our existing portfolio companies with certain affiliates that are private funds even if such other funds had not previously invested in such existing portfolio companies, subject to certain conditions. However, if filed, there is no guarantee that such application will be granted.
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. Potential conflicts arise when addressing, among other things, questions as to whether payment obligations and covenants should be enforced, modified or waived, or whether debt should be restructured, modified or refinanced. For a discussion of the risks associated with conflicts of interest, see “Item 1. Business—Regulation—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” in our Annual Report on Form 10-K for the year ended December 31, 2023.
Portfolio Composition and Investment Activity
Portfolio Composition
As of September 30, 2024, the fair value of our debt investment portfolio totaled $231.1 million in 42 portfolio companies, of which approximately 82% and 18% were first lien and second lien debt investments, respectively. We also had equity investments in 15 portfolio companies with a fair value of approximately $89.8 million and 17 investments in Structured Finance Securities with a fair value of $73.8 million. As of September 30, 2024, we had unfunded commitments of $8.5 million to eight portfolio companies. Set forth in the tables and charts below is selected information with respect to our portfolio as of September 30, 2024 and December 31, 2023.
The following table presents our ten largest investments by portfolio company based on fair value as of September 30, 2024 (dollar amounts in thousands):
As of September 30, 2024, our common equity investment in Pfanstiehl Holdings, Inc., a global manufacturer of high-purity pharmaceutical ingredients, accounted for 18.7% and 48.7% of our total portfolio at fair value and our total net assets, respectively. The value of this investment is substantially comprised of unrealized appreciation of $73.4 million.
As of September 30, 2024, approximately 5.1% and 13.3% of our total portfolio at fair value and net assets, respectively, were comprised of Structured Finance Securities managed by a single adviser.
A deterioration or improvement in the operating performance of these portfolio investments, or other factors underlying the valuation of these investments, could have a material impact on our NAV.
Portfolio Yields
The following table presents weighted-average yield metrics for our portfolio as of September 30, 2024 and June 30, 2024:
For the Three Months Ended
September 30, 2024
June 30, 2024
Weighted-average performing income yield(1):
Debt investments
13.3
%
13.7
%
Structured Finance Securities
14.2
%
12.4
%
Interest-bearing investments
13.6
%
13.4
%
Weighted-average realized yield(2):
Interest-bearing investments
11.8
%
11.8
%
(1) Performing income yield is calculated as (a) the actual amount earned on performing interest-bearing investments, including interest, prepayment fees and amortization of Net Loan Fees, divided by (b) the weighted-average of total performing interest-bearing investments at amortized cost.
(2) Realized yield is calculated as (a) the actual amount earned on interest-bearing investments, including interest, prepayment fees and amortization of Net Loan Fees, divided by (b) the weighted-average of total interest-bearing investments at amortized cost, in each case, including debt investments on non-accrual status and non-income producing Structured Finance Securities.
For the three months ended September 30, 2024, the weighted-average performing income yield on interest-bearing investments increased to 13.6% from 13.4% during the prior quarter, primarily due to the sale of certain Structured Finance Securities and the redeployment of proceeds into higher yielding CLO subordinated note securities, partially offset by the timing of the redeployment of proceeds from repayments related to certain debt investments.
Weighted-average yields of our investments are 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 yields will remain at their current levels. As of September 30, 2024, 91% of our total loan portfolio, at fair value, consisted of variable rate investments, generally indexed to SOFR. See additional information under “Item 3. Quantitative and Qualitative Disclosures About Market Risk”.
53
Portfolio Company Investments
The following table summarizes the composition of our Portfolio Company Investments as of September 30, 2024 and December 31, 2023 (dollar amounts in thousands):
September 30, 2024
December 31, 2023
Amortized Cost
Fair Value
Amortized Cost
Fair Value
First lien debt investments(1)
$
212,280
$
189,516
$
220,941
$
202,792
Second lien debt investments
50,516
41,571
57,848
48,521
Subordinated debt investments
—
—
4,680
—
Preferred equity
9,904
10,009
11,403
13,240
Common equity, warrants and other
12,365
79,810
11,537
76,689
Total Portfolio Company Investments
$
285,065
$
320,906
$
306,409
$
341,242
Number of portfolio companies
52
52
55
55
(1) As of September 30, 2024 and December 31, 2023, first lien debt investments include unitranche investments (which are loans that combine both senior and subordinated debt, in a first lien position) with an amortized cost and fair value of $119.7 million and $109.4 million, respectively, and $141.3 million and $131.3 million, respectively.
As of September 30, 2024, 100% of our loan portfolio and 59% of our total portfolio consisted of first lien and second lien loans, based on fair value.
As of September 30, 2024, the three largest industries of our Portfolio Company Investments by fair value, were: (1) Manufacturing (33.4%); (2) Health Care and Social Assistance (20.5%); and (3) Professional, Scientific, and Technical Services (8.8%), totaling an aggregate of approximately 62.7% of our Portfolio Company Investment portfolio. For a full summary of our investment portfolio by industry, see “Item 1—Financial Statements—Note 4.”
Structured Finance Securities
The following table summarizes the composition of our Structured Finance Securities as of September 30, 2024 and December 31, 2023 (dollar amounts in thousands):
September 30, 2024
December 31, 2023
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Subordinated notes
$
70,836
$
57,437
$
66,774
$
49,985
Mezzanine debt
16,700
16,391
30,347
29,060
Total Structured Finance Securities
$
87,536
$
73,828
$
97,121
$
79,045
Number of Structured Finance Securities
17
17
21
21
As of September 30, 2024, the amortized cost and fair value of non-performing Structured Finance Securities were $5.7 million and $1.9 million, respectively. Non-performing Structured Finance Securities are securities that have not been optionally redeemed and have an effective yield of 0.0%, as remaining residual distributions are anticipated to be recognized as a return of capital.
During the nine months ended September 30, 2024, we sold Structured Finance Securities for aggregate net proceeds of $19.2 million and recognized a net realized loss of $3.5 million.
54
Investment Activity
The following is a summary of our investment activity for the three and nine months ended September 30, 2024 (dollar amounts in thousands):
Three Months Ended September 30, 2024
Nine Months Ended September 30, 2024
Investments in debt and equity securities
$
30,418
$
42,766
Investments in Structured Finance Securities
17,982
17,982
Total investment purchases and originations
$
48,400
$
60,748
Proceeds from principal payments
$
31,803
$
52,707
Proceeds from investments sold or redeemed
18,569
22,242
Proceeds from distributions received from portfolio investments
2,935
11,053
Total proceeds from principal payments, sales or redemptions, and distributions received from portfolio investments
$
53,307
$
86,002
Non-Cash Investment Activity
During the three months ended September 30, 2024, we wrote off our preferred and common equity investments in Master Cutlery, LLC, resulting in a net realized loss of $3.5 million. The net realized loss of $3.5 million was fully recognized in prior fiscal periods and did not impact our NAV during the quarter.
During the nine months ended September 30, 2024, our first lien debt investment in GoTo Group underwent a restructuring whereby our first lien debt investment was exchanged at a price equal to 77% of par for new first lien debt investments in the company. We recognized a realized loss of $0.7 million on the debt restructure corresponding to the amount forgiven upon the exchange.
During the nine months ended September 30, 2024, we restructured our first lien debt investments in Avison Young to, among other things, exchange our first lien debt investments for new first lien debt investments, preferred equity and common equity. The cost of the existing first lien debt investments was ascribed to the new investments received in the exchange, and no realized loss was recognized. We also invested an incremental $0.8 million in new-issue first lien debt.
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” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed on March 5, 2024. The following table shows the classification of our debt investments, excluding Structured Finance Securities, by credit risk rating as of September 30, 2024 and December 31, 2023 (dollar amounts in thousands):
Debt Investments as of
September 30, 2024
December 31, 2023
Risk Category
Amortized Cost
Fair Value
% of Debt Investments, at Fair Value
Amortized Cost
Fair Value
% of Debt Investments, at Fair Value
1 (Low Risk)
$
—
$
—
—
%
$
—
$
—
—
%
2 (Below Average Risk)
—
—
—
—
—
—
3 (Average)
195,041
189,264
81.9
230,338
223,394
88.9
4 (Special Mention)
47,216
33,199
14.4
25,147
19,581
7.8
5 (Substandard)
18,604
8,600
3.7
18,772
8,136
3.2
6 (Doubtful)
1,935
24
—
9,212
202
0.1
7 (Loss)
—
—
—
—
—
—
$
262,796
$
231,087
100.0
%
$
283,469
$
251,313
100.0
%
Non-Accrual Loans
Management reviews, for placement on non-accrual status, all loans and CLO mezzanine debt investments that become past due on principal and interest, and/or when there is reasonable doubt that principal or interest will be collected. When a loan is placed on non-accrual status, accrued and unpaid cash interest is reversed. Additionally, Net Loan Fees are no
55
longer recognized as of the date the loan is placed on non-accrual status. Depending upon management’s judgment, interest payments subsequently received on non-accrual investments may be recognized as interest income or applied as a reduction to amortized cost. Interest accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal and interest payments and, in the judgment of management, it is probable that the Company will collect all principal and interest from the investment.
As of September 30, 2024
The following table shows the classification of our debt investments on non-accrual status (dollar amounts in thousands):
September 30, 2024
Amortized Cost
Fair Value
First lien debt
$
32,549
$
18,332
Second lien debt
8,519
2,793
Total
$
41,068
$
21,125
For the three months ended September 30, 2024, one first lien debt investment with an amortized cost and fair value of $4.5 million and $2.4 million, respectively, was placed on non-accrual status.
For the three months ended September 30, 2024, we wrote off our subordinated debt investment in Master Cutlery, LLC, which was previously on non-accrual status, following a partial-recovery payment of $0.3 million, resulting in a net realized loss of $4.4 million. The net realized loss was fully recognized in prior periods as an unrealized loss.
As of December 31, 2023
The following table shows the classification of our debt investments on non-accrual status (dollar amounts in thousands):
December 31, 2023
Amortized Cost
Fair Value
First lien debt
$
18,772
$
8,136
Second lien debt
11,115
4,003
Subordinated debt
4,680
—
Total
$
34,567
$
12,139
Results of Operations
Our key financial measures are described in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Key Financial Measures” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed on March 5, 2024. The following is a discussion of the key financial measures that management employs in reviewing the performance of our operations.
We do not believe that our historical operating performance is necessarily indicative of our future results of operations. We are primarily focused on debt investments in middle-market and larger companies in the United States and, to a lesser extent, equity investments, including warrants and other minority equity securities, and Structured Finance Securities. This approach differs from our historical investment concentration in that we now also focus on the debt of larger U.S. companies and Structured Finance 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. 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.
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 (decrease) in net assets resulting from operations may not be meaningful.
The following analysis compares our quarterly results of operations to the preceding quarter, as well as our year-to-date results of operations to the corresponding period in the prior year. We believe a comparison of our current quarterly results to the preceding quarter is more meaningful and transparent than a comparison to the corresponding prior-year quarter as our results of operations are not influenced by seasonal factors the latter comparison is designed to elicit and highlight.
56
Comparison of the three months ended September 30, 2024 and June 30, 2024 and comparison of the nine months ended September 30, 2024 and 2023
Consolidated operating results for the three months ended September 30, 2024 and June 30, 2024, and the nine months ended September 30, 2024 and 2023 are as follows (in thousands):
Three Months Ended
Nine Months Ended
September 30, 2024
June 30, 2024
September 30, 2024
September 30, 2023
Investment income
Interest income:
Cash interest income
$
7,535
$
7,931
$
23,683
$
31,171
PIK interest income
349
492
1,183
610
Net Loan Fee amortization
436
562
1,296
1,238
Accretion of interest income on CLO subordinated notes
2,163
1,783
6,039
8,534
Other interest income
130
86
659
232
Total interest income
10,613
10,854
32,860
41,785
Dividend income:
Cash dividends
11
9
2,469
649
Preferred equity PIK dividends
279
271
812
804
Total dividend income
290
280
3,281
1,453
Fee income:
Syndication fees
—
—
106
96
Prepayment and other fees
15
31
69
126
Total fee income
15
31
175
222
Total investment income
10,918
11,165
36,316
43,460
Total expenses
7,315
7,728
23,680
27,997
Net investment income
3,603
3,437
12,636
15,463
Net gain (loss) on investments
(1,915)
6,891
(9,669)
(11,607)
Loss on extinguishment of debt
—
—
—
(213)
Net increase in net assets resulting from operations
$
1,688
$
10,328
$
2,967
$
3,643
Investment Income
Comparison of the three months ended September 30, 2024 and June 30, 2024
For the three months ended September 30, 2024, total investment income decreased to $10.9 million from $11.2 million in the prior quarter, primarily due to a decrease in interest income of $0.2 million.
Interest income decreased $0.2 million during the three months ended September 30, 2024 compared to the prior quarter, primarily due to an aggregate decrease of $0.5 million in contractual cash and PIK interest, partially offset by an increase in accretion of interest income on our CLO subordinated notes of $0.4 million.
During the three months ended September 30, 2024, dividend and fee income remained stable compared to the prior quarter.
Fee income is primarily comprised of unused fees, prepayment fees and syndication fees that generally result from periodic transactions rather than from holding portfolio investments, and are considered non-recurring. We receive syndication fees on investments where OFS Advisor sources, structures, and arranges the lending group.
57
Comparison of the nine months ended September 30, 2024 and 2023
Total investment income for the nine months ended September 30, 2024 decreased $7.1 million compared to the corresponding period in the prior year, primarily due to a decrease in total interest income of $8.9 million, partially offset by an increase in total dividend income of $1.8 million.
Expenses
Operating expenses for the three months ended September 30, 2024 and June 30, 2024, and the nine months ended September 30, 2024 and 2023 are presented below (in thousands):
Three Months Ended
Nine Months Ended
September 30, 2024
June 30, 2024
September 30, 2024
September 30, 2023
Interest expense
$
4,022
$
4,117
$
12,711
$
14,798
Base management fee
1,472
1,478
4,473
5,573
Income Incentive Fee
901
859
3,159
3,866
Professional fees
391
414
1,219
1,262
Administration fee
337
453
1,184
1,302
Other expenses
192
407
934
1,196
Total expenses
$
7,315
$
7,728
$
23,680
$
27,997
Comparison of the three months ended September 30, 2024 and June 30, 2024
Interest expense for the three months ended September 30, 2024 decreased $0.1 million compared to the prior quarter, primarily due to a decrease of $6.1 million in our average outstanding debt balances compared to the prior quarter.
Other expenses for the three months ended September 30, 2024 decreased $0.2 million compared to the prior quarter, primarily due to an excise tax refund accrual of $0.1 million upon finalizing the prior year tax return, as well as the prior quarter including the write-off of $0.1 million of deferred offering costs upon our new shelf registration statement being deemed effective.
Comparison of the nine months ended September 30, 2024 and 2023
Interest expense for the nine months ended September 30, 2024 decreased $2.1 million compared to the corresponding period in the prior year, primarily due to the full repayment of our SBA debentures in March 2024 and a reduction in the outstanding amount under the BNP Facility.
Base management fees for the nine months ended September 30, 2024 decreased $1.1 million compared to the corresponding period in the prior year, primarily due to the decrease in our average total assets (excluding cash and cash equivalents) during the period.
Income Incentive Fees for the nine months ended September 30, 2024 decreased $0.7 million compared to the corresponding period in the prior year, primarily due to a decrease in our average interest-bearing investment portfolio, at cost, which reduced our net investment income during the current year.
Net realized and unrealized gain (loss) on investments
Net gain (loss) on investments, inclusive of realized and unrealized gains (losses), by investment type for the three months ended September 30, 2024 and June 30, 2024, and the nine months ended September 30, 2024 and 2023 were as follows (in thousands):
Three Months Ended
Nine Months Ended
September 30, 2024
June 30, 2024
September 30, 2024
September 30, 2023
Debt investments
$
(4,327)
$
(3,079)
$
(8,656)
$
(3,080)
Equity investments
3,916
8,310
(1,421)
(5,052)
Structured Finance Securities
(1,272)
1,798
841
(3,421)
Current/deferred income tax expense
(232)
(138)
(433)
(54)
Total net gain (loss) on investments
$
(1,915)
$
6,891
$
(9,669)
$
(11,607)
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Net gain (loss) on investments for the three months ended September 30, 2024 and June 30, 2024
Three months ended September 30, 2024
For the three months ended September 30, 2024, we recognized a net loss on investments of $1.9 million, primarily comprised of aggregate net losses of $5.6 million on our loans and Structured Finance Securities, and partially offset by net gains of $3.7 million on our equity securities.
Three months ended June 30, 2024
For the three months ended June 30, 2024, we recognized a net gain on investments of $6.9 million, primarily due to net unrealized appreciation of $11.2 million, net of taxes, partially offset by net realized losses of $4.3 million. For the three months ended June 30, 2024, our net unrealized appreciation of $11.2 million, net of taxes, was primarily related to net unrealized appreciation of $7.8 million on our common equity in Pfanstiehl Holdings, Inc., and net unrealized appreciation of $2.1 million on our subordinated note investment in Apex Credit CLO 2020 Ltd.
Net gain (loss) on investments for the nine months ended September 30, 2024 and 2023
Nine months ended September 30, 2024
For the nine months ended September 30, 2024, we recognized a net loss on investments of $9.7 million, primarily due to a net loss on our debt investments of $8.7 million, of which $6.4 million related to net unrealized depreciation on our current non-accrual debt investments.
During the nine months ended September 30, 2024, our common equity investment in Pfanstiehl Holdings, Inc. experienced net unrealized appreciation of $2.7 million.
Nine months ended September 30, 2023
During the nine months ended September 30, 2023, our portfolio experienced net losses of $11.6 million, primarily due to net unrealized depreciation of $6.7 million on our common equity, warrants and other investments and $3.4 million on our Structured Finance Securities, respectively.
During the nine months ended September 30, 2023, our common equity investment in Pfanstiehl Holdings, Inc. experienced unrealized depreciation of $8.4 million.
Loss on Extinguishment of Debt
Nine months ended September 30, 2023
During the nine months ended September 30, 2023, we redeemed SBA debentures of $19.0 million, and, as a result, we recognized a loss on extinguishment of debt of $0.2 million related to the acceleration of unamortized deferred debt issuance costs on the redeemed debentures.
Liquidity and Capital Resources
As of September 30, 2024, we held cash and cash equivalents of $20.3 million, which included $8.0 million held by OFSCC-FS. Distributions from OFSCC-FS to the Parent are restricted by the terms and conditions of the BNP Facility. During the nine months ended September 30, 2024, the Parent received $8.8 million in cash distributions from OFSCC-FS.
As of September 30, 2024, we had an unused commitment of $25.0 million under our Banc of California Credit Facility, as well as an unused commitment of $80.9 million under our BNP Facility, both of which are subject to a borrowing base requirements and other covenants. As of September 30, 2024, we had a payable for investments purchased of $14.7 million and unfunded commitments of $8.5 million to eight portfolio companies.
As of September 30, 2024, the aggregate amount outstanding of the senior securities issued by us was $249.1 million, for which our asset coverage was 161%, exceeding our minimum asset coverage requirement of 150% under the 1940 Act. 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.
59
Sources and Uses of Cash
We generate operating cash flows from net investment income and the net proceeds from liquidation of portfolio investments, and use cash in our operations in the net purchase of portfolio investments and payment of expenses. 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 certain 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 accreted interest income on Structured Finance Securities, which may not coincide with cash distributions from these investments. As discussed in “Item 1.—Financial Statements—Note 3,” we pay OFS Advisor a quarterly incentive fee with respect to our pre-incentive fee net investment income, which may include investment income that we have not received in cash. In addition, we must distribute substantially all of our taxable income, which approximates, but will not always equal, the cash we generate from net investment income to maintain our RIC tax treatment. 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):
Nine Months Ended September 30,
2024
2023
Cash from net investment income(1)
$
8,815
$
12,638
Net (purchases and originations) / repayments and sales of portfolio investments(1)
33,100
34,365
Net cash provided by operating activities
41,915
47,003
Distributions paid to stockholders(2)
(13,666)
(13,398)
Net repayments under revolving lines of credit
(21,400)
(13,600)
Repayments of SBA debentures
(31,920)
(19,000)
Net cash used in financing activities
(66,986)
(45,998)
Net increase (decrease) in cash and cash equivalents
$
(25,071)
$
1,005
(1) Cash from net investment income includes all other cash flows from operating activities reported in our statements of cash flows. Net purchases and originations/repayments and sales of portfolio investments includes the purchase and origination of portfolio investments, proceeds from principal payments on portfolio investments, proceeds from sale or redemption of portfolio investments, changes in receivable for investments sold, payable from investments purchased as reported in our statements of cash flows, as well as differences in proceeds from distributions received from Structured Finance Securities relative to accretion of interest income on Structured Finance Securities.
(2) The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our 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 our distributions for a full year.
Cash from net investment income
For the nine months ended September 30, 2024, cash from net investment income of $8.8 million decreased $3.8 million compared to the nine months ended September 30, 2023, primarily due to a decrease of $5.7 million in cash interest and dividend income.
Net (purchases and originations) / repayments and sales of portfolio investments
During the nine months ended September 30, 2024, net sales and repayments of portfolio investments of $33.1 million were primarily due to $79.2 million of cash we received from principal repayments, sales on our portfolio investments and the proceeds from distributions received from Structured Finance Securities, net of accretion of interest income on Structured Finance Securities, partially offset by $46.1 million of cash we used to purchase portfolio investments. During the nine months ended September 30, 2023, net sales and repayments of portfolio investments of $34.4 million were primarily due to $69.1 million of cash we received from amortized cost repayments, sales on our portfolio investments, net proceeds from distributions received from Structured Finance Securities and accretion of interest income on Structured Finance Securities, partially offset by $34.7 million of cash we used to purchase portfolio investments. See “—Portfolio Composition and Investment Activity—Investment Activity.”
Borrowings
SBA Debentures
SBIC I LP had an SBIC license that allowed it to obtain leverage by issuing SBA-guaranteed debentures. On March 1, 2024, SBIC I LP fully repaid its outstanding SBA debentures totaling $31.9 million and, on April 17, 2024, surrendered its
60
license to operate as a SBIC. As of September 30, 2024 and December 31, 2023, SBIC I LP had outstanding debentures of $-0- and $31.9 million, respectively.
Banc of California Credit Facility
We are party to the BLA with Banc of California, as lender, to provide us with a senior secured revolving credit facility, or the Banc of California Credit Facility, which is available for general corporate purposes including investment funding. The maximum availability of the Banc of California 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 Banc of California Credit Facility is guaranteed by OFSCC-MB and secured by all of our and OFSCC-MB’s current and future assets, excluding assets held by OFSCC-FS and SBIC I LP and the Company’s partnership interests in SBIC I LP.
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, a debt/worth ratio and a net loss restriction. 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 September 30, 2024, we were in compliance in all material respects with the applicable covenants under the Banc of California Credit Facility.
As of September 30, 2024, we had $-0- outstanding and an unused commitment of $25.0 million under the Banc of California Credit Facility, subject to a borrowing base and other covenants. The Banc of California Credit Facility bears interest at a variable Prime Rate plus a 0.25% margin, with a 5.00% floor, and as of September 30, 2024, the effective interest rate on the Banc of California Credit Facility was 8.75%.
On December 15, 2023, we amended the Banc of California Credit Facility to: (i) extend the maturity date from February 28, 2024 to February 28, 2026; (ii) increase the interest rate floor from 4.00% to 5.00%; and (iii) eliminate the 0.50% unused line fee and replace it with an annual commitment fee of 0.50% of the maximum principal amount of the facility.
Unsecured Notes
As of September 30, 2024 and December 31, 2023, we had $180.0 million in outstanding Unsecured Notes. 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 Banc of California Credit Facility and BNP Facility.
In order to, among other things, reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we may, from time to time, purchase the Unsecured Notes for cash in open market purchases and/or privately negotiated transactions. We will evaluate any such transactions in light of then-existing market conditions, taking into account our current liquidity, prospects for future access to capital, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material. During the nine months ended September 30, 2024, no outstanding Unsecured Notes were repurchased.
BNP Facility
On June 20, 2019, OFSCC-FS entered into the BNP Facility, which provides for borrowings in an aggregate principal amount up to $150.0 million, of which $69.1 million was drawn as of September 30, 2024. Borrowings under the BNP Facility bear interest based on SOFR for the relevant interest period, plus an applicable spread (subject to an effective floor of 2.65%). The reinvestment period (and the ability to access the undrawn facility commitment) of the BNP Facility ends on June 20, 2025, unless extended. Borrowings under the BNP Facility are secured by substantially all of the assets held by OFSCC-FS. As of September 30, 2024, we were in compliance in all material respects with the applicable covenants under the BNP Facility.
As of September 30, 2024, the effective interest rate on the BNP Facility was 8.78% and the unused commitment under the facility was $80.9 million.
On a stand-alone basis, as of September 30, 2024 and December 31, 2023, OFSCC-FS held approximately $154.5 million and $158.3 million in total assets, respectively, which accounted for approximately 37% and 34% of our total consolidated assets, respectively.
Other Liquidity Matters
We expect to fund the growth of our investment portfolio utilizing our current borrowings, follow-on equity offerings, and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act. We cannot assure stockholders
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that our plans to raise capital will be successful or available to us on favorable terms, if at all. 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 and incur a capital loss.
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, we 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 Securities and other non-qualifying assets, consistent with our investment strategy. As of September 30, 2024, approximately 81% of our investments were qualifying assets.
On May 3, 2018, our Board, including a required majority (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, effective May 3, 2019, our minimum required asset coverage ratio decreased from 200% to 150%.
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 ended May 22, 2020. On each of May 4, 2020 and May 3, 2022, our Board extended the Stock Repurchase Program for additional two-year periods. On April 30, 2024, our Board extended the Stock Repurchase Program for the two-year period ending on May 22, 2026. 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, 2026, 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. During the nine months ended September 30, 2024, we did not make any repurchases of common stock on the open market under the Stock Repurchase Program. As of September 30, 2024, the approximate dollar value of shares remaining that may be purchased under the program was $9.6 million.
As a BDC, we are generally not permitted 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 the Board determines that such sale is in the best interests of us and our stockholders, and if our stockholders approve such sale. On June 26, 2024, 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). We have not sold any shares below net asset value pursuant to the proposal approved by our stockholders.
We continue to monitor the current banking environment. If the banks and financial institutions with whom we have credit facilities enter into receivership, undergo consolidation or become insolvent in the future, our liquidity may be reduced significantly. At various times, our cash balances at third-party financial institutions exceed the federally insured limit. Our cash and cash equivalent balances are retained in custodian accounts with U.S. Bank Trust Company, National Association and Citibank N.A., and we do not believe they are exposed to any significant credit risk.
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Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
As of September 30, 2024, we had $20.3 million of cash and cash equivalents, as well unused commitments of $25.0 million under our Banc of California Credit Facility and $80.9 million under our BNP Facility, respectively, to meet our short-term contractual obligations, subject to contractual requirements and regulatory asset coverage requirements. As of September 30, 2024, we had a payable for investments purchased of $14.7 million and $8.5 million in unfunded commitments to fund portfolio investments that can be funded with our current cash or credit facilities.
Long-term contractual obligations, such as our BNP Facility that matures in 2027 and had $69.1 million outstanding as of September 30, 2024, could be repaid by selling OFSCC-FS portfolio investments that have a fair value of $144.4 million as of September 30, 2024. The OFSCC-FS portfolio includes $38.2 million of broadly syndicated loans in larger portfolio companies that generally can be sold over a relatively short period to generate cash. We cannot, however, be certain that this source of funds will be available and upon terms acceptable to us in sufficient amounts in the future. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than its current fair value and incur significant realized losses on our invested capital.
As of September 30, 2024, we had $180.0 million of outstanding Unsecured Notes, of which $125.0 million matures on February 10, 2026. The Unsecured Notes Due February 2026 can be repaid by selling portfolio investments or by issuing additional senior securities to refinance the debt.
As of September 30, 2024, approximately 50% of our outstanding debt matures in 2027 and beyond, 72% of our outstanding debt carries fixed interest rates and is unsecured.
Off-Balance Sheet Arrangements
We have entered into contracts with third parties under which we have 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 on the balance sheet. There is no guarantee that these amounts will be funded to the borrowing party now or in the future. We continue to believe that we have sufficient levels of liquidity to support our existing portfolio companies and will meet these unfunded commitments by using our cash on hand or utilizing our available borrowings under the Banc of California Credit Facility and BNP Facility. In addition, we generally hold broadly syndicated loans in larger portfolio companies that can be sold over a relatively short period to generate cash. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than its current fair value and incur significant realized losses on our invested capital.
Distributions
We are taxed as a RIC under the Code. In order to maintain our tax treatment as a RIC, we are required to distribute annually to our stockholders at least 90% of our ICTI, as defined by the Code. Additionally, to avoid a 4% excise tax on undistributed earnings we are required to distribute each calendar year the sum of: (i) 98% of our ordinary income for such calendar year; (ii) 98.2% of our 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 we paid no federal income tax. Maintenance of our RIC status requires adherence to certain source of income and asset diversification requirements. 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 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.
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Our Board maintains a variable dividend policy with the objective of distributing 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, during the year, we may pay a special 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. We may choose to retain a portion of our taxable income in any year and pay the 4% U.S. federal excise tax on the retained amounts. Distributions in excess of our current and accumulated ICTI would be treated first as a return of capital to the extent of the stockholder’s adjusted tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our estimated ICTI for the full year and distributions paid for the full year. Each year, a statement on Form 1099-DIV identifying the source of the distribution is mailed to our stockholders.
Recent Developments
On October 29, 2024, our Board declared a distribution of $0.34 per share for the fourth quarter of 2024, payable on December 31, 2024 to stockholders of record as of December 20, 2024.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in interest rates and the valuations of our investment portfolio. The economic effects of the ongoing war between Russia and Ukraine, the escalated armed conflict in the Middle East, interest rate changes and elevated inflation rates, ongoing supply chain and labor market disruptions, including those as a result of strikes, work stoppages or accidents, uncertainties related to the 2024 U.S. presidential election, instability in the U.S. and international banking systems and the risk of recession or a shutdown of U.S. government services has introduced significant volatility in the financial markets, and the effects of this volatility has impacted and could continue to impact our market risks. For additional information concerning risks and their potential impact on our business and our operating results, see “Part I—Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed on March 5, 2024.
Investment Valuation Risk
Because there is not a readily available market value for most of the investments in our portfolio, we value a significant portion of our portfolio investments at fair value as determined in good faith by OFS Advisor, as valuation designee, based, in part, on independent third-party valuation firms that have been engaged at the direction of OFS Advisor to assist in the valuation of most portfolio investments without a readily available market quotation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, some investments may be subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than its current fair value. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Estimates” as well as Notes 2 and 5 to our consolidated financial statements for the nine months ended September 30, 2024 for more information relating to our investment valuation.
Interest Rate Risk
As of September 30, 2024, 91% of our loan portfolio, at fair value, bore interest at floating interest rates and contained interest rate reset provisions that adjust applicable interest rates to current rates on a periodic basis. The 50 basis point reduction in the U.S. Federal Reserve target federal funds rate effected in September 2024 influences SOFR-based rates, to which our variable rate debt investments are generally indexed. This rate decrease will likely result in our variable rate debt investments generating less interest income, all-else equal. Changes in interest rates, including potential additional interest rate reductions approved by the U.S. Federal Reserve, may impact our investment income, cost of funding and the valuation of our investments. Additional reductions in interest rates would reduce our interest income, which could in turn decrease our net investment income if such decreases in base interest rates are not offset by other factors, such as increases in the spread over such base interest rates or decreases in our operating expenses.
Our Unsecured Notes bear interest at fixed rates, which may result in net interest margin compression in a period of falling rates. As of September 30, 2024, our Banc of California Credit Facility and BNP Facility had floating interest rate provisions based on the applicable reference rates.
Interest rate sensitivity refers to the change in our earnings that may result from changes in the level of interest rates as of September 30, 2024. As of September 30, 2024, 1-month and 3-month SOFR were 4.85% and 4.59%, respectively. Assuming that the interim and unaudited consolidated balance sheet as of September 30, 2024 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 changes in interest rate indices (in thousands).
Basis point increase
Interest income
Interest expense
Net change
25
$
(233)
(1)
$
149
(1)
$
(84)
50
315
(24)
291
75
863
(197)
666
100
1,411
(370)
1,041
125
1,959
(542)
1,417
65
Basis point decrease
Interest income
Interest expense
Net change
25
$
(1,328)
$
494
$
(834)
50
(1,876)
667
(1209)
75
(2,424)
840
(1,584)
100
(2,971)
1,012
(1,959)
125
(3,519)
1,185
(2,334)
(1) A portion of the loan portfolio and our BNP Facility have yet to reset to comparatively lower current SOFR rates and a 25 basis point increase from current rates would still yield an interest rate lower than the current interest rate on these securities as of September 30, 2024.
Although we believe that the foregoing analysis is indicative of our net interest margin sensitivity to interest rate changes as of September 30, 2024, 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 facilities, 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.
Item 4. 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 September 30, 2024. 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 September 30, 2024, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2024, 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 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
66
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We, OFS Advisor and OFS Services, are not currently subject to any material pending legal proceedings threatened against us as of September 30, 2024. 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 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 1A. Risk Factors
Investing in our common stock may be speculative and involves a high degree of risk. In addition to the other information contained in this Quarterly Report on Form 10-Q, including our financial statements, and the related notes, schedules and exhibits, you should carefully consider the risk factors described in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “Annual Report on Form 10-K”), filed on March 5, 2024, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K. The risks previously disclosed in the Annual Report on Form 10-K should be read together with the other information disclosed elsewhere in this Quarterly Report on Form 10-Q and our other reports filed with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Sales of Unregistered Securities, Use of Proceeds
None.
Issuer Purchases of Equity Securities
On May 22, 2018, the Board authorized the Company to initiate the Stock Repurchase Program under which the Company could acquire up to $10.0 million of its outstanding common stock through the two-year period ended May 22, 2020.
On each of May 4, 2020 and May 3, 2022, our Board extended the Stock Repurchase Program for additional two-year periods. On April 30, 2024, the Board extended the Stock Repurchase Program for the two-year period ending May 22, 2026. Under the extended Stock Repurchase Program, the Company is authorized to 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, 2026, or until the approved dollar amount has been used to repurchase shares. The Stock Repurchase Program does not obligate the Company 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. The Company retires all shares of common stock that it purchases in connection with the Stock Repurchase Program. As of September 30, 2024, the approximate dollar value of shares remaining that may be purchased under the program was $9.6 million.
During the three months ended September 30, 2024, the Company did not make any repurchases of its common stock on the open market under the Stock Repurchase Program.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
67
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the three months ended September 30, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Price Range of Common Stock and Distributions
The Company’s common stock is traded on the Nasdaq Global Select Market under the symbol “OFS”. The following table lists the high and low intraday sale price for the Company’s common stock, NAV per share, and the cash distributions per share that were declared on its common stock for each fiscal quarter during the last two most recently completed fiscal years and each full fiscal quarter of the current fiscal year. The last reported sale price for our common stock on the Nasdaq Global Select Market on September 30, 2024 was $8.45 per share.
NAV Per Share(1)
Price Range
Premium (Discount) of High Sales Price to NAV
Premium (Discount) of Low Sales Price to NAV
Cash Distribution per Share
Period
High
Low
Fiscal 2024
Third Quarter
$
11.29
$
9.35
$
7.75
-17.2
%
-31.4
%
$
0.34
Second Quarter
$
11.51
$
10.14
$
8.42
-11.9
%
-26.8
%
$
0.34
First Quarter
$
11.08
$
12.07
$
9.53
8.9
%
-14.0
%
$
0.34
Fiscal 2023
Fourth Quarter
$
12.09
$
12.41
$
9.69
2.6
%
-19.9
%
$
0.34
Third Quarter
$
12.74
$
12.44
$
9.51
-2.4
%
-25.4
%
$
0.34
Second Quarter
$
12.94
$
11.01
$
9.10
-14.9
%
-29.7
%
$
0.33
First Quarter
$
13.42
$
10.92
$
9.60
-18.6
%
-28.5
%
$
0.33
Fiscal 2022
Fourth Quarter
$
13.47
$
11.25
$
8.03
-16.5
%
-40.4
%
$
0.30
Third Quarter
$
13.58
$
11.50
$
7.54
-15.3
%
-44.5
%
$
0.29
Second Quarter
$
14.57
$
13.47
$
9.72
-7.5
%
-33.3
%
$
0.29
First Quarter
$
15.52
$
13.18
$
9.40
-15.1
%
-39.4
%
$
0.28
(1)NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices. The NAVs shown are based on outstanding shares at the end of each period.
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Item 6. Exhibits
Listed below are the exhibits that are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):
Inline XBRL Document Set for the consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q.
*
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
*
Filed herewith
†
Furnished herewith
69
SIGNATURES
Pursuant to the requirements 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.