Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______

Commission file number 814-00813

OFS CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
46-1339639
State or Other Jurisdiction of
 
I.R.S. Employer Identification No.
Incorporation or Organization
 
 
 
 
 
10 S. Wacker Drive, Suite 2500, Chicago, Illinois
 
60606
Address of Principal Executive Offices
 
Zip Code
 
 
 
 
(847) 734-2000
 
                                      Registrant’s Telephone Number, Including Area Code
 
 
 
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý     No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ¨     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨  
Smaller reporting company
¨
 
 
 
 
Emerging growth company
¨
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨     No  ý

The number of shares of the issuer’s Common Stock, $0.01 par value, outstanding as of May 1, 2019 was 13,361,134.



OFS CAPITAL CORPORATION

TABLE OF CONTENTS
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2
Item 3.
Item 4.
Item 5.
Item 6.

2


Defined Terms
We have used "we," "us," "our," "our company" and "the Company" to refer to OFS Capital Corporation in this report. We also have used several other terms in this report, which are explained or defined below:
Term
Explanation or Definition
1940 Act
Investment Company Act of 1940, as amended
Administration Agreement
Administration Agreement between the Company and OFS Services dated November 7, 2012
Annual Distribution Requirement
Distributions to our stockholders, for each taxable year, of at least 90% of our ICTI
April 2017 Offering
The April 2017 follow-on public offering 3,625,000 shares of our common stock at an offering price of $14.57 per share
ASC
Accounting Standards Codification, as issued by the FASB
ASU
Accounting Standards Updates, as issued by the FASB
BDC
Business Development Company under the 1940 Act
BLA
Business Loan Agreement, as amended, with Pacific Western Bank, as lender, which provides the Company with a senior secured revolving credit facility
Board
The Company's board of directors
CLO
Collateralized loan obligation
Code
Internal Revenue Code of 1986, as amended
DRIP
Distribution reinvestment plan
EBITDA
Earnings before interest, taxes, depreciation, and amortization
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
GAAP
Accounting principles generally accepted in the United States
HPCI
Hancock Park Corporate Income, Inc., a Maryland corporation and non-traded BDC for whom OFS Advisor serves as investment adviser
ICTI
Investment company taxable income, which is generally net ordinary income plus net short-term capital gains in excess of net long-term capital losses
Indicative Prices
Market quotations, prices from pricing services or bids from brokers or dealers
Investment Advisory Agreement
Investment Advisory and Management Agreement between the Company and OFS Advisor dated November 7, 2012
IPO
Initial Public Offering
LIBOR
London Interbank Offered Rate
Net Loan Fees
The cumulative amount of fees, such as discounts, premiums and amendment fees that are deferred and recognized as income over the life of the loan.
OCCI
OFS Credit Company, Inc., a Delaware corporation and a non-diversified, closed-end management investment company for whom OFS Advisor serves as investment adviser
OFS Advisor
OFS Capital Management, LLC, a wholly owned subsidiary of OFSAM and registered investment advisor under the Investment Advisers Act of 1940, as amended
OFS Capital WM
OFS Capital WM, LLC, a wholly owned investment company subsidiary of the Company
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 full-service provider of capital and leveraged finance solutions to U.S. corporations
PIK
Payment-in-kind, non-cash interest or dividends payable as an addition to the loan or equity security producing the income.
Prime Rate
United States Prime interest rate
PWB Credit Facility
Senior secured revolving credit facility between the Company and Pacific Western Bank, as lender
RIC
Regulated investment company under the Code
SBA
U.S. Small Business Administration

3


Term
Explanation or Definition
SBCAA
Small Business Credit Availability Act
SBIC
A fund licensed under the SBA small business investment company program
SBIC Acquisition
The Company's acquisition of the remaining ownership interests in SBIC I LP and OFS SBIC I GP, LLC on December 4, 2013
SBIC Act
Small Business Investment Act of 1958, as amended
SBIC I LP
OFS SBIC I, LP, a wholly owned SBIC subsidiary of the Company
SEC
U.S. Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
Secured Revolver Amendment
The amended Business Loan Agreement with Pacific Western Bank, as lender, dated April 10, 2019
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
Structured Finance Notes
CLO subordinated debt positions. CLO subordinated debt positions are entitled to recurring distributions which are generally equal to the remaining cash flow of payments made by underlying securities less contractual payments to debt holders and fund expenses

The Order
We received exemptive relief from the SEC to permit us to co-invest in portfolio companies with certain funds managed by 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.
Transaction Price
The cost of an arm's length transaction occurring in the same security
Unsecured Notes
The combination of the Unsecured Notes Due April 2025 and the Unsecured Notes Due October 2025
Unsecured Notes Due April 2025
The Company’s $50.0 million aggregate principal amount of 6.375% notes due April 30, 2025
Unsecured Notes Due October 2025
The Company’s $46.0 million aggregate principal amount of 6.5% notes due October 30, 2025

4


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 an SBIC, or maintaining our tax treatment as a RIC under Subchapter M of the Code;
our dependence on key personnel;
our ability to maintain or develop referral relationships;
our ability to replicate historical results;
the ability of OFS Advisor to identify, invest in and monitor companies that meet our investment criteria;
actual and potential conflicts of interest with OFS Advisor and other affiliates of OFSAM;
constraint on investment due to access to material nonpublic information;
restrictions on our ability to enter into transactions with our affiliates;
limitations on the amount of SBA-guaranteed debentures that may be issued by an SBIC;
our ability to comply with SBA regulations and requirements;
the use of borrowed money to finance a portion of our investments;
our ability to incur additional leverage pursuant to the SBCAA, beginning on May 3, 2019;
competition for investment opportunities;
the ability of SBIC I LP to make distributions enabling us to meet RIC requirements;
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;
uncertain valuations of our portfolio investments; 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 “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018. 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 Reports on Form 10-Q are excluded from the safe harbor protection provided by Section 21E of the Exchange Act.

5


PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Assets and Liabilities
(Dollar amounts in thousands, except per share data)

March 31,
2019

December 31,
2018

(unaudited)


Assets





Investments, at fair value:





Non-control/non-affiliate investments (amortized cost of $323,794 and $312,223, respectively)
$
310,090


$
297,749

Affiliate investments (amortized cost of $120,199 and $90,751, respectively)
117,431


89,103

Control investment (amortized cost of $10,368 and $10,337, respectively)
10,146


9,945

Total investments at fair value (amortized cost of $454,361 and $413,311, respectively)
437,667


396,797

Cash
15,156


38,172

Interest receivable
3,787


2,787

Prepaid expenses and other assets
3,592


3,665

Total assets
$
460,202


$
441,421







Liabilities





Revolving line of credit
$
35,750


$
12,000

SBA debentures (net of deferred debt issuance costs of $2,188 and $2,280, respectively)
147,692


147,600

Unsecured notes (net of deferred debt issuance costs of $3,176 and $3,299 respectively)
95,349


95,226

Interest payable
1,478


2,791

Payable to adviser and affiliates (Note 3)
3,767


3,700

Payable for investments purchased
1,027


4,151

Accrued professional fees
662


637

Other liabilities
219


293

Total liabilities
285,944


266,398







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 March 31, 2019, and December 31, 2018, respectively
$


$

Common stock, par value of $0.01 per share, 100,000,000 shares authorized, 13,361,134 and 13,357,337 shares issued and outstanding as of March 31, 2019, and December 31, 2018, respectively
134


134

Paid-in capital in excess of par
187,604


187,540

Total distributable earnings (losses)
(13,480
)

(12,651
)
Total net assets
174,258


175,023







Total liabilities and net assets
$
460,202


$
441,421







Number of shares outstanding
13,361,134


13,357,337

Net asset value per share
$
13.04


$
13.10


See Notes to Consolidated Financial Statements.

6


OFS Capital Corporation and Subsidiaries
Consolidated Statements of Operations (unaudited)
(Dollar amounts in thousands, except per share data)


Three Months Ended March 31,


2019

2018
Investment income






Interest income:






Non-control/non-affiliate investments

$
8,642


$
5,758

Affiliate investments

2,333


2,085

Control investment

259


239

Total interest income

11,234


8,082

Payment-in-kind interest and dividend income:






Non-control/non-affiliate investments

97


224

Affiliate investments

252


461

Control investment

27


27

Total payment-in-kind interest and dividend income

376


712

Dividend income:






Affiliate investments

173


130

Control investment



33

Total dividend income

173


163

Fee income:






Non-control/non-affiliate investments

342


26

Affiliate investments

205


2

Control investment

15


18

Total fee income

562


46

Total investment income

12,345


9,003

Expenses






Interest and financing expense

3,455


1,634

Management fee

1,843


1,360

Incentive fee

1,163


736

Professional fees

535


201

Administration fee

437


583

Other expenses

84


695

Total expenses before incentive fee waiver

7,517


5,209

Incentive fee waiver (see Note 3)



(22
)
Total expenses, net of incentive fee waiver

7,517


5,187

Net investment income

4,828


3,816








Net realized and unrealized gain (loss) on investments






Net realized gain (loss) on non-control/non-affiliate investments

(804
)

461

Net realized loss on affiliate investments



(541
)
Net unrealized appreciation (depreciation) on non-control/non-affiliate investments

658


(1,563
)
Net unrealized appreciation (depreciation) on affiliate investments

(1,120
)

1,245

Net unrealized appreciation on control investment

170


75








Net loss on investments

(1,096
)

(323
)







Net increase in net assets resulting from operations

$
3,732


$
3,493








Net investment income per common share – basic and diluted

$
0.36


$
0.29

Net increase in net assets resulting from operations per common share – basic and diluted

$
0.28


$
0.26

Distributions declared per common share

$
0.34


$
0.71

Basic and diluted weighted average shares outstanding

13,357,464


13,340,502

See Notes to Consolidated Financial Statements.

7


OFS Capital Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets (unaudited)
(Dollar amounts in thousands)
 
Preferred stock
 
Common Stock
 
 
 
 
 
 
 
Number of shares
 
Par value
 
Number of shares
 
Par value
 
Paid-in capital in excess of par
 
Total distributable earnings (losses)
 
Total net assets
Balances at January 1, 2018

 

 
13,340,217


$
133


$
187,398


$
805


$
188,336

Net increase in net assets resulting from operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Net investment income

 

 

 

 

 
3,816

 
3,816

  Net realized loss on investments

 

 

 

 

 
(80
)
 
(80
)
  Net unrealized depreciation on investments

 

 






(243
)

(243
)
  Tax reclassifications of permanent differences

 

 

 

 
18

 
(18
)
 

Distributions to stockholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Common stock issued from reinvestment of stockholder distributions

 

 
8,557

 

 
96

 

 
96

  Dividends declared

 

 






(9,472
)

(9,472
)
Total increase (decrease) for the period ended March 31, 2018

 

 
8,557

 

 
114

 
(5,997
)
 
(5,883
)
Balances at March 31, 2018

 

 
13,348,774

 
$
133

 
$
187,512

 
$
(5,192
)
 
$
182,453

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at January 1, 2019

 

 
13,357,337


$
134


$
187,540


$
(12,651
)

$
175,023

Net increase in net assets resulting from operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Net investment income

 

 

 

 

 
4,828

 
4,828

  Net realized loss on investments

 

 

 

 

 
(804
)
 
(804
)
  Net unrealized depreciation on investments

 

 

 

 

 
(292
)
 
(292
)
  Tax reclassifications of permanent differences

 

 

 

 
19

 
(19
)
 

Distributions to stockholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Common stock issued from reinvestment of stockholder distributions

 

 
3,797

 

 
45

 

 
45

  Dividends declared

 

 

 

 

 
(4,542
)
 
(4,542
)
Total increase (decrease) for the period ended March 31, 2019

 

 
3,797

 

 
64

 
(829
)
 
(765
)
Balances at March 31, 2019

 

 
13,361,134

 
$
134

 
$
187,604

 
$
(13,480
)
 
$
174,258


See Notes to Consolidated Financial Statements.

8


OFS Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(Dollar amounts in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net increase in net assets resulting from operations
$
3,732


$
3,493

Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:





Net realized loss on investments
804


80

Net unrealized depreciation on investments
292


243

Amortization of Net Loan Fees
(178
)

(275
)
Payment-in-kind interest and dividend income
(377
)

(712
)
Accretion of interest income on structured-finance notes
(467
)
 

Amortization of debt issuance costs
277


144

Amortization of intangible asset
49


49

Purchase and origination of portfolio investments
(63,630
)

(98,208
)
Proceeds from principal payments on portfolio investments
6,013


13,025

Proceeds from sale or redemption of portfolio investments
16,328


28,203

Proceeds from distributions received from portfolio investments
433



Changes in operating assets and liabilities:



 
Interest receivable
(1,000
)

(181
)
Interest payable
(1,313
)

(1,186
)
Payable to adviser and affiliates
67


361

Other assets and liabilities
(3,297
)

137

Net cash used in operating activities
(42,267
)

(54,827
)
 
 
 
 
Cash flows from financing activities
 
 
 
Distributions paid to stockholders
(4,496
)

(9,376
)
Borrowings under revolving line of credit
36,500


46,250

Repayments under revolving line of credit
(12,750
)

(22,900
)
Payment of debt issuance costs


(173
)
Repurchases of common stock under Stock Repurchase Program
(3
)
 

Net cash provided by financing activities
19,251


13,801

Net decrease in cash
(23,016
)

(41,026
)
   Cash — beginning of period
38,172


72,952

   Cash — end of period
$
15,156


$
31,926

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash paid during the period for interest
$
4,491


$
2,676

Reinvestment of stockholder common stock
45


96


See Notes to Consolidated Financial Statements.

9

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments
March 31, 2019
(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
Non-control/Non-affiliate Investments
 
 




















Debt and Equity Investments
 
 




















Baymark Health Services, Inc.

Outpatient Mental Health & Sub. Abuse Centers




















Senior Secured Loan



10.74%

(L +8.25%)

3/22/2018

3/1/2025

$
4,000


$
3,966


$
3,960


2.3
%























Brookfield WEC Holdings Inc.,

Business to Business Electronic Markets




















Senior Secured Loan



9.25%

(L +6.75%)

12/6/2018

8/3/2026

1,959


1,959


1,969


1.1
























Carolina Lubes, Inc. (4)

Automotive Oil Change and Lubrication Shops




















Senior Secured Loan (8)



10.61%

(L +7.82%)

8/23/2017

8/23/2022

20,696


20,572


20,920


12.0

Senior Secured Loan (Revolver)



0.25% (18)

(L +7.25%)

8/23/2017

8/23/2022



(10
)
















20,696

 
20,562

 
20,920

 
12.0

Cenexel Clinical Research Holdings, Inc. (f/k/a JBR Clinical Research, Inc.) (4) (8)

Research and Development in the Social Sciences and Humanities




















Senior Secured Loan



10.61%

(L +7.79%)

8/2/2018

8/2/2023

22,419


22,283


22,059


12.8
























Cirrus Medical Staffing, Inc. (4)

Temporary Help Services




















Senior Secured Loan



10.85%

(L +8.25%)

3/5/2018

10/19/2022

12,835


12,699


12,573


7.2

Senior Secured Loan (Revolver)



10.85%

(L +8.25%)

3/5/2018

10/19/2022

26


26


25















12,861


12,725


12,598


7.2

Community Intervention Services, Inc. (4) (6) (10) (11)

Outpatient Mental Health and Substance Abuse Centers




















Subordinated  Loan



7.0% cash / 6.0% PIK

N/A

7/16/2015

1/16/2021

9,196


7,639




























Confie Seguros Holdings II Co.

Insurance Agencies and Brokerages




















Senior Secured Loan



11.13%

(L +8.50%)

7/7/2015

11/1/2025

9,678


9,495


9,417


5.4
























Constellis Holdings, LLC

Other Justice, Public Order, and Safety Activities




















Senior Secured Loan



11.74%

(L +9.00%)

4/28/2017

4/21/2025

9,950


9,836


9,442


5.4

























10

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
March 31, 2019
(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
Convergint Technologies

Security Systems Services (except Locksmiths)




















Senior Secured Loan



9.25%

(L +6.75%)

9/28/2018

2/2/2026

$
3,481


$
3,424


$
3,433


2.0
%























Davis Vision, Inc.

Direct Health and Medical Insurance Carriers




















Senior Secured Loan



9.25%

(L +6.75%)

7/17/2018

12/1/2025

5,854


5,705


5,749


3.3
























DuPage Medical Group

Offices of Physicians, Mental Health Specialists




















Senior Secured Loan



9.49%

(L +7.00%)

8/22/2017

8/15/2025

10,099


10,181


10,079


5.8
























Eblens Holdings, Inc.

Shoe Store




















Subordinated Loan (11)



12.0% cash / 1.0% PIK

N/A

7/13/2017

1/13/2023

8,942


8,881


8,843


5.1

Common Equity (71,250 Class A units) (10)







7/13/2017






713


813


0.5













8,942


9,594


9,656


5.6

Elgin Fasteners Group

Bolt, Nut, Screw, Rivet, and Washer Manufacturing




















Senior Secured Loan



9.10%

(L +6.50%)

10/31/2011

8/27/2018

3,591


3,591


3,427


2.0
























Envocore Holding, LLC (FKA LRI Holding, LLC) (4)

Electrical Contractors and Other Wiring Installation Contractors




















Senior Secured Loan



11.85%

(L +9.25%)

6/30/2017

6/30/2022

17,112


16,993


15,760


9.0

Preferred Equity (238,095 Series B units) (10)







6/30/2017






300


74



Preferred Equity (13,315 Series C units) (10)







8/13/2018






13


15















17,112


17,306


15,849


9.0

Excelin Home Health, LLC

Home Health Care Services




















Senior Secured Loan



12.10%

(L +9.50%)

10/25/2018

4/25/2024

4,250


4,172


4,161


2.4
























GGC Aerospace Topco L.P.

Other Aircraft Parts and Auxiliary Equipment Manufacturing




















Senior Secured Loan



11.37%

(L +8.75%)

12/29/2017

9/8/2024

5,000


4,898


4,000


2.3

Common Equity (368,852 Class A units) (10)







12/29/2017






450


140


0.1

Common Equity (40,984 Class B units) (10)







12/29/2017






50


6















5,000


5,398


4,146


2.4


11

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
March 31, 2019
(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
GOBP Holdings, Inc.,

Supermarkets and Other Grocery (except Convenience) Stores




















Senior Secured Loan



9.85%

(L +7.25%)

10/17/2018

10/22/2026

$
1,400


$
1,387


$
1,403


0.8
%























Hyland Software, Inc.

Software Publishers




















Senior Secured Loan



6.00%

(L +3.50%)

10/24/2018

7/1/2024

173


173


173


0.1

Senior Secured Loan



9.50%

(L +7.00%)

10/24/2018

7/7/2025

2,601


2,619


2,598


1.5













2,774


2,792


2,771


1.6

Inergex Holdings, LLC

Other Computer Related Services




















Senior Secured Loan



9.80%

(L +7.00%)

10/1/2018

10/1/2024

13,092


12,911


12,790


7.3

Senior Secured Loan (Revolver)



11.50%

(Prime + 6.00%)

10/1/2018

10/1/2024

516


490


504


0.3













13,608


13,401


13,294


7.6

Institutional Shareholder Services Inc.

Administrative Management and General Management Consulting Services




















Senior Secured Loan



11.12%

(L +8.50%)

3/4/2019

3/5/2027

6,244


6,058


6,058


3.5
























MAI Holdings, Inc. (4)

Printing Machinery and Equipment Manufacturing




















Senior Secured Loan



9.50%

N/A

6/21/2018

6/1/2023

5,000


5,000


2,950


1.7
























My Alarm Center, LLC (4) (10) (13)

Security Systems Services (except Locksmiths)




















Preferred Equity (1,485 Class A units), 8% PIK







7/14/2017






1,571


1,221


0.7

Preferred Equity (1,198 Class B units)







7/14/2017






1,198





Preferred Equity (335 Class Z units)







9/12/2018






325


1,038


0.6

Common Equity (64,149 units)







7/14/2017


























3,094


2,259


1.3

Online Tech Stores, LLC (4)

Stationary & Office Supply Merchant Wholesaler




















Subordinated Loan



10.50% cash / 1.0% PIK

N/A

2/1/2018

8/1/2023

16,188


15,936


16,121


9.3
























OnSite Care, PLLC (4) (8)

Home Health Care Services




















Senior Secured Loan



10.34%

(L +7.83%)

8/10/2018

8/10/2023

7,100


7,038


6,994


4.0

























12

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
March 31, 2019
(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
Parfums Holding Company, Inc.

Cosmetics, Beauty Supplies, and Perfume Stores




















Senior Secured Loan



11.36%

(L +8.75%)

11/16/2017

6/30/2025

$
6,320


$
6,333


$
6,352


3.6
%



















Pelican Products, Inc.

Unlaminated Plastics Profile Shape Manufacturing




















Senior Secured Loan



10.23%

(L +7.75%)

9/24/2018

5/1/2026

6,055


6,060


5,982


3.4
























Performance Team LLC (4)

General Warehousing and Storage




















Senior Secured Loan



12.50%

(L +10.00%)

5/24/2018

11/24/2023

20,300


20,128


20,502


11.8
























PM Acquisition LLC

All Other General Merchandise Stores
















Senior Secured Loan



11.50% cash / 2.5% PIK

N/A

9/30/2017

10/29/2021

5,497


5,424


5,195


3.0

Common Equity (499 units) (10) (13)







9/30/2017






499


107


0.1













5,497


5,923


5,302


3.1

Resource Label Group, LLC

Commercial Printing (except Screen and Books)




















Senior Secured Loan



11.30%

(L +8.50%)

6/7/2017

11/26/2023

4,821


4,769


4,739


2.7
























Rocket Software, Inc.

Software Publishers




















Senior Secured Loan



6.75%

(L +4.25%)

11/20/2018

11/28/2025

670


667


670


0.4

Senior Secured Loan



10.75%

(L +8.25%)

11/20/2018

11/19/2026

6,275


6,165


6,319


3.6













6,945


6,832


6,989


4.0

RPLF Holdings, LLC (10) (13)

Software Publishers




















Common Equity (254,110 Class A units)







1/17/2018






254


285


0.2
























Sentry Centers Holdings, LLC

Other Professional, Scientific, and Technical Services




















Senior Secured Loan (15)



13.50%

(L +11.50%)

1/25/2016

7/24/2020

8,850


8,805


8,757


5.0

Common Equity (5,000 Series C units) (10) (13)







3/31/2014





500


1,160


0.7













8,850


9,305


9,917


5.7


13

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
March 31, 2019
(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
Southern Technical Institute, LLC (4) (6) (10)

Colleges, Universities, and Professional Schools




















Subordinated Loan



6.00% PIK

N/A

6/27/2018

12/31/2021

$
1,540


$


$


%
Other







6/27/2018























1,540







Spring Education Group, Inc. (F/K/A SSH Group Holdings, Inc.,)

Child Day Care Services




















Senior Secured Loan



6.75%

(L +4.25%)

7/26/2018

7/30/2025

979


977


951


0.5

Senior Secured Loan



10.75%

(L +8.25%)

7/26/2018

7/30/2026

7,216


7,150


7,122


4.1













8,195


8,127


8,073


4.6

Stancor, L.P. (4)

Pump and Pumping Equipment Manufacturing




















Preferred Equity (1,250,000 Class A units), 8% PIK (10)







8/19/2014






1,501


1,350


0.8
























STS Operating, Inc.

Industrial Machinery and Equipment Merchant Wholesalers




















Senior Secured Loan



6.75%

(L +4.25%)

5/16/2018

12/11/2024

637


635


629


0.4

Senior Secured Loan



10.50%

(L +8.00%)

5/15/2018

4/30/2026

9,073


9,068


8,936


5.1













9,710


9,703


9,565


5.5

The Escape Game, LLC (4)

Other amusement and recreation industries




















Senior Secured Loan



11.25%

(L +8.75%)

12/22/2017

12/22/2022

7,000


6,961


6,843


3.9

Senior Secured Loan (Delayed Draw)



11.25%

(L +8.75%)

7/20/2018

12/22/2022

6,067


6,067


5,931


3.4













13,067


13,028


12,774


7.3

Truck Hero, Inc.

Truck Trailer Manufacturing




















Senior Secured Loan



10.75%

(L +8.25%)

5/30/2017

4/21/2025

7,014


6,978


6,895


4.0
























United Biologics Holdings, LLC (4) (10)

Medical Laboratories




















Preferred Equity (151,787 units)







4/16/2013






9


20



Warrants (29,374 units)







7/26/2012

3/05/2022 (12)




82


18

















91


38



Wastebuilt Environmental Solutions, LLC. (4)

Industrial Supplies Merchant Wholesalers




















Senior Secured Loan



11.35%

(L +8.75%)

10/11/2018

10/11/2024

7,000


6,865


6,878


3.9

























14

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
March 31, 2019
(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
Total Debt and Equity Investments











306,716


308,439


294,356


169.1
























Structured Finance Note Investments (7)






















Elevation CLO 2017-7. Ltd






















Subordinated Notes



15.27% (9)



2/6/2019

7/15/2030 (17)

10,000


7,781 (16)


7,700


4.4





 





 




 






Flatiron CLO 18, Ltd



 





 




 






Subordinated Notes



17.77% (9)



1/2/2019

4/17/2031 (17)

9,680


7,574 (16)


8,034


4.6
























Total Structured Finance Note Investments











19,680


15,355


15,734


9.0
























Total Non-control/Non-affiliate Investments











326,396


323,794


310,090


178.1

Affiliate Investments






















3rd Rock Gaming Holdings, LLC

Software Publishers




















Senior Secured Loan



10.30%

(L +7.50%)

3/13/2018

3/12/2023

21,500


21,244


20,231


11.6

Common Equity (2,547,250 units) (10) (13)







3/13/2018






2,547


1,245


0.7













21,500


23,791


21,476


12.3

Chemical Resources Holdings, Inc.

Custom Compounding of Purchased Resins




















Senior Secured Loan (4)



10.88%

(L +8.05%)

1/25/2019

1/25/2024

13,743


13,564


13,565


7.8

Common Equity (1,832 Class A shares) (10) (13)







1/25/2019






1,813


1,813


1.0













13,743


15,377


15,378


8.8

Contract Datascan Holdings, Inc. (4)

Office Machinery and Equipment Rental and Leasing




















Subordinated Loan



11.50%

N/A

8/5/2015

2/5/2021

8,000


7,991


8,000


4.6

Preferred Equity (3,061 Series A shares), 10% PIK







8/5/2015






5,102


6,677


3.8

Common Equity (11,273 shares) (10)







6/28/2016






104

















8,000


13,197


14,677


8.4

DRS Imaging Services, LLC

Data Processing, Hosting, and Related Services




















Senior Secured Loan (4) (8)



12.23%

(L +9.39%)

3/8/2018

11/20/2023

10,864


10,780


10,657


6.1

Common Equity (453 units) (10) (13)







3/8/2018






1,135


1,657


1.0













10,864


11,915


12,314


7.1


15

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
March 31, 2019
(Dollar amounts in thousands)


Portfolio Company (1)
Investment Type
 
Industry
 
Interest Rate (2)
 
Spread Above Index (2)
 
Initial Acquisition Date
 
Maturity
 
Principal Amount
 
Amortized Cost
 
Fair Value (3)
 
Percent of Net Assets
Master Cutlery, LLC (4) (6) (10)

Sporting and Recreational Goods and Supplies Merchant Wholesalers




















Subordinated Loan (11)



13.00%

N/A

4/17/2015

4/17/2020

$
5,403


$
4,764


$
732


0.4
%
Preferred Equity (3,723 Series A units), 8% PIK







4/17/2015






3,483





Common Equity (15,564 units)







4/17/2015























5,403


8,247


732


0.4

NeoSystems Corp. (4)

Other Accounting Services




















Preferred Equity (521,962 convertible shares), 10% PIK







8/14/2014






1,575


2,250


1.3
























Pfanstiehl Holdings, Inc. (4)

Pharmaceutical Preparation Manufacturing




















Subordinated Loan



10.50%

N/A

1/1/2014

9/29/2022

3,788


3,813


3,788


2.2

Common Equity (400 Class A shares)







1/1/2014






217


8,960


5.1













3,788


4,030


12,748


7.3

Professional Pipe Holdings, LLC

Plumbing, Heating, and Air-Conditioning Contractors




















Senior Secured Loan



8.75% cash / 1.50% PIK

(L +8.75%)

3/23/2018

3/23/2023

7,543


7,422


7,294


4.2

Common Equity (1,414 Class A units) (10)







3/23/2018






1,414


1,753


1.0













7,543


8,836


9,047


5.2

TRS Services, LLC (4) (11)

Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance




















Senior Secured Loan



11.25% cash / 1.00% PIK

(L +8.75%)

12/10/2014

3/16/2020

14,666


14,627


14,181


8.1

Preferred Equity (329,266 Class AA units), 15% PIK







6/30/2016






483


453


0.3

Preferred Equity (3,000,000 Class A units), 11% PIK (10)







12/10/2014






3,374





Common Equity (3,000,000 units) (10)







12/10/2014






572

















14,666


19,056


14,634


8.4

TTG Healthcare, LLC

Diagnostic Imaging Centers




















Senior Secured Loan (4)



11.49%

(L +9.00%)

3/1/2019

3/1/2024

12103


11,866


11,866


6.8

Preferred Equity ( 2,309 Class B units) (10) (13)







3/1/2019






2,309


2,309


1.3













12,103


14,175


14,175


8.1


16

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
March 31, 2019
(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
Total Affiliate Investments











97,610


120,199


117,431


67.3

Control Investment






















MTE Holding Corp. (4)

Travel Trailer and Camper Manufacturing




















Subordinated Loan (to Mirage Trailers, LLC, a controlled, consolidated subsidiary of MTE Holding Corp.)



14.10% cash / 1.5% PIK

(L +11.50%)

11/25/2015

11/25/2020

$
7,323


$
7,299


$
7,322


4.2
%
Common Equity (554 shares)







11/25/2015






3,069


2,824


1.6













7,323


10,368


10,146


5.8

Total Control Investment











7,323


10,368


10,146


5.8
























Total Investments











$
431,329


$
454,361


$
437,667


251.2
%

(1)
Equity ownership may be held in shares or units of companies affiliated with the portfolio company. The Company's investments are generally classified as "restricted securities" as such term is defined under Regulation S-X Rule 6-03(f) or Securities Act Rule 144.
(2)
Substantially all of the investments that bear interest at a variable rate are indexed to LIBOR (L), and reset monthly, quarterly, or semi-annually. Variable-rate loans with an aggregate cost of $344,896 include LIBOR reference rate floor provisions of generally 1% to 2%; at March 31, 2019, the reference rate on all such instruments was above the stated floors. For each investment, the Company has provided the spread over the reference rate and current interest rate in effect at March 31, 2019. 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)
Fair value was determined using significant unobservable inputs for all of the Company's investments. See Note 5 for further details.
(4)
Investments (or portion thereof) held by SBIC I LP. All other investments pledged as collateral under the PWB Credit Facility.
(5)
Elgin Fasteners Group became contractually due on August 27, 2018. The lending group entered into a forbearance agreement to extend the maturity through September 26, 2019. The investment shall continue to accrue interest as the borrower has continued to make interest and amortization payments.
(6)
Investment was on non-accrual status as of March 31, 2019, meaning the Company has ceased recognizing all or a portion of income on the investment. See Note 4 for further details.
(7)
Structured Finance Notes are considered CLO subordinated debt positions. CLO subordinated debt positions are entitled to recurring distributions which are generally equal to the remaining cash flow of payments made by underlying securities less contractual payments to debt holders and fund expenses.
(8)
The Company has entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, it has agreed to receive its payment after the repayment of certain co‑lenders pursuant to a payment waterfall. The table below provides additional details as of March 31, 2019:
Portfolio Company
 
Reported Interest Rate
 
Interest Rate per Credit Agreement
 
Additional Interest per Annum
Carolina Lubes, Inc.
 
10.61%
 
10.05%
 
0.56%
Cenexel Clinical Holding (F/K/A JBR Clinical Research, Inc.)
 
10.61%
 
9.05%
 
1.56%
Chemical Resources Holdings, Inc.
 
10.88%
 
8.77%
 
2.11%
DRS Imaging Services, LLC
 
12.23%
 
10.80%
 
1.43%
OnSite Care, PLLC
 
10.34%
 
8.74%
 
1.60%

(9)
The rate disclosed is an estimated effective yield based upon the current projection of the amount and timing of distributions in addition to the estimated amount and timing of terminal principal payments. Effective yields for the Company's Structured Finance Note investments are monitored and evaluated at each reporting date. The estimated yield and investment cost may ultimately not be realized.
(10)
Non-income producing.

17

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
March 31, 2019
(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 March 31, 2019:
Portfolio Company
 
Investment Type
 
Range of PIK
Option
 
Range of Cash
Option
 
Maximum PIK
Rate Allowed
Community Intervention Services, Inc.

Subordinated Loan

0% or 6.00%

13.00% or 7.00%

6.00%
Eblens Holdings, Inc.

Subordinated Loan

0% or 1.00%

13.00% or 12.00%

1.00%
Master Cutlery, LLC

Senior Secured Loan

0% to 13.00%

13.00% to 0%

13.00%
TRS Services, LLC

Senior Secured Loan

0% or 1.00%

10.84% or 1.00%

1.00%

(12)
Represents expiration date of the warrants.
(13)
All or portion of investment held by a wholly-owned subsidiary subject to income tax.
(14)
The PIK provision is reset at the beginning of each interest period equal to the excess of reference rate over the reference rate floor of 1.00%. The PIK interest rate in the schedule represents the current PIK interest rate in effect.
(15)
Maximum interest rate allowable under the terms of this investment is 13.50%.
(16)
Amortized cost reflects accretion of effective yield less any cash distributions received or entitled to be received from CLO Structured Finance Note investments.
(17)
Maturity represents the contractual maturity date of the structured finance notes. Expected maturity and cash flows, not contractual maturity and cash flows, were utilized in deriving the effective yield of the investments.
(18)
Commitment fee on undrawn funds.

See Notes to Consolidated Financial Statements.

18

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments
December 31, 2018
(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
Non-control/Non-affiliate Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BayMark Health Services
 
Outpatient Mental Health and Substance Abuse Centers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
10.60%
 
(L +8.25%)
 
3/22/2018
 
3/1/2025
 
$
4,000

 
$
3,964

 
$
3,933

 
2.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brookfield WEC Holdings Inc.,
 
Business to Business Electronic Markets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
9.27%
 
(L +6.75%)
 
12/6/2018
 
8/3/2026
 
1,959

 
1,959

 
1,914

 
1.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carolina Lubes, Inc. (4)
 
Automotive Oil Change and Lubrication Shops
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan (8)
 
 
 
10.24%
 
(L +7.82%)
 
8/23/2017
 
8/23/2022
 
20,840

 
20,705

 
20,839

 
11.9

Senior Secured Loan (Revolver) (7)
 
 
 
9.65%
 
(L +7.25%)
 
8/23/2017
 
8/23/2022
 

 
(11
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
20,840

 
20,694

 
20,839

 
11.9

Cirrus Medical Staffing, Inc. (4)
 
Temporary Help Services
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
11.05%
 
(L +8.25%)
 
3/5/2018
 
10/19/2022
 
12,926

 
12,779

 
12,732

 
7.3

Senior Secured Loan (Revolver) (7)
 
 
 
11.05%
 
(L +8.25%)
 
3/5/2018
 
10/19/2022
 
1,280

 
1,280

 
1,261

 
0.7

 
 
 
 
 
 
 
 
 
 
 
 
14,206

 
14,059

 
13,993

 
8.0

Community Intervention Services, Inc. (4) (6) (10) (11)
 
Outpatient Mental Health and Substance Abuse Centers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinated  Loan
 
 
 
7.0% cash / 6.0% PIK
 
N/A
 
7/16/2015
 
1/16/2021
 
9,060

 
7,639

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Confie Seguros Holdings II Co.
 
Insurance Agencies and Brokerages
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
11.24%
 
(L +8.50%)
 
7/7/2015
 
11/1/2025
 
9,678

 
9,489

 
9,290

 
5.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Constellis Holdings, LLC
 
Other Justice, Public Order, and Safety Activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
11.52%
 
(L +9.00%)
 
4/28/2017
 
4/21/2025
 
9,950

 
9,832

 
9,437

 
5.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convergint Technologies
 
Security Systems Services (except Locksmiths)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
9.27%
 
(L +6.75%)
 
9/28/2018
 
2/2/2026
 
3,481

 
3,422

 
3,327

 
1.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

19

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
December 31, 2018
(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
Davis Vision, Inc.
 
Direct Health and Medical Insurance Carriers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
9.28%
 
(L +6.75%)
 
7/17/2018
 
12/1/2025
 
$
5,854

 
$
5,700

 
$
5,570

 
3.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DuPage Medical Group
 
Offices of Physicians, Mental Health Specialists
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
9.50%
 
(L +7.00%)
 
8/22/2017
 
8/15/2025
 
10,098

 
10,185

 
9,771

 
5.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Eblens Holdings, Inc.
 
Shoe Store
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinated  Loan (11)
 
 
 
12.0% cash / 1.00% PIK
 
N/A
 
7/13/2017
 
1/13/2023
 
8,920

 
8,855

 
8,821

 
5

Common Equity (71,250 Class A units) (10)
 
 
 
 
 
 
 
7/13/2017
 
 
 
 
 
713

 
722

 
0.4

 
 
 
 
 
 
 
 
 
 
 
 
8,920

 
9,568

 
9,543

 
5.4

Elgin Fasteners Group
 
Bolt, Nut, Screw, Rivet, and Washer Manufacturing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
9.30%
 
(L +6.50%)
 
10/31/2011
 
8/27/2018
 
3,645

 
3,645

 
3,509

 
2.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Envocore Holding, LLC (FKA LRI Holding, LLC) (4)
 
Electrical Contractors and Other Wiring Installation Contractors
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
12.05%
 
(L +9.25%)
 
6/30/2017
 
6/30/2022
 
17,344

 
17,212

 
16,821

 
9.6

Preferred Equity (238,095 Series B units) (10)
 
 
 
 
 
 
 
6/30/2017
 
 
 
 
 
300

 
300

 
0.2

Preferred Equity (13,315 Series C units) (10)
 
 
 
 
 
 
 
8/13/2018
 
 
 
 
 
13

 
13

 

 
 
 
 
 
 
 
 
 
 
 
 
17,344

 
17,525

 
17,134

 
9.8

Excelin Home Health, LLC
 
Home Health Care Services
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
12.31%
 
(L +9.50%)
 
10/25/2018
 
4/25/2024
 
4,250

 
4,168

 
4,168

 
2.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GGC Aerospace Topco L.P.
 
Other Aircraft Parts and Auxiliary Equipment Manufacturing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
11.49%
 
(L +8.75%)
 
12/29/2017
 
9/8/2024
 
5,000

 
4,894

 
4,033

 
2.3

Common Equity (368,852 Class A units) (10)
 
 
 
 
 
 
 
12/29/2017
 
 
 
 
 
450

 
104

 
0.1

Common Equity (40,984 Class B units) (10)
 
 
 
 
 
 
 
12/29/2017
 
 
 
 
 
50

 
4

 

 
 
 
 
 
 
 
 
 
 
 
 
5,000

 
5,394

 
4,141

 
2.4

GOBP Holdings, Inc.,
 
Supermarkets and Other Grocery (except Convenience) Stores
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
10.05%
 
(L +7.25%)
 
10/17/2018
 
10/22/2026
 
1,400

 
1,386

 
1,349

 
0.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

20

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
December 31, 2018
(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
Hyland Software, Inc.
 
Software Publishers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
6.02%
 
(L +3.50%)
 
10/24/2018
 
7/1/2024
 
$
173

 
$
173

 
$
166

 
0.1
%
Senior Secured Loan
 
 
 
9.52%
 
(L +7.00%)
 
10/24/2018
 
7/7/2025
 
2,601

 
2,620

 
2,534

 
1.4

 
 
 
 
 
 
 
 
 
 
 
 
2,774

 
2,793

 
2,700

 
1.5

Inergex Holdings
 
Other Computer Related Services
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
9.39%
 
(L +7.00%)
 
10/1/2018
 
10/1/2024
 
13,092

 
12,904

 
12,904

 
7.4

Senior Secured Loan (Revolver) (7)
 
 
 
0.50%
 
 
 
10/1/2018
 
10/1/2024
 

 
(27
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
13,092

 
12,877

 
12,904

 
7.4

JBR Clinical Research, Inc. (4) (8)
 
Research and Development in the Social Sciences and Humanities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
9.10%
 
(L +6.71%)
 
8/2/2018
 
8/2/2023
 
29,943

 
29,693

 
29,016

 
16.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MAI Holdings, Inc. (4)
 
Printing Machinery and Equipment Manufacturing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
9.50%
 
N/A
 
6/21/2018
 
6/1/2023
 
5,000

 
5,000

 
4,841

 
2.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
My Alarm Center, LLC (4) (10) (13)
 
Security Systems Services (except Locksmiths)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Equity (1,485 Class A units), 8% PIK
 
 
 
 
 
 
 
7/14/2017
 
 
 
 
 
1,571

 
1,536

 
0.9

Preferred Equity (1,198 Class B units)
 
 
 
 
 
 
 
7/14/2017
 
 
 
 
 
1,198

 

 

Preferred Equity (335 Class Z units) 25% PIK
 
 
 
 
 
 
 
9/12/2018
 
 
 
 
 
325

 
1,038

 
0.6

Common Equity (64,149 units)
 
 
 
 
 
 
 
7/14/2017
 
 
 
 
 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,094

 
2,574

 
1.5

Online Tech Stores, LLC (4)
 
Stationery and Office Supplies Merchant Wholesalers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinated Loan
 
 
 
10.50% cash / 1.0% PIK
 
N/A
 
2/1/2018
 
8/1/2023
 
16,150

 
15,882

 
15,785

 
8.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OnSite Care, PLLC (4) (8)
 
Home Health Care Services
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
10.22%
 
(L +7.85%)
 
8/10/2018
 
8/10/2023
 
7,100

 
7,035

 
7,008

 
4.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Parfums Holding Company, Inc.
 
Cosmetics, Beauty Supplies, and Perfume Stores
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
11.56%
 
(L +8.75%)
 
11/16/2017
 
6/30/2025
 
6,320

 
6,334

 
6,292

 
3.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

21

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
December 31, 2018
(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
Pelican Products, Inc.
 
Unlaminated Plastics Profile Shape Manufacturing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
10.13%
 
(L +7.75%)
 
9/24/2018
 
5/1/2026
 
$
6,055

 
$
6,060

 
$
5,901

 
3.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performance Team LLC (4)
 
General Warehousing and Storage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
12.52%
 
(L +10.00%)
 
5/24/2018
 
11/24/2023
 
20,300

 
20,118

 
20,647

 
11.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PM Acquisition LLC
 
All Other General Merchandise Stores
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
11.50% cash / 2.50% PIK
 
N/A
 
9/30/2017
 
10/29/2021
 
5,512

 
5,431

 
5,217

 
3.0

Common Equity (499 units) (10) (13)
 
 
 
 
 
 
 
9/30/2017
 
 
 
 
 
499

 
137

 
0.1

 
 
 
 
 
 
 
 
 
 
 
 
5,512

 
5,930

 
5,354

 
3.1

Resource Label Group, LLC
 
Commercial Printing (except Screen and Books)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
10.90%
 
(L +8.50%)
 
6/7/2017
 
11/26/2023
 
4,821

 
4,767

 
4,772

 
2.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rocket Software, Inc.
 
Software Publishers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
6.77%
 
(L +4.25%)
 
11/20/2018
 
11/19/2025
 
670

 
667

 
645

 
0.4

Senior Secured Loan
 
 
 
10.77%
 
(L +8.25%)
 
11/20/2018
 
11/19/2026
 
5,187

 
5,136

 
5,046

 
2.9

 
 
 
 
 
 
 
 
 
 
 
 
5,857

 
5,803

 
5,691

 
3.3

RPLF Holdings, LLC (10) (13)
 
Software Publishers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity (254,110 Class A units)
 
 
 
 
 
 
 
1/17/2018
 
 
 
 
 
254

 
291

 
0.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sentry Centers Holdings, LLC
 
Other Professional, Scientific, and Technical Services
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan (14)
 
 
 
13.50%
 
(L +11.50%)
 
1/25/2016
 
7/24/2020
 
8,855

 
8,802

 
8,753

 
5.0

Common Equity (5,000 Series C units) (10) (13)
 
 
 
 
 
 
 
3/31/2014
 
 
 

 
500

 
983

 
0.6

 
 
 
 
 
 
 
 
 
 
 
 
8,855

 
9,302

 
9,736

 
5.6

Southern Technical Institute, LLC (4) (6) (10)
 
Colleges, Universities, and Professional Schools
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinated Loan
 
 
 
6.00% PIK
 
N/A
 
6/27/2018
 
12/31/2021
 
1,517

 

 

 

Other
 
 
 
 
 
 
 
6/27/2018
 
 
 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
1,517

 

 

 


22

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
December 31, 2018
(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
SSH Group Holdings, Inc.,
 
Child Day Care Services
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
6.77%
 
(L +4.25%)
 
7/26/2018
 
7/30/2025
 
$
982

 
$
979

 
$
920

 
0.5
%
Senior Secured Loan
 
 
 
10.77%
 
(L +8.25%)
 
7/26/2018
 
7/30/2026
 
7,216

 
7,147

 
6,839

 
3.9

 
 
 
 
 
 
 
 
 
 
 
 
8,198

 
8,126

 
7,759

 
4.4

Stancor, L.P. (4) (10)
 
Pump and Pumping Equipment Manufacturing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Equity (1,250,000 Class A units), 8% PIK
 
 
 
 
 
 
 
8/19/2014
 
 
 

 
1,501

 
1,416

 
0.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
STS Operating, Inc.
 
Industrial Machinery and Equipment Merchant Wholesalers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
6.77%
 
(L +4.25%)
 
5/16/2018
 
12/11/2024
 
638

 
637

 
602

 
0.3

Senior Secured Loan
 
 
 
10.52%
 
(L +8.00%)
 
5/15/2018
 
4/30/2026
 
9,073

 
9,069

 
8,484

 
4.8

 
 
 
 
 
 
 
 
 
 
 
 
9,711

 
9,706

 
9,086

 
5.1

The Escape Game, LLC (4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
Other amusement and recreation industries
 
11.27%
 
(L +8.75%)
 
12/22/2017
 
12/22/2022
 
7,000

 
6,958

 
6,855

 
3.9

Senior Secured Loan (Delayed Draw) (7)
 
 
 
11.22%
 
(L +8.75%)
 
7/20/2018
 
12/22/2022
 
3,733

 
3,733

 
3,656

 
2.1

 
 
 
 
 
 
 
 
 
 
 
 
10,733

 
10,691

 
10,511

 
6.0

Truck Hero, Inc.
 
Truck Trailer Manufacturing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
10.76%
 
(L +8.25%)
 
5/30/2017
 
4/21/2025
 
7,014

 
6,977

 
6,808

 
3.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Biologics Holdings, LLC (4) (10)
 
Medical Laboratories
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Equity (151,787 units)
 
 
 
 
 
 
 
7/26/2012
 
 
 

 
9

 
20

 

Warrants (29,374 units)
 
 
 
 
 
 
 
7/26/2012
 
3/5/2022
 

 
82

 
25

 

 
 
 
 
 
 
 
 
 
 
 
 

 
91

 
45

 

Wand Intermediate I LP
 
Automotive Body, Paint, and Interior Repair and Maintenance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
9.84%
 
(L +7.25%)
 
5/14/2018
 
9/19/2022
 
3,770

 
3,802

 
3,747

 
2.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wastebuilt Environmental Solutions, LLC.
 
Industrial Supplies Merchant Wholesalers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
11.27%
 
(L +8.75%)
 
10/11/2018
 
10/11/2024
 
7,000

 
6,858

 
6,858

 
3.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

23

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
December 31, 2018
(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
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
$
900

 
$
89

 
0.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Non-control/Non-affiliate Investments
 
 
 
 
 
 
 
 
 
 
 
309,407

 
312,223

 
297,749

 
169.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Affiliate Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3rd Rock Gaming Holdings, LLC
 
Software Publishers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
10.30%
 
(L +7.50%)
 
3/13/2018
 
3/12/2023
 
21,626

 
21,353

 
20,023

 
11.4

Common Equity (2,547,250 units) (10) (13)
 
 
 
 
 
 
 
3/13/2018
 
 
 

 
2,547

 
1,073

 
0.6

 
 
 
 
 
 
 
 
 
 
 
 
21,626

 
23,900

 
21,096

 
12.0

Contract Datascan Holdings, Inc. (4)
 
Office Machinery and Equipment Rental and Leasing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinated Loan
 
 
 
11.50%
 
N/A
 
8/5/2015
 
2/5/2021
 
8,000

 
7,990

 
8,000

 
4.6

Preferred Equity (3,061 Series A shares), 10% PIK
 
 
 
 
 
 
 
8/5/2015
 
 
 

 
4,944

 
6,652

 
3.8

Common Equity (11,273 shares) (10)
 
 
 
 
 
 
 
6/28/2016
 
 
 

 
104

 
2,313

 
1.3

 
 
 
 
 
 
 
 
 
 
 
 
8,000

 
13,038

 
16,965

 
9.7

DRS Imaging Services, LLC
 
Data Processing, Hosting, and Related Services
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan (4) (8)
 
 
 
12.23%
 
(L +9.42%)
 
3/8/2018
 
11/20/2023
 
10,864

 
10,774

 
10,617

 
6.1

Common Equity (1,135 units) (10) (13)
 
 
 
 
 
 
 
3/8/2018
 
 
 

 
1,135

 
1,197

 
0.7

 
 
 
 
 
 
 
 
 
 
 
 
10,864

 
11,909

 
11,814

 
6.8

Master Cutlery, LLC (4) (6) (10)
 
Sporting and Recreational Goods and Supplies Merchant Wholesalers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinated Loan (11)
 
 
 
13.00% PIK
 
N/A
 
4/17/2015
 
4/17/2020
 
5,229

 
4,764

 
850

 
0.5

Preferred Equity (3,723 Series A units), 8% PIK
 
 
 
 
 
 
 
4/17/2015
 
 
 

 
3,483

 

 

Common Equity (15,564 units)
 
 
 
 
 
 
 
4/17/2015
 
 
 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
5,229

 
8,247

 
850

 
0.5

NeoSystems Corp. (4) (10)
 
Other Accounting Services
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Equity (521,962 convertible shares), 10% PIK
 
 
 
 
 
 
 
8/14/2014
 
 
 

 
1,537

 
2,250

 
1.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

24

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
December 31, 2018
(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. (4)
 
Pharmaceutical Preparation Manufacturing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinated Loan
 
 
 
10.50%
 
N/A
 
1/1/2014
 
9/29/2022
 
$
3,788

 
$
3,814

 
$
3,788

 
2.2
%
Common Equity (400 Class A shares)
 
 
 
 
 
 
 
1/1/2014
 
 
 

 
217

 
8,360

 
4.8

 
 
 
 
 
 
 
 
 
 
 
 
3,788

 
4,031

 
12,148

 
7.0

Professional Pipe Holdings, LLC
 
Plumbing, Heating, and Air-Conditioning Contractors
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
12.77%
 
(L +10.25%)
 
3/23/2018
 
3/23/2023
 
7,779

 
7,647

 
7,466

 
4.3

Common Equity (1,414 Class A units) (10)
 
 
 
 
 
 
 
3/23/2018
 
 
 

 
1,414

 
769

 
0.4

 
 
 
 
 
 
 
 
 
 
 
 
7,779

 
9,061

 
8,235

 
4.7

TRS Services, LLC (4) (11)
 
Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
11.27% cash / 1.0% PIK
 
(L +8.75%)
 
12/10/2014
 
12/10/2019
 
14,681

 
14,617

 
14,446

 
8.3

Preferred Equity (329,266 Class AA units), 15% PIK
 
 
 
 
 
 
 
6/30/2016
 
 
 

 
465

 
473

 
0.3

Preferred Equity (3,000,000 Class A units), 11% PIK (10)
 
 
 
 
 
 
 
12/10/2014
 
 
 

 
3,374

 
826

 
0.5

Common Equity (3,000,000 units) (10)
 
 
 
 
 
 
 
12/10/2014
 
 
 

 
572

 

 

 
 
 
 
 
 
 
 
 
 
 
 
14,681

 
19,028

 
15,745

 
9.1

Total Affiliate Investments
 
 
 
 
 
 
 
 
 
 
 
71,967

 
90,751

 
89,103

 
51.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Control Investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MTE Holding Corp. (4)
 
Travel Trailer and Camper Manufacturing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinated Loan (to Mirage Trailers, LLC, a controlled, consolidated subsidiary of MTE Holding Corp.)
 
 
 
14.00% cash / 1.50% PIK
 
(L +11.50%)
 
11/25/2015
 
11/25/2020
 
7,296

 
7,268

 
7,296

 
4.2

Common Equity (554 shares)
 
 
 
 
 
 
 
11/25/2015
 
 
 

 
3,069

 
2,649

 
1.5

 
 
 
 
 
 
 
 
 
 
 
 
7,296

 
10,337

 
9,945

 
5.7

Total Control Investment
 
 
 
 
 
 
 
 
 
 
 
7,296

 
10,337

 
9,945

 
5.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Investments
 
 
 
 
 
 
 
 
 
 
 
$
388,670

 
$
413,311

 
$
396,797

 
226.7
%

(1)
Equity ownership may be held in shares or units of companies affiliated with the portfolio company. The Company's investments are generally classified as "restricted securities" as such term is defined under Regulation S-X Rule 6-03(f) or Securities Act Rule 144.
(2)
Substantially all of the investments that bear interest at a variable rate are indexed to LIBOR (L), and reset monthly, quarterly, or semi-annually. Variable-rate loans with an aggregate cost of $316,260 include LIBOR reference rate floor provisions of generally 1% to 2%. At December 31, 2018, the reference rate on all such instruments was above the stated floors. For each investment, the Company has provided the

25

OFS Capital Corporation and Subsidiaries

Consolidated Schedule of Investments - Continued
December 31, 2018
(Dollar amounts in thousands)


spread over the reference rate and current interest rate in effect at December 31, 2018. 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)
Fair value was determined using significant unobservable inputs for all of the Company's investments. See Note 5 for further details.
(4)
Investments (or portion thereof) held by SBIC I LP. All other investments pledged as collateral under the PWB Credit Facility.
(5)
Elgin Fasteners Group became contractually due on August 27, 2018. The lending group entered into a forbearance agreement to extend the maturity through September 26, 2019. The investment shall continue to accrue interest as the borrower has continued to make interest and amortization payments.
(6)
Investment was on non-accrual status as of December 31, 2018, meaning the Company has ceased recognizing all or a portion of income on the investment. See Note 5 for further details.
(7)
Subject to unfunded commitments. See Note 6 for further details.
(8)
The Company has entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, it has agreed to receive its principal payment after the repayment of certain co‑lenders pursuant to a payment waterfall. The table below provides additional details as of December 31, 2018:
Portfolio Company
 
Reported Interest Rate
 
Interest Rate per Credit Agreement
 
Additional Interest per Annum
Carolina Lubes, Inc.
 
10.24%
 
9.65%
 
0.59%
DRS Imaging Services, LLC
 
12.23%
 
10.80%
 
1.43%
JBR Clinical Research, Inc.
 
9.10%
 
8.64%
 
0.46%
OnSite Care, PLLC
 
10.22%
 
8.60%
 
1.62%
(9)
Reserved.
(10)
Non-income producing.
(11)The interest rate on these investments contains a PIK provision, whereby the issuer has the option to make interest payments in cash or with the issuance of additional securities as payment of the entire PIK provision. The interest rate in the schedule represents the current interest rate in effect for these investments. The following table provides additional details on these PIK investments, including the maximum annual PIK interest rate allowed as of December 31, 2018
Portfolio Company
 
Investment Type
 
Range of PIK
Option
 
Range of Cash
Option
 
Maximum PIK
Rate Allowed
Community Intervention Services, Inc.
 
Subordinated Loan
 
0% or 6.00%
 
13.00% or 7.00%
 
6.00%
Eblens Holdings, Inc.
 
Subordinated Loan
 
0% or 1.00%
 
14.00% or 12.00%
 
1.50%
Master Cutlery, LLC
 
Senior Secured Loan
 
0% to 13.00%
 
13.00% to 0%
 
13.00%
TRS Services, LLC
 
Senior Secured Loan
 
0% or 1.00%
 
11.25% or 1.00%
 
1.00%

(12)
Represents expiration date of the warrants.
(13)
All or portion of investment held by a wholly-owned subsidiary subject to corporate income tax. See Note 8 for further details.
(14)
Maximum interest rate allowable under the terms of this investment is 13.50%



See Notes to Consolidated Financial Statements.


26

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(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 as a RIC under Subchapter M of the Code.
The Company’s objective is to provide stockholders with current income and capital appreciation primarily through debt investments and, to a lesser extent, equity investments primarily in middle-market companies principally in the United States. 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 for HPCI, a non-traded BDC with an investment strategy and objective similar to the Company. OFS Advisor also serves as the investment adviser for OCCI, a non-diversified, externally managed, closed-end management investment company that has registered as an investment company under the 1940 Act that primarily invests in the equity tranche of CLOs.
The Company may make investments directly or through SBIC I LP. SBIC I LP is subject to SBA regulatory requirements, including: limitations on the businesses and industries in which it can invest; requirements to invest at least 25% of its regulatory capital in eligible smaller businesses, as defined under the SBIC Act; limitations on the financing terms of investments; and capitalization thresholds that may limit distributions to the Company. SBIC I LP is subject to periodic audits and examinations of its financial statements.
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. Certain amounts in the prior period financial statements have been reclassified to conform to the current year presentation. These consolidated financial statements and notes thereto 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, 2018. 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 2018 Form 10-K.
Investments: The Company acquired Structured Finance Notes of CLO investment vehicles. In valuing such investments, the Company considers the indicative prices provided by a recognized industry pricing service as a primary source, and the implied yield of such prices, supplemented by actual trades executed in the market at or around period-end, as well as the indicative prices provided by broker-dealers. The Company also considers the operating metrics of the CLO vehicle, including compliance with collateralization tests as well as defaults, restructuring activity, and prepayments on the outstanding loans, if any.
Interest income: Interest income from investments in Structured Finance Notes is recognized on the basis of the estimated effective yield to expected redemptions utilizing assumed cash flows in accordance with ASC Sub-topic 325-40, Beneficial Interests in Securitized Financial Assets. The Company monitors the expected cash flows from its Structured Finance Notes and the effective yield is determined and updated periodically.
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 its debt instruments, including investments in Structured Finance Notes of CLOs, financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits at financial institutions. At various times during the year, the Company may exceed the federally insured limits. The Company places cash deposits only with high credit quality institutions, which OFS Advisor believes will mitigate the risk of loss due to credit risk. The amount of loss due to credit risk from debt investments if borrowers fail to perform according to the terms of the contracts, and the collateral or other security for those instruments proved to be of no value to the Company, is equal to the

27

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


Company's recorded investment in debt instruments and the unfunded loan commitments as disclosed in Note 6. The amount of loss due to credit risk from investments in Structured Finance Notes, if underlying funds and managers fail to perform according to the terms of the indentures and collateral management agreements, and the collateral or other security for those instruments proved to be of no value to the Company is equal to the Company's recorded investment in Structured Finance Notes.
New Accounting Standards: In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance effective September 30, 2018.
The Company did not adopt any other new accounting pronouncements during the three months ended March 31, 2019 that had, or is expected to have, a material impact on the Company's consolidated financial statements.
The following table discusses recently issued ASUs, as issued by the FASB yet to be adopted by the Company:
Standard
 
Description
 
Effect of Adoption on the Financial Statements
Standards that are not yet adopted
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
 
Removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
 
Annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early application is permitted. The adoption of ASU 2017-04 is not expected to have a material effect on the Company's consolidated financial statements.
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 4, 2019. Under the terms of the Investment Advisory Agreement, which are in accordance with the 1940 Act and subject to the overall supervision of the Company’s 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 collateral manager to CLO funds and other companies, including HPCI and OCCI.
OFS Advisor receives fees for providing services, consisting of two components: a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.75% and based on the average value of the Company’s total assets (other than cash 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. OFS Advisor has elected to exclude the value of the intangible asset and goodwill resulting from the SBIC Acquisition from the base management fee calculation.
The incentive fee has two parts. The first part ("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 (defined below) and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest or dividend

28

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


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% (which is 8.0% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, OFS Advisor receives no incentive fee until the net investment income equals the hurdle rate of 2.0%, but then receives, as a “catch-up,” 100.0% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, OFS Advisor will receive 20.0% of the pre-incentive fee net investment income.
Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter in which the Company incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that quarter due to realized and unrealized capital losses. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the base management fee. These calculations are appropriately prorated for any period of less than three months.
The second part of the incentive fee (the “Capital Gain Fee”) is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20.0% of the Company’s aggregate realized capital gains, if any, on a cumulative basis from the date of the election to be a BDC through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation through the end of such year, less all previous amounts paid in respect of the Capital Gain Fee.
The Company accrues the Capital Gain Fee if, on a cumulative basis, the sum of net realized capital gains and (losses) plus net unrealized appreciation and (depreciation) is positive. If, on a cumulative basis, the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation) decreases during a period, the Company will reverse any excess Capital Gain Fee previously accrued such that the amount of Capital Gains Fee accrued is no more than 20% of the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation).
On May 1, 2018, OFS Advisor agreed to irrevocably waive the receipt of $22 in Income Incentive Fees (based on net investment income) related to net investment income, that it would otherwise be entitled to receive under the Investment Advisory Agreement for the three months ended March 31, 2018. As a result of the voluntary fee waiver, the Company incurred Income Incentive Fee expense of $714 for the three months ended March 31, 2018, which is equal to the Income Incentive Fee expense the Company incurred for the three months ended December 31, 2017. The voluntary fee waiver did not include Capital Gain Fees, which was $0 for the three months ended March 31, 2018.
License Agreement: The Company entered into a license agreement with OFSAM under which OFSAM has agreed to grant the Company a non-exclusive, royalty-free license to use the name “OFS.”
Administration Agreement: OFS Services furnishes the Company with office facilities and equipment, necessary software licenses and subscriptions, and clerical, bookkeeping and record keeping services at such facilities pursuant to the Administration Agreement. 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

29

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


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.
Expenses recognized for the three months ended March 31, 2019 and 2018, under agreements with OFS Advisor and OFS Services are presented below:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Base management fees

$
1,843


$
1,360

Incentive fees:
 
 
 
 
Income Incentive Fee
 
1,163

 
736

Capital Gain Fee
 

 

Incentive fee waiver



(22
)
Administration fee expense
 
437

 
583

Note 4. Investments
As of March 31, 2019, the Company had loans to 46 portfolio companies, of which 88% were senior secured loans and 12% were subordinated loans, at fair value, as well as equity investments in 15 of these portfolio companies. The Company also held equity investments in five portfolio companies in which it did not hold a debt investment and two investments in Structured Finance Notes. At March 31, 2019, 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
Senior secured debt investments (1)
$
348,021


76.5
%
 
199.7
%
 
$
340,939

 
78.0
%
 
195.8
%
Subordinated debt investments
56,323


12.4

 
32.3

 
44,806

 
10.2

 
25.7

Preferred equity
21,243


4.7

 
12.2

 
15,407

 
3.5

 
8.8

Common equity and warrants
13,419


3.0

 
7.7

 
20,781

 
4.7

 
11.9

  Total debt and equity investments
439,006

 
96.6

 
251.9

 
421,933

 
96.4

 
242.2

Structured Finance Notes
15,355

 
3.4

 
8.8

 
15,734

 
3.6

 
9.0

Total investments
$
454,361


100.0
%
 
260.7
%
 
$
437,667

 
100.0
%
 
251.2
%
(1)
Includes debt investments, typically referred to as unitranche, in which we have entered into contractual arrangements with co‑lenders whereby, subject to certain conditions, we have agreed to receive our principal payments after the repayment of certain co‑lenders pursuant to a payment waterfall. Amortized cost and fair value of these investments were $74,237 and $74,195, respectively.

30

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


As of March 31, 2019, all of the Company’s debt and equity investments were domiciled in the United States. Geographic composition is determined by the location of the corporate headquarters of the portfolio company. The industry compositions of the Company’s debt and equity investment portfolio was as follows:
 
 
 
 
Percentage of Total
 
 
 
Percentage of Total
 
 
Amortized Cost
 
Amortized Cost
 
Net Assets
 
Fair Value
 
Fair Value
 
Net Assets
Administrative and Support and Waste Management and Remediation Services





 
 


 


 
 
Security Systems Services (except Locksmiths)

$
6,518


1.5
%

3.7
%
 
$
5,692

 
1.3
%
 
3.3
%
Temporary Help Services

12,725


2.9

 
7.3

 
12,598


3.0

 
7.2

Arts, Entertainment, and Recreation






 

 

 

Other amusement and recreation industries

13,028


3.0

 
7.5

 
12,774


3.0

 
7.3

Construction






 

 

 

Electrical Contractors and Other Wiring Installation Contractors

17,306


3.9


9.9

 
15,849

 
3.8

 
9.1

Plumbing, Heating, and Air-Conditioning Contractors

8,836


2.0

 
5.1

 
9,047


2.1

 
5.2

Education Services






 

 

 

Colleges, Universities, and Professional Schools






 

 

 

Finance and Insurance






 

 

 

Direct Health and Medical Insurance Carriers

5,705


1.3

 
3.3

 
5,749

 
1.4

 
3.3

Insurance Agencies and Brokerages

9,495


2.2


5.4

 
9,417

 
2.2

 
5.4

Health Care and Social Assistance









 


 


 


Child Day Care Services

8,127


1.9

 
4.7

 
8,073

 
1.9

 
4.6

Diagnostic Imaging Centers

14,175


3.2


8.1

 
14,175


3.4

 
8.1

Home Health Care Services

11,210


2.6

 
6.4

 
11,155

 
2.6

 
6.4

Medical Laboratories

91




0.1

 
38

 

 

Offices of Physicians, Mental Health Specialists

10,181


2.3


5.8

 
10,079

 
2.4

 
5.8

Outpatient Mental Health and Substance Abuse Centers

11,605


2.6


6.7

 
3,960

 
0.9

 
2.3

Information









 


 
 
 


Data Processing, Hosting, and Related Services

11,915


2.7

 
6.8

 
12,314


2.9

 
7.1

Software Publishers

33,669


7.7


19.4

 
31,521

 
7.5

 
18.2

Manufacturing









 


 


 


Bolt, Nut, Screw, Rivet, and Washer Manufacturing

3,591


0.8


2.1

 
3,427

 
0.8

 
2.0

Commercial Printing (except Screen and Books)

4,769


1.1


2.7

 
4,739

 
1.1

 
2.7

Custom Compounding of Purchased Resins

15,377


3.5


8.8

 
15,378


3.6

 
8.8

Other Aircraft Parts and Auxiliary Equipment Manufacturing

5,398


1.2


3.1

 
4,146

 
1.0

 
2.4

Pharmaceutical Preparation Manufacturing

4,030


0.9


2.3

 
12,748

 
3.0

 
7.3

Printing Machinery and Equipment Manufacturing

5,000


1.1


2.9

 
2,950

 
0.7

 
1.7

Pump and Pumping Equipment Manufacturing

1,501


0.3


0.9

 
1,350

 
0.3

 
0.8


31

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


 
 
 
 
Percentage of Total
 
 
 
Percentage of Total
 
 
Amortized Cost
 
Amortized Cost
 
Net Assets
 
Fair Value
 
Fair Value
 
Net Assets
Travel Trailer and Camper Manufacturing

10,368


2.4


5.9

 
10,146

 
2.4

 
5.8

Truck Trailer Manufacturing

6,978


1.6


4.0

 
6,895

 
1.6

 
4.0

Unlaminated Plastics Profile Shape Manufacturing

6,060


1.4

 
3.5

 
5,982

 
1.4

 
3.4

Other Services (except Public Administration)






 

 

 

Automotive Oil Change and Lubrication Shops

20,562


4.8


11.8

 
20,920

 
5.1

 
12.0

Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance

19,056


4.3


10.9

 
14,634

 
3.5

 
8.4

Professional, Scientific, and Technical Services









 


 


 


Administrative Management and General Management Consulting Services

6,058


1.4


3.5

 
6,058


1.4

 
3.5

Other Accounting Services

1,575


0.4


0.9

 
2,250

 
0.5

 
1.3

Other Computer Related Services

13,401


3.1


7.7

 
13,294

 
3.2

 
7.6

Other Professional, Scientific, and Technical Services

9,305


2.1


5.3

 
9,917

 
2.4

 
5.7

Research and Development in the Social Sciences and Humanities
 
22,283

 
5.1

 
12.8

 
22,059

 
5.2

 
12.7

Public Administration









 


 


 


Other Justice, Public Order, and Safety Activities

9,836


2.2


5.6

 
9,442

 
2.2

 
5.4

Real Estate and Rental and Leasing









 


 


 


Office Machinery and Equipment Rental and Leasing

13,197


3.0


7.6

 
14,677

 
3.5

 
8.4

Retail Trade









 


 


 


Cosmetics, Beauty Supplies, and Perfume Stores
 
6,333


1.4

 
3.6

 
6,352


1.5

 
3.6

Shoe store

9,594


2.2


5.5

 
9,656


2.3

 
5.5

Supermarkets and Other Grocery (except Convenience) Stores

1,387


0.3


0.8

 
1,403


0.3

 
0.8

All Other General Merchandise Stores

5,923


1.3


3.4

 
5,302


1.3

 
3.0

Transportation and Warehousing







 
 
 
 
 
 
 
General Warehousing and Storage

20,128


4.6


11.7

 
20,502


4.9

 
11.8

Wholesale Trade









 


 


 


Business to Business Electronic Markets

1,959


0.4


1.1

 
1,969


0.5

 
1.1

Industrial Machinery and Equipment Merchant Wholesalers

9,703


2.2


5.6

 
9,565


2.3

 
5.5

Industrial Supplies Merchant Wholesalers

6,865


1.6


3.9

 
6,878


1.6

 
3.9

Sporting and Recreational Goods and Supplies Merchant Wholesalers

8,247


1.9


4.7

 
732

 
0.2

 
0.4

Stationary & Office Supply Merchant Wholesaler
 
15,936


3.6

 
9.1

 
16,121


3.8

 
9.3

   Total debt and equity investments

$
439,006


100.0
%

251.9
%
 
$
421,933

 
100.0
%
 
242.1
%
Structured Finance Notes
 
15,355

 

 
8.8
%
 
15,734

 

 
9.0
%
Total investments
 
$
454,361

 
100.0
%
 
260.7
%
 
$
437,667


100.0
%
 
251.1
%

32

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 



As of December 31, 2018, the Company had loans to 44 portfolio companies, of which 88% were senior secured loans and 12% were subordinated loans, at fair value, as well as equity investments in 13 of these portfolio companies. The Company also held an equity investment in six portfolio companies in which it did not hold a debt investment.
At December 31, 2018, the Company's debt and equity investments consisted of the following:
 
 
 
Percentage of Total
 
 
 
Percentage of Total
 
Amortized Cost
 
Amortized Cost
 
Net Assets
 
Fair Value
 
Fair Value
 
Net Assets
Senior secured debt investments
$
325,873

 
78.8
%
 
186.2
%
 
$
319,017

 
80.4
%
 
182.3
%
Subordinated debt investments
56,212

 
13.6

 
32.1

 
44,540

 
11.2

 
25.4

Preferred equity
19,620

 
4.7

 
11.2

 
14,613

 
3.7

 
8.4

Common equity and warrants
11,606

 
2.8

 
6.6

 
18,627

 
4.7

 
10.6

Total
$
413,311

 
100.0
%
 
236.1
%
 
$
396,797

 
100.0
%
 
226.7
%
At December 31, 2018, all of the Company’s debt and equity investments were domiciled in the United States. The industry compositions of the Company’s debt and equity investment portfolio were as follows:
 
 
 
 
Percentage of Total
 
 
 
Percentage of Total
 
 
Amortized Cost
 
Amortized Cost
 
Net Assets
 
Fair Value
 
Fair Value
 
Net Assets
Administrative and Support and Waste Management and Remediation Services
 
 
 
 
 
 
 
 
 
 
 
 
Security Systems Services (except Locksmiths)
 
$
6,516

 
1.6
%
 
3.7
%
 
$
5,901

 
1.5
%
 
3.4
%
Temporary Help Services
 
14,059

 
3.4

 
8.0

 
13,993

 
3.5

 
8.0

Arts, Entertainment, and Recreation
 
 
 
 
 
 
 
 
 
 
 
 
Other Amusement and Recreation Industries
 
10,691

 
2.6

 
6.1

 
10,511

 
2.6

 
6.0

Construction
 
 
 
 
 
 
 
 
 
 
 
 
Electrical Contractors and Other Wiring Installation Contractors
 
17,525

 
4.2

 
10.0

 
17,134

 
4.3

 
9.8

Plumbing, Heating, and Air-Conditioning Contractors
 
9,061

 
2.2

 
5.2

 
8,235

 
2.1

 
4.7

Education Services
 
 
 
 
 
 
 
 
 
 
 
 
Colleges, Universities, and Professional Schools
 

 

 

 

 

 

Finance and Insurance
 
 
 
 
 
 
 
 
 
 
 
 
Direct Health and Medical Insurance Carriers
 
5,700

 
1.4

 
3.3

 
5,570

 
1.4

 
3.2

Insurance Agencies and Brokerages
 
9,489

 
2.3

 
5.4

 
9,290

 
2.3

 
5.3

Health Care and Social Assistance
 
 
 
 
 
 
 
 
 
 
 
 
Child Day Care Services
 
8,126

 
2.0

 
4.6

 
7,759

 
2.0

 
4.4

Home Health Care Services
 
11,203

 
2.7

 
6.4

 
11,176

 
2.8

 
6.4

Medical Laboratories
 
91

 

 
0.1

 
45

 

 

Offices of Physicians, Mental Health Specialists
 
10,185

 
2.5

 
5.8

 
9,771

 
2.5

 
5.6

Outpatient Mental Health and Substance Abuse Centers
 
11,603

 
2.8

 
6.6

 
3,933

 
1.0

 
2.2

Information
 
 
 
 
 
 
 
 
 
 
 
 
Data Processing, Hosting, and Related Services
 
11,909

 
2.9

 
6.8

 
11,814

 
3.0

 
6.7

Software Publishers
 
32,750

 
7.9

 
18.6

 
29,778

 
7.5

 
16.9


33

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


 
 
 
 
Percentage of Total
 
 
 
Percentage of Total
 
 
Amortized Cost
 
Amortized Cost
 
Net Assets
 
Fair Value
 
Fair Value
 
Net Assets
Manufacturing
 
 
 
 
 
 
 
 
 
 
 
 
Bolt, Nut, Screw, Rivet, and Washer Manufacturing
 
3,645

 
0.9

 
2.1

 
3,509

 
0.9

 
2.0

Commercial Printing (except Screen and Books)
 
4,767

 
1.2

 
2.7

 
4,772

 
1.2

 
2.7

Other Aircraft Parts and Auxiliary Equipment Manufacturing
 
5,394

 
1.3

 
3.1

 
4,141

 
1.0

 
2.4

Pharmaceutical Preparation Manufacturing
 
4,031

 
1.0

 
2.3

 
12,148

 
3.1

 
6.9

Printing Machinery and Equipment Manufacturing
 
5,000

 
1.2

 
2.9

 
4,841

 
1.2

 
2.8

Pump and Pumping Equipment Manufacturing
 
1,501

 
0.4

 
0.9

 
1,416

 
0.4

 
0.8

Travel Trailer and Camper Manufacturing
 
10,337

 
2.5

 
5.9

 
9,945

 
2.5

 
5.7

Truck Trailer Manufacturing
 
6,977

 
1.7

 
4.0

 
6,808

 
1.7

 
3.9

Unlaminated Plastics Profile Shape Manufacturing
 
6,060

 
1.5

 
3.5

 
5,901

 
1.5

 
3.4

Other Services (except Public Administration)
 
 
 
 
 
 
 
 
 
 
 
 
Automotive Body, Paint, and Interior Repair and Maintenance
 
3,802

 
0.9

 
2.2

 
3,747

 
0.9

 
2.1

Automotive Oil Change and Lubrication Shops
 
20,694

 
5.0

 
11.8

 
20,839

 
5.3

 
11.9

Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance
 
19,028

 
4.6

 
10.9

 
15,745

 
4.0

 
9.0

Professional, Scientific, and Technical Services
 
 
 
 
 
 
 
 
 
 
 
 
Other Accounting Services
 
1,537

 
0.4

 
0.9

 
2,250

 
0.6

 
1.3

Other Computer Related Services
 
12,877

 
3.1

 
7.4

 
12,904

 
3.3

 
7.4

Other Professional, Scientific, and Technical Services
 
9,302

 
2.3

 
5.3

 
9,736

 
2.5

 
5.6

Research and Development in the Social Sciences and Humanities
 
29,693

 
7.2

 
17.0

 
29,016

 
7.3

 
16.5

Public Administration
 
 
 
 
 
 
 
 
 
 
 
 
Other Justice, Public Order, and Safety Activities
 
9,832

 
2.4

 
5.6

 
9,437

 
2.4

 
5.4

Real Estate and Rental and Leasing
 
 
 
 
 
 
 
 
 
 
 
 
Home Health Equipment Rental
 
900

 
0.2

 
0.5

 
89

 

 
0.1

Office Machinery and Equipment Rental and Leasing
 
13,038

 
3.2

 
7.4

 
16,965

 
4.3

 
9.7

Retail Trade
 
 
 
 
 
 
 
 
 
 
 
 
Cosmetics, Beauty Supplies, and Perfume Stores
 
6,334

 
1.5

 
3.6

 
6,292

 
1.6

 
3.6

Shoe store
 
9,568

 
2.2

 
5.5

 
9,543

 
2.4

 
5.5

Supermarkets and Other Grocery (except Convenience) Stores
 
1,386

 
0.3

 
0.8

 
1,349

 
0.3

 
0.8

All Other General Merchandise Stores
 
5,930

 
1.4

 
3.4

 
5,354

 
1.2

 
3.1

Transportation and Warehousing
 
 
 
 
 
 
 
 
 
 
 
 

34

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


 
 
 
 
Percentage of Total
 
 
 
Percentage of Total
 
 
Amortized Cost
 
Amortized Cost
 
Net Assets
 
Fair Value
 
Fair Value
 
Net Assets
General Warehousing and Storage
 
20,118

 
4.9

 
11.5

 
20,647

 
5.2

 
11.8

Wholesale Trade
 
 
 
 
 
 
 
 
 
 
 
 
Business to Business Electronic Markets
 
1,959

 
0.5

 
1.1

 
1,914

 
0.5

 
1.1

Industrial Machinery and Equipment Merchant Wholesalers
 
9,706

 
2.3

 
5.5

 
9,086

 
2.3

 
5.2

Industrial Supplies Merchant Wholesalers
 
6,858

 
1.7

 
3.9

 
6,858

 
1.7

 
3.9

Sporting and Recreational Goods and Supplies Merchant Wholesalers
 
8,247

 
2.0

 
4.7

 
850

 
0.2

 
0.5

Stationery and Office Supplies Merchant Wholesalers
 
15,882

 
3.7

 
9.1

 
15,785

 
4.0

 
9.0

 
 
$
413,311

 
100.0
%
 
236.1
%
 
$
396,797

 
100.0
%
 
226.7
%
When there is reasonable doubt that principal, cash interest, or PIK interest will be collected, loan investments are placed on non-accrual status and the Company will generally cease recognizing cash interest, PIK interest, or Net Loan Fee amortization, as applicable. Interest accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal, interest and when, in the judgment of management, the investments are estimated to be fully collectible as to all principal. The aggregate amortized cost and fair value of loans on non-accrual status with respect to all interest and Net Loan Fee amortization was $12,403 and $732, respectively, at March 31, 2019, and $12,403 and $850 at December 31, 2018, respectively.
In August 2018, the Elgin Fasteners Group senior secured loan became contractually due. The lending group entered into a forbearance agreement with respect to the maturity date through September 26, 2019, subject to other terms and conditions. The investment will continue to accrue interest as the borrower has continued to make interest and amortization payments.
On January 31, 2019, Maverick Healthcare Equity, LLC was acquired in a purchase transaction. Proceeds from this transaction were insufficient to redeem the class of equity held by the Company. Accordingly, the Company recognized a net loss of $89, which is comprised of $900 realized loss net of $811 unrealized loss reversal, in the three months ended March 31, 2019. 


Note 5. Fair Value of Financial Instruments
The Company’s investments are valued at fair value as determined in good faith by management under the supervision, and review and approval of the Board.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair values are determined with models or other valuation techniques, valuation inputs, and assumptions market participants would use in pricing an asset or liability. Valuation inputs are organized in a hierarchy that gives the highest priority to prices for identical assets or liabilities quoted in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of inputs in the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2: Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include: (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived principally from or corroborated by observable market data. 
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.

35

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


The inputs into the determination of fair value are based upon the best information under the circumstances and may require significant judgment or estimation by management. 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.
Beginning in the first quarter of 2019 and with the addition of Structured Finance Notes to the Company's portfolio, the Company values Structure Finance Notes at non-binding indicative bid ("NBIB") prices. In valuing such investments, the Company considers the indicative prices provided by a recognized industry pricing service as a primary source, and the implied yield of such prices, supplemented by actual trades executed in the market at or around period-end, as well as the indicative prices provided by broker-dealers. The Company also considers the operating metrics of the CLO vehicle, including compliance with collateralization tests as well as defaults, restructuring activity and prepayment, and prepayments on the outstanding loans, if any. The Company engages a third-party valuation firm to provide assistance to the Company's Board in valuing our investments, which they will evaluate and consider in determining fair value.
There were no transfers among Level 1, 2 and 3 for the three months ended March 31, 2019 and 2018.
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. The Company’s investments are subject to market risk. Market risk is the potential for changes in the value due to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments are traded.
The following tables provide quantitative information about valuation techniques and the Company’s significant inputs to the Company’s Level 3 fair value measurements as of March 31, 2019 and December 31, 2018. In addition to the techniques and inputs noted in the tables below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining the Company’s fair value measurements. The table below is not intended to be exhaustive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements.
 
Fair Value at March 31, 2019 (1)
 
Valuation technique
 
Unobservable inputs
 
Range
(Weighted average)
Debt investments:
 
 
 
 
 
 
 
Senior secured
$
309,451


Discounted cash flow

Discount rates

6.27% - 19.86% (12.43%)
 
31,488

 
Transaction Price
 
 
 
 









Subordinated
36,751


Discounted cash flow

Discount rates

6.57% - 15.44% (11.61%)

8,055


Enterprise value

EBITDA multiples

4.25x - 6.00x (5.25x)









Structured Finance Notes:








Subordinated notes
15,734


Market quotes

NBIB

75.5% - 84.5% (80.0%)









Equity investments:








Preferred equity
10,839


Enterprise value

EBITDA multiples

4.75x - 8.5x (7.39x)

2,259


Enterprise value

Reocurring monthly revenue

38.0x - 42.0x (40.0x)
 
2,309

 
Transaction Price
 
 
 
 
 
 
 
 
 
 
 
 
Common equity and warrants
18,968


Enterprise value

EBITDA multiples

4.00x - 11.5x (9.50x)
 
1,813

 
Transaction Price
 
 
 
 


36

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


 
Fair Value at December 31, 2018 (1)
 
Valuation technique
 
Unobservable inputs
 
Range
(Weighted average)
Debt investments:
 
 
 
 
 
 
 
Senior secured
$
295,087

 
Discounted cash flow
 
Discount rates
 
6.94% - 19.70% (12.49%)
 
23,930

 
Transaction Price
 
 
 
 
 
 
 
 
 
 
 
 
Subordinated
36,394

 
Discounted cash flow
 
Discount rates
 
7.16% - 15.40% (7.21%)
 
8,146

 
Market approach
 
EBITDA multiples
 
3.50x - 7.65x (5.10x)
 
 
 
 
 
 
 
 
Equity investments
 
 
 
 
 
 
 
    Preferred equity
12,039

 
Market approach
 
EBITDA multiples
 
 4.50x - 8.50x (7.42x)
 
2,574

 
Market approach
 
Reoccurring Monthly Revenue
 
38.0x - 42.0x (40.0x)
Common equity and warrants
18,627

 
Market approach
 
EBITDA multiples
 
3.50x - 11.00x (8.68x)
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 EBITDA and/or EBITDA multiples, among other things, could have a significant impact on fair values, with the fair value of a particular debt investment susceptible to change in inverse relation to the changes in the discount rate. Changes in EBITDA and/or EBITDA multiples, as well as changes in the discount rate, could have a significant impact on fair values, with the fair value of an equity investment susceptible to change in tandem with the changes in EBITDA and/or EBITDA multiples, and in inverse relation to changes in the discount rate. Due to the wide range of 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.


37

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


The following tables present changes in investments measured at fair value using Level 3 inputs for the three months ended March 31, 2019 and March 31, 2018.
 
Three Months Ended March 31, 2019
 
Senior
Secured Debt
Investments
 
Subordinated
Debt
Investments
 
Preferred Equity
 
Common Equity and Warrants
 
Structured Finance Notes
 
Total
Level 3 assets, January 1, 2019
$
319,017

 
$
44,540

 
$
14,613

 
$
18,627

 
$

 
$
396,797

 
 
 
 
 
 
 
 
 
 
 
 
Net realized gain (loss) on investments
73

 

 
(900
)
 

 

 
(827
)
Net unrealized appreciation (depreciation) on investments
(225
)
 
155

 
(829
)
 
341

 
379

 
(179
)
Amortization of Net Loan Fees
157

 
21

 

 

 

 
178

Accretion of interest income on structured-finance notes

 

 

 

 
467

 
467

Capitalized PIK interest and dividends
71

 
90

 
214

 

 

 
375

Purchase and origination of portfolio investments
44,187

 

 
2,309

 
1,813

 
15,321

 
63,630

Proceeds from principal payments on portfolio investments
(6,013
)
 

 

 

 

 
(6,013
)
Sale and redemption of portfolio investments
(16,328
)
 

 

 

 

 
(16,328
)
Proceeds from distributions received from portfolio investments

 

 

 

 
(433
)
 
(433
)
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 assets, March 31, 2019
$
340,939


$
44,806


$
15,407


$
20,781


$
15,734


$
437,667


38

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


 
Three Months Ended March 31, 2018
 
Senior
Secured Debt
Investments
 
Subordinated
Debt
Investments
 
Preferred Equity
 
Common Equity and Warrants
 
Total
Level 3 assets, January 1, 2018
$
195,112

 
$
51,198

 
$
19,200

 
$
11,989

 
277,499

 
 
 
 
 
 
 
 
 
 
Net realized gain (loss) on investments
401

 

 
60

 
(541
)
 
(80
)
Net unrealized appreciation (depreciation) on investments
(122
)
 
(1,400
)
 
(1,112
)
 
2,398

 
(236
)
Amortization of Net Loan Fees
245

 
30

 

 

 
275

Capitalized PIK interest, dividends
263

 
110

 
339

 

 
712

Purchase and origination of portfolio investments
72,350

 
20,930

 
2,547

 
2,381

 
98,208

Proceeds from principal payments on portfolio investments
(7,828
)
 
(5,197
)
 

 

 
(13,025
)
Sale and redemption of portfolio investments
(27,097
)
 

 
(578
)
 
(214
)
 
(27,889
)
 
 
 
 
 
 
 
 
 
 
Level 3 assets, March 31, 2018
$
233,324

 
$
65,671

 
$
20,456

 
$
16,013

 
$
335,464

The net unrealized appreciation (depreciation) reported in the Company’s consolidated statements of operations for the three months ended March 31, 2019 and 2018, attributable to the Company’s Level 3 assets still held at those respective period ends was as follows:
 
Period ended March 31,
 
2019
 
2018
Senior secured debt investments
$
(280
)
 
$
(75
)
Subordinated debt investments
155

 
(1,400
)
Preferred equity
(1,640
)
 
(1,112
)
Common equity and warrants
341

 
1,944

Structured Finance Notes
379

 

Net unrealized depreciation on investments held
$
(1,045
)
 
$
(643
)


39

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


Other Financial Assets and Liabilities
GAAP requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. The Company believes that the carrying amounts of its other financial instruments such as cash, receivables and payables approximate the fair value of such items due to the short maturity of such instruments. The PWB Facility is a variable rate instrument and fair value is approximately book value.
The following tables present the fair value measurements of the Company's debt and indicate the fair value hierarchy of the significant unobservable inputs utilized by the Company to determine such fair values as of March 31, 2019 and December 31, 2018:
 
March 31, 2019
Description
Level 1
 
Level 2
 
Level 3 (1)
 
Total
PWB Facility
$

 
$

 
$
35,750

 
$
35,750

OFS Capital Corporation 6.375% Notes due 2025
50,760

 

 

 
50,760

OFS Capital Corporation 6.5% Notes due 2025
48,176

 

 

 
48,176

SBA-guaranteed debentures

 

 
150,086

 
150,086

Total debt, at fair value
$
98,936

 
$

 
$
185,836

 
$
284,772

 
December 31, 2018
Description
Level 1
 
Level 2
 
Level 3 (1)
 
Total
PWB Facility
$

 
$

 
$
12,000

 
$
12,000

OFS Capital Corporation 6.375% Notes due 2025
48,500

 

 

 
48,500

OFS Capital Corporation 6.5% Notes due 2025
46,603

 

 

 
46,603

SBA-guaranteed debentures

 

 
147,956

 
147,956

Total debt, at fair value
$
95,103

 
$

 
$
159,956

 
$
255,059

(1) For Level 3 measurements, fair value is estimated by discounting remaining payments using current market rates for similar instruments at the measurement date and considering such factors as the legal maturity date.
The following are the carrying values and fair values of the Company’s debt as of March 31, 2019 and December 31, 2018:
 
As of March 31, 2019
 
As of December 31, 2018
Description
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
PWB Facility
$
35,750

 
$
35,750

 
$
12,000

 
$
12,000

OFS Capital Corporation 6.375% Notes due 2025
48,440

 
50,760

 
48,377

 
48,500

OFS Capital Corporation 6.5% Notes due 2025
46,909

 
48,176

 
46,849

 
46,603

SBA-guaranteed debentures
147,692

 
150,086

 
147,600

 
147,956

Total debt, at fair value
$
278,791

 
$
284,772

 
$
254,826

 
$
255,059



40

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


Note 6. Commitments and Contingencies
The Company has the following unfunded commitments to portfolio companies as of March 31, 2019:
Name of Portfolio Company
 
Investment Type
 
Commitment
Carolina Lubes, Inc.
 
Senior Secured Loan (Revolver)
 
$
2,920

Cirrus Medical Staffing, Inc.
 
Senior Secured Loan (Revolver)
 
1,383

Inergex Holdings, LLC
 
Senior Secured Loan (Revolver)
 
1,359

The Escape Game, LLC
 
Senior Secured Loan (Delayed Draw)
 
933

TTG Healthcare, LLC
 
Senior Secured Loan (Delayed Draw)
 
2,775

 
 
 
 
$
9,370

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 March 31, 2019.
Additionally, the Company is subject to periodic inspection by regulators to assess compliance with applicable BDC regulations and the SBIC I LP is subject to periodic inspections by the SBA.
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide 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 occurred. The Company believes the risk of any material obligation under these indemnifications to be low.
Note 7. Borrowings
SBA Debentures: The SBA Debentures issued by SBIC I LP and other SBA regulations generally restrict assets held by SBIC I LP. On a stand-alone basis, SBIC I LP held $249,494 and $251,060 in assets at March 31, 2019, and December 31, 2018, respectively, which accounted for approximately 54% and 57% of the Company’s total consolidated assets, respectively. These assets can not be pledged under any debt obligation of the Company.
PWB Credit Facility: The Company had up to $50,000 of available credit under its PWB Credit Facility maturing January 31, 2020, of which $35,750 was drawn as of March 31, 2019. The average dollar amount of borrowings outstanding during the three months ended March 31, 2019 and 2018, were $23,602 and $22,379, respectively. The effective interest rate on the PWB Credit Facility was 6.58% at March 31, 2019. Availability under the PWB Credit Facility as of March 31, 2019 was $14,250 based on the stated advance rate of 50% of the borrowing base.
On April 10, 2019, the BLA was amended to, among other things: (i) increase the maximum amount available from $50.0 million to $100.0 million; (ii) change the interest rate from a variable rate of Prime Rate plus a 0.75% margin to a variable rate of Prime Rate plus a 0.25% margin (with a floor of 5.25%); (iii) extend the maturity date from January 31, 2020 to February 28, 2021; (iv) increase the minimum quarterly net investment income covenant from $2.0 million to $3.0 million; (v) reduce the statutory asset coverage ratio test from 200% to 150%; and (vi) add a total liabilities to Net Asset Value (as defined in the Secured Revolver Amendment) covenant of 300%.
Unsecured NotesThe Company has Unsecured Notes with an aggregate outstanding principal of $98,525. The Unsecured Notes are direct unsecured obligations and rank equal in right of payment with all current and future unsecured indebtedness of the Company. Because the Unsecured Notes are not secured by any of the Company's assets, they are effectively subordinated to all existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which the Company subsequently grant a security interest), to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under the PWB Credit Facility.

41

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


Interest expense for the three months ended March 31, 2019 and 2018 on the Company's outstanding borrowings is presented below:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
SBA Debentures
 
$
1,267

 
$
1,267

PWB Credit Facility
 
462

 
367

Unsecured Notes Due April 2025
 
860

 

Unsecured Notes Due October 2025
 
866

 

Total interest expense

$
3,455


$
1,634

 
 
 
 
 
Average dollar borrowings
 
$
272,007

 
$
172,259

Average interest rate
 
4.98
%
 
3.71
%
Note 8. Federal Income Tax
The Company has elected to be taxed as a RIC under Subchapter M of the Code. The determination of the tax attributes of the Company's distributions is made annually as of the end of its fiscal year based on its ICTI and distributions for the full year.
The Company records reclassifications to its capital accounts for permanent and temporary differences between the GAAP and tax treatment of components of income and the bases of assets and liabilities.
The tax-basis cost of investments and associated tax-basis gross unrealized appreciation (depreciation) inherent in the fair value of investments as of March 31, 2019, and December 31, 2018, were as follows:
 
March 31, 2019
 
December 31, 2018
Tax-basis amortized cost of investments
$
449,597

 
$
408,715

Tax-basis gross unrealized appreciation on investments
18,537

 
18,426

Tax-basis gross unrealized depreciation on investments
(30,467
)
 
(30,344
)
Tax-basis net unrealized appreciation (depreciation) on investments
(11,930
)
 
(11,918
)
Fair value of investments
$
437,667

 
$
396,797

For further information, see the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

42

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


Note 9. Financial Highlights
The following is a schedule of financial highlights for the three months ended March 31, 2019 and 2018:
 
 
Three Months Ended
March 31,
 
 
2019

2018
Per share operating performance:
 
 
 
 
Net asset value per share at beginning of period
 
$
13.10

 
$
14.12

Distributions 
 
(0.34
)
 
(0.71
)
Net investment income (4)
 
0.36

 
0.29

Net realized gain (loss) on non-control/non-affiliate investments (4)

(0.06
)

0.03

Net realized loss on affiliate investments (4)



(0.04
)
Net unrealized appreciation (depreciation) on non-control/non-affiliate investments (4)

0.05


(0.12
)
Net unrealized appreciation (depreciation) on affiliate investments (4)

(0.08
)

0.09

Net unrealized appreciation on control investment (4)

0.01


0.01

Net asset value per share at end of period

$
13.04


$
13.67

 
 
 
 
 
Per share market value, end of period
 
$
11.75

 
$
11.22

Total return based on market value (1)
 
14.1
%
 
0.3
%
Total return based on net asset value (2)
 
2.4
%
 
2.0
%
Shares outstanding at end of period
 
13,361,134

 
13,348,774

Weighted average shares outstanding
 
13,357,464

 
13,340,502

Ratio/Supplemental Data (in thousands except ratios)
 


 


Average net asset value (3)
 
$
174,654

 
$
185,395

Net asset value at end of period
 
$
174,258

 
$
182,453

Net investment income
 
$
4,828

 
$
3,816

Ratio of total expenses, net to average net assets (5) (7)
 
17.2
%
 
11.2
%
Ratio of net investment income to average net assets (5) (8)
 
11.1
%
 
8.2
%
Portfolio turnover (6)
 
5.5
%
 
13.5
%
(1)
Calculation is ending market value less beginning market value, adjusting for distributions reinvested at prices based on the Company’s dividend reinvestment plan for the respective distributions.
(2)
Calculation is ending net asset value less beginning net asset value, adjusting for distributions reinvested at the Company’s dividend reinvestment plan for the respective distributions.
(3)
Based on the average of the net asset value at the beginning of the indicated period and the preceding calendar quarter.
(4)
Calculated on the average share method.
(5)
Annualized.
(6)
Portfolio turnover rate is calculated using the lesser of period-to-date sales and principal payments or period-to-date purchases over the average of the invested assets at fair value.
(7)
Ratio of total expenses before incentive fee waiver to average net assets was 11.2% for the three months ended March 31, 2018.
(8)
Ratio of net investment income before incentive fee waiver to average net assets was 8.2% for the three months ended March 31, 2018.

Note 10. Capital Transactions
Distributions: The Company intends to distribute to stockholders, on a quarterly basis, substantially all of its net investment income. In addition, although the Company intends to 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.

43

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


The Company may be limited in its ability to make distributions due to the BDC asset coverage requirements of the 1940 Act. The Company’s ability to make distributions may also be affected by SBIC I LP's distributions to the Company, which are governed by SBA regulations. Net assets of SBIC I LP were $101,292, and consolidated cash at March 31, 2019 includes $12,943 held by SBIC I LP, of which $11,031 was available for distribution to the Company.
The following table summarizes distributions declared and paid for the three months ended March 31, 2019 and 2018:
Date Declared
 
Record Date
 
Payment Date
 
Amount
Per Share
 
Cash
Distribution
 
DRIP Shares
Issued
 
DRIP Shares
Value
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
February 12, 2018 (1)
 
March 22, 2018
 
March 29, 2018
 
$
0.37

 
$
4,886

 
4,459

 
$
50

February 27, 2018
 
March 22, 2018
 
March 29, 2018
 
0.34

 
4,490

 
4,098

 
46

 
 
 
 
 
 
$
0.71

 
$
9,376

 
$
8,557


$
96

Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
March 5, 2019
 
March 22, 2019
 
March 29, 2019
 
$
0.34

 
$
4,497

 
3,797

 
$
45

 
 
 
 
 
 
$
0.34

 
$
4,497

 
$
3,797

 
$
45

(1) Special dividend representing undistributed net long-term capital gains realized by the Company in 2017.
Distributions in excess of the Company’s current and accumulated ICTI would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of the Company’s distributions is made annually as of the end of its fiscal year based upon its ICTI for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. Each year, a statement on Form 1099-DIV identifying the 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 $10.0 million of its outstanding common stock. No shares of common stock were repurchased under the Stock Repurchase Program during the three months ended March 31, 2019 and 2018, respectively.

44

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


Note 11. Consolidated Schedule of Investments In and Advances To Affiliates
 
 
 
 
Period ended March 31, 2019
 
 
 
 
 
 
 
 
Name of Portfolio Company
 
Investment Type (1)
 
Net Realized Gain (Loss)
 
Net change in unrealized appreciation/(depreciation)
 
Interest & PIK Interest
 
Dividends
 
Fees
 
Total Income (2)
 
December 31, 2018, Fair Value
 
Gross
Additions (3)
 
Gross
Reductions (4)
 
March 31, 2019, Fair Value (5)
Control Investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MTE Holding Corp.
 
Subordinated Loan
 
$

 
$
(5
)
 
$
286

 
$

 
$
15

 
$
301

 
$
7,296

 
$
31

 
$
(5
)
 
$
7,322

 
 
Common Equity
 

 
175

 

 

 

 

 
2,649

 
175

 

 
2,824

 
 
 
 

 
170

 
286

 

 
15

 
301

 
9,945

 
206

 
(5
)
 
10,146

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Control Investment
 
 
 

 
170

 
286

 

 
15

 
301

 
9,945

 
206

 
(5
)
 
10,146

Affiliate Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3rd Rock Gaming Holdings, LLC
 
Senior Secured Loan
 

 
318

 
573

 

 

 
573

 
20,023

 
333

 
(125
)
 
20,231

 
 
Preferred Equity (6)
 

 
172

 

 

 

 

 
1,073

 
172

 

 
1,245

 
 
 
 

 
490

 
573

 

 

 
573

 
21,096

 
505

 
(125
)
 
21,476

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chemical Resources Holdings, Inc.
 
Senior Secured Loan
 

 

 
281

 

 
204

 
485

 

 
13,565

 

 
13,565

 
 
Common Equity (6)
 

 

 

 

 

 

 

 
1,813

 

 
1,813

 
 
 
 

 

 
281

 

 
204

 
485

 

 
15,378

 

 
15,378

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contract Datascan Holdings, Inc.
 
Subordinated Loan
 

 
(1
)
 
225

 

 

 
225

 
8,000

 
1

 
(1
)
 
8,000

 
 
Preferred Equity A (7)
 

 
(133
)
 
158

 

 

 
158

 
6,652

 
158

 
(133
)
 
6,677

 
 
Common Equity (6)
 

 
(2,313
)
 

 

 

 

 
2,313

 

 
(2,313
)
 

 
 
 
 

 
(2,447
)
 
383

 

 

 
383

 
16,965

 
159

 
(2,447
)
 
14,677

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DRS Imaging Services, LLC
 
Senior Secured Loan
 

 
35

 
337

 

 

 
337

 
10,617

 
40

 

 
10,657

 
 
Common Equity (6)
 

 
460

 

 

 

 

 
1,197

 
460

 

 
1,657

 
 
 
 

 
495

 
337

 

 

 
337

 
11,814

 
500

 

 
12,314

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Master Cutlery, LLC
 
Subordinated Loan (6)
 

 
(118
)
 

 

 

 

 
850

 

 
(118
)
 
732

 
 
Preferred Equity (6)
 

 

 

 

 

 

 

 

 

 

 
 
Common Equity (6)
 

 

 

 

 

 

 

 

 

 

 
 
 
 

 
(118
)
 

 

 

 

 
850

 

 
(118
)
 
732

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NeoSystems Corp.
 
Convertible Preferred Stock (7)
 

 
(38
)
 
38

 

 

 
38

 
2,250

 
38

 
(38
)
 
2,250

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

45

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


 
 
 
 
Period ended March 31, 2019
 
 
 
 
 
 
 
 
Name of Portfolio Company
 
Investment Type (1)
 
Net Realized Gain (Loss)
 
Net change in unrealized appreciation/(depreciation)
 
Interest & PIK Interest
 
Dividends
 
Fees
 
Total Income (2)
 
December 31, 2018, Fair Value
 
Gross
Additions (3)
 
Gross
Reductions (4)
 
March 31, 2019, Fair Value (5)
Pfanstiehl Holdings, Inc
 
Subordinated Loan
 

 
2

 
96

 

 

 
96

 
3,788

 
2

 
(2
)
 
3,788

 
 
Class A Common Equity
 

 
600

 

 
173

 

 
173

 
8,360

 
600

 

 
8,960

 
 
 
 

 
602

 
96

 
173

 

 
269

 
12,148

 
602

 
(2
)
 
12,748

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Professional Pipe Holdings, LLC
 
Senior Secured Loan
 

 
52

 
259

 

 

 
259

 
7,466

 
64

 
(236
)
 
7,294

 
 
Common Equity (6)
 

 
984

 

 

 

 

 
769

 
984

 

 
1,753

 
 
 
 

 
1,036

 
259

 

 

 
259

 
8,235

 
1,048

 
(236
)
 
9,047

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TRS Services, Inc.
 
Senior Term Loan
 

 
(276
)
 
476

 

 

 
476

 
14,446

 
62

 
(327
)
 
14,181

 
 
Class AA Units in IGT Holdings, LLC (7)
 

 
(38
)
 
18

 

 

 
18

 
473

 
18

 
(38
)
 
453

 
 
Class A Units in IGT Holdings, LLC (6)
 

 
(826
)
 

 

 

 

 
826

 

 
(826
)
 

 
 
Common Equity (6)
 

 

 

 

 

 

 

 

 

 

 
 
 
 

 
(1,140
)
 
494

 

 

 
494

 
15,745

 
80

 
(1,191
)
 
14,634

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TTG Healthcare, LLC
 
Senior Secured Loan
 

 

 
124

 

 
1

 
125

 

 
11,866

 

 
11,866

 
 
Preferred Equity (6)
 

 

 

 

 

 

 

 
2,309

 

 
2,309

 
 
 
 

 

 
124

 

 
1

 
125

 

 
14,175

 

 
14,175

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Affiliate Investments
 
 
 

 
(1,120
)
 
2,585

 
173

 
205

 
2,963

 
89,103

 
32,485

 
(4,157
)
 
117,431

Total Control and Affiliate Investments
 
 
 
$

 
$
(950
)
 
$
2,871

 
$
173

 
$
220

 
$
3,264

 
$
99,048

 
$
32,691

 
$
(4,162
)
 
$
127,577

(1)
Principal balance of debt investments and ownership detail for equity investments are shown in the consolidated schedule of investments. The Company's investments are generally classified as "restricted securities" as such term is defined under Regulation S-X Rule 6-03(f) or Securities Act Rule 144.
(2)
Represents the total amount of interest, fees or dividends included in income for the three months ended March 31, 2019, that an investment was included in Control or Affiliate Investment categories, respectively.
(3)
Gross additions include increases in cost basis resulting from a new portfolio investment, PIK interest, fees and dividends, accretion of OID, and net increases in unrealized net appreciation or decreases in net unrealized depreciation.
(4)
Gross reductions include decreases in the cost basis of investments resulting from principal repayments and sales, if any, and net decreases in net unrealized appreciation or net increases in unrealized depreciation.
(5)
Fair value was determined using significant unobservable inputs. See Note 5 for further details.
(6)
Non-income producing.
(7)
Dividends credited to income include dividends contractually earned but not declared.

46

OFS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
 
 
 


Note 12. Subsequent Events Not Disclosed Elsewhere
On April 30, 2019, the Company’s Board declared a distribution of $0.34 per share for the second quarter of 2019, payable on June 28, 2019, to stockholders of record as of June 21, 2019.


47



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.
Overview
We are an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a BDC under the 1940 Act, which imposes certain investment restrictions on our portfolio. Our investment activities are managed by OFS Advisor; and OFS Services, an affiliate of OFS Advisor, provides the administrative services necessary for us to operate. In exchange for these services we pay OFS Advisor a base management fee and an incentive fee and we pay OFS Services an administration fee. The base management fee, incentive fee, and the administration fee represents a substantial portion of our total expenses.
Our investment objective is to provide our stockholders with both current income and capital appreciation primarily through debt investments and, to a lesser extent, equity investments in middle-market companies in the United States. We believe that these middle-market companies represent a significant growth segment of the U.S. economy and often require substantial capital investments to grow. Middle-market companies have historically constituted the bulk of our portfolio companies since inception. We believe that this market segment will continue to produce significant investment opportunities for us.
We execute our investment strategy, in part, through SBIC I LP, a licensee under the SBA's SBIC program. The SBIC license allows SBIC I LP to receive SBA-guaranteed debenture funding, subject to the issuance of a leverage commitment by the SBA and other customary procedures. SBA leverage funding is subject to SBIC I LP’s payment of certain fees to the SBA, and the ability of SBIC I LP to draw on the leverage commitment is subject to its compliance with SBA regulations and policies, including an audit by the SBA. For additional information regarding the regulation of SBIC I LP, see "Item 1. Business—Regulation—Small Business Investment Company Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2018. On a stand-alone basis, SBIC I LP held approximately $249.5 million and $251.6 million in assets at March 31, 2019 and December 31, 2018, respectively, which accounted for approximately 54% and 57% of our total consolidated assets, respectively.
We generate revenue in the form of interest income on debt investments, and capital gains and dividend income from our equity investments. Our debt investments typically have a term of three to eight years and bear interest at fixed and floating rates. As of March 31, 2019, floating rate and fixed rate loans comprised 88% and 12%, respectively, of our current debt investment portfolio at fair value. Our Structured Finance Notes comprise 3.6% of our portfolio at fair value. We expect to make quarterly distributions, such that we distribute substantially all of our ICTI. In addition, although we intend to distribute at least annually net realized capital gains, net of taxes if any, out of assets legally available for such distributions, we may also retain such capital gains for investment through a deemed distribution.
Further, we have elected to be taxed as a RIC under the Code. As a RIC, we are not required to pay corporate-level federal income taxes on any income that we distribute to our stockholders from our ICTI. We are required to recognize ICTI in circumstances in which we have not received a corresponding payment in cash. For example, we hold debt obligations that are treated under applicable tax rules as issued at a discount and debt instruments with PIK interest, and we must include in ICTI each year the portion of the discount and PIK interest that accrues for that year (as it accrues over the life of the obligation), irrespective of the fact the cash representing such income is received by us in that taxable year. The continued recognition of non-cash ICTI may cause difficulty in meeting the Annual Distribution Requirement. We may be required to sell investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital, or forgo new investment opportunities to meet this requirement. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.
The 1940 Act generally prohibits us from incurring indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). On March 23, 2018, the Consolidated Appropriations Act of 2018, which includes the SBCAA, was signed into law. The SBCAA amends the 1940 Act to permit a BDC to reduce the required minimum asset coverage ratio applicable to it from 200% to 150%, subject to certain requirements described therein.
On May 3, 2018, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. As a result, the asset coverage ratio test applicable to us will be decreased from 200% to 150%, effective May 3, 2019. Additionally, we received exemptive relief from the SEC effective November 26, 2013, which allows us to exclude our SBA guaranteed debentures from the definition of senior securities in the statutory asset coverage ratio under the 1940 Act.

48


We may borrow money when the terms and conditions available are favorable to do so and are aligned with our investment strategy and portfolio composition. The use of borrowed funds or the proceeds of preferred stock to make investments would have its own specific benefits and risks, and all of the costs of borrowing funds or issuing preferred stock would be borne by holders of our common stock. For a discussion of the risks associated with leverage, see “Item 1A. Risk Factors—Risks Related to our Business and Structure" in our Annual Report on Form 10-K for the year ended December 31, 2018 as supplemented by our other reports filed with the SEC. As a BDC, we may need to raise additional capital, which will expose us to risks, including the typical risks associated with leverage. 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, 2018.
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 - Notes to Financial Statements - Note 2" and "Management's Discussion and Analysis - Critical Accounting Policies and Significant Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2018.
Fair value estimates. As of March 31, 2019, approximately 95% of our total assets were carried at fair value, which was generally measured using the discounted cash flow or market-approach valuation techniques. Our discounted cash flow valuations involve a determination of a discount rate commensurate with the risk inherent of each investment. Management uses two primary methods to estimate discount rates: the weighted-average cost of capital method, which is a method based upon a hypothetical recapitalization of the entity given its current operating performance and current market conditions; and a hypothetical debt rating method, which assigns a surrogate debt rating to the entity based on known industry standards for assigning such ratings and then estimates the discount rate based on observed market yields for actual rated debt. Management may also use a relative value method to estimate yields, which involves measuring the discount rate of non-traded subject debt investments based on an expected or assumed relationship between NBIB or observed prices on traded debt and the subject debt for a portfolio company. All three methods generally involve calibration of the internal rate of return on the subject investment at close or purchase date to the observable inputs utilized in each method as of or near that date. These methods generally produce a range of discount rates, and management, under the supervision of the Board, generally selects the midpoint of the range for fair value measures. Such midpoint values may be further limited based on the portfolio company's ability to prepay the investment without penalty.
Our market approach valuations, generally applied to equity investments and investments in non-performing debt, involve a determination of an enterprise value multiple to a financial performance metric for the portfolio company, generally EBITDA. These determinations are based on identification of a comparable set of publicly traded companies and determination of a public-to-private liquidity adjustment factor, generally through calibration to transaction prices in the subject investment instrument. This method generally produces a range of multiplier values and management, under the supervision of the Board, generally select the midpoint of the range for fair value measures.

49


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 at March 31, 2019 (dollar amounts in thousands):
 
 
Fair Value at March 31, 2019
 
Range of Fair Value
Investment Type
 
 
Low-end
 
High-end
Debt investments:
 
 

 
 

 
 

Senior secured
 
$
309,451


$
303,987

 
$
314,926

Senior secured (valued at Transaction Prices)
 
31,488

 
31,488

 
31,488

Subordinated
 
44,806


44,112

 
45,504

 
 
 
 
 
 
 
Investment:
 
 
 
 
 
 
Structured finance notes
 
15,734

 
15,439

 
16,030

 
 
 
 
 
 
 
Equity investments:
 
 
 
 
 
 
Preferred equity
 
13,098


11,749

 
13,926

Preferred equity (valued at Transaction Prices)
 
2,309

 
2,309

 
2,309

Common equity and warrants
 
18,968


15,450

 
22,923

Common equity and warrants (valuated at Transaction Prices)
 
1,813

 
1,813

 
1,813

 
 
$
437,667

 
$
426,347

 
$
448,919


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 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 affiliated with OFS Advisor, so long as its services to us are not impaired. OFS Advisor also serves as the investment adviser to CLO funds and other assets, including HPCI and OCCI. Additionally, OFS Advisor expects to provide sub-advisory services to CIM Real Assets & Credit Fund, a newly organized externally managed registered investment company that intends to operate as an interval fund that expects to invest primarily in a combination of real estate, credit and related investments. 
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 October 12, 2016, we received the Order from the SEC to permit us to co-invest in portfolio companies with certain BDCs, registered investment companies and private funds managed by OFS Advisor, or any adviser that controls, is controlled by, or is under common control with, OFS Adviser and is registered as an investment adviser under the Advisers Act, in a manner consistent with our investment strategy as well as applicable law, including the terms and conditions of the Order. Pursuant to the Order, we are generally permitted to participate in a co-investment transaction if a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors makes 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 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. We have applied for a new exemptive order, which, if granted, would

50


supersede the Order and would permit us greater flexibility to enter into co-investment transactions. There can be no assurance that we will obtain such new exemptive relief from the SEC.
Portfolio Composition and Investment Activity
Portfolio Composition
As of March 31, 2019, the fair value of our debt investment portfolio totaled $385.7 million in 46 portfolio companies, of which 88% and 12% were senior secured loans and subordinated loans, respectively, and approximately $36.2 million in equity investments, at fair value, in 15 portfolio companies in which we also held debt investments. We also have five portfolio companies in which we solely held an equity investment, as well as two investments in Structured Finance Notes. We had unfunded commitments of $9.4 million to five portfolio companies at March 31, 2019. Set forth in the tables and charts below is selected information with respect to our portfolio as of March 31, 2019 and December 31, 2018.
The following table summarizes the composition of our portfolio of direct investments in the debt and equity securities of portfolio companies as of March 31, 2019, and December 31, 2018 (dollar amounts in thousands):
 
March 31, 2019
 
December 31, 2018
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Senior secured debt investments (1)
$
348,021


$
340,939

 
$
325,873

 
$
319,017

Subordinated debt investments
56,323


44,806

 
56,212

 
44,540

Preferred equity
21,243


15,407

 
19,620

 
14,613

Common equity and warrants
13,419


20,781

 
11,606

 
18,627

Total direct investments in the debt and equity securities of portfolio companies
$
439,006

 
$
421,933

 
$
413,311

 
$
396,797

Total number of portfolio companies
51

 
51

 
50

 
50

(1)
Includes debt investments in which we have entered into contractual arrangements with co‑lenders whereby, subject to certain conditions, we have agreed to receive our principal payments after the repayment of certain co‑lenders pursuant to a payment waterfall. The aggregate amortized cost and fair value of these investments was $74,237 and $74,195 at March 31, 2019, respectively, and $68,207 and $67,480, at December 31, 2018, respectively
The following table shows the composition of our portfolio of direct investments in the debt and equity securities of portfolio companies by geographic region at amortized cost and fair value and as a percentage of total debt and equity investments; the geographic composition is determined by the location of the portfolio companies' corporate headquarters (dollar amounts in thousands):
 
Amortized Cost
 
Fair Value
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
South - US
$
124,774

 
28.4
%
 
$
124,795

 
30.2
%
 
$
121,536

 
28.8
%
 
$
123,344

 
31.1
%
Northeast - US
169,168

 
38.6

 
109,899

 
26.6

 
151,302

 
35.8

 
92,570

 
23.4

West - US
95,292

 
21.7

 
124,991

 
30.2

 
93,120

 
22.1

 
120,788

 
30.4

Midwest - US
49,772

 
11.3

 
53,626

 
13.0

 
55,975

 
13.3

 
60,095

 
15.1

Total
$
439,006

 
100.0
%
 
$
413,311

 
100.0
%
 
$
421,933

 
100.0
%
 
$
396,797

 
100.0
%
As of March 31, 2019, our investment portfolio’s three largest industries by fair value, were (1) Manufacturing (16.1%), (2) Professional, Scientific, and Technical Services (12.7%), and (3) Health Care and Social Assistance (11.2%), totaling approximately 40.0% of the investment portfolio. For a full summary of our investment portfolio by industry, see “Item 1–Financial Statements–Note 4."

51


The following table presents our debt investment portfolio by investment size as of March 31, 2019, and December 31, 2018 (dollar amounts in thousands):
 
Amortized Cost
 
Fair Value
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
Up to $4,000
$
20,932

 
5.2
%
 
$
24,785

 
6.4
%
 
$
28,433

 
7.4
%
 
$
25,117

 
6.9
%
$4,001 to $7,000
73,858

 
18.3

 
66,756

 
17.5

 
65,992

 
17.1

 
60,151

 
16.5

$7,001 to $10,000
92,236

 
22.8

 
92,389

 
24.2

 
76,713

 
19.9

 
92,687

 
25.5

$10,001 to $13,000
45,552

 
11.3

 
44,527

 
11.7

 
57,974

 
15.0

 
34,032

 
9.4

Greater than $13,000
171,766

 
42.4

 
153,628

 
40.2

 
156,633

 
40.6

 
151,570

 
41.7

Total
$
404,344

 
100.0
%
 
$
382,085

 
100.0
%
 
$
385,745

 
100.0
%
 
$
363,557

 
100.0
%
The following table displays the composition of our performing debt investment and Structured Finance Note portfolio by weighted average yield as of March 31, 2019, and December 31, 2018:
 
March 31, 2019
 
December 31, 2018
 
Senior
Secured
Subordinated
Structured Finance
 
 
Senior
Secured
Subordinated
Structured Finance
 
Weighted Ave. Yield (1)
Debt
Debt
Notes
Total
 
Debt
Debt
Notes
Total
Less than 8%
1.7
%
%
%
1.4
%
 
0.7
%
%
%
0.7
%
8% - 10%
8.3



7.1

 
22.5



19.8

10% - 12%
57.0

26.9


51.6

 
42.9

26.9


41.0

12% - 14%
28.9

56.5


30.8

 
29.5

56.5


32.7

Greater than 14%
4.1

16.6

100.0

9.1

 
4.4

16.6


5.8

Total
100.0
%
100.0
%
100.0
%
100.0
%
 
100.0
%
100.0
%
%
100.0
%
Weighted average yield - performing debt and Structured Finance Note investments (1)
11.46
%
12.84
%
16.50
%
11.80
%
 
11.33
%
12.74
%
%
11.50
%
Weighted average yield - total debt and Structured Finance Note investments (2)
11.46
%
10.02
%
16.50
%
11.45
%
 
11.33
%
9.93
%
%
11.12
%
(1) The weighted average yield on our performing debt and Structured Finance Note investments is computed as (a) the sum of (i) the annual stated accruing interest on debt investments plus the annualized accretion of Net Loan Fees; and (ii) the annual effective yield on Structured Finance Notes divided by (b) amortized cost of our debt and Structured Finance Note investments, excluding debt investments in non-accrual status as of the balance sheet date.
(2) The weighted average yield on our total debt and Structured Finance Note investments is computed as (a) the sum of (i) the annual stated accruing interest plus the annualized accretion of Net Loan Fees and (ii) plus the annual effective yield on Structured Finance Notes divided by (b) amortized cost of our debt and Structured Finance Note investments, including debt investments in non-accrual status as of the balance sheet date.
The weighted average yield on total investments was 10.74% and 10.49% at March 31, 2019 and December 31, 2018, respectively. Weighted average yield on total investments is computed as (a) the sum of (i) the annual stated accruing interest on our debt investments at the balance sheet date plus the annualized accretion of Net Loan Fees, (ii) the effective yield on our performing preferred equity investments, and (iii) the annual effective yield on Structured Finance Notes, divided by (b) amortized cost of our total investment portfolio, including assets in non-accrual status as of the balance sheet date. The weighted average yield of our investments is not the same as a return on investment for our stockholders but, rather, the gross investment income from our investment portfolio before the payment of all of our fees and expenses. There can be no assurance that the weighted average yield will remain at its current level.
The weighted average yield on performing direct investments in portfolio-company debt securities increased slightly to 11.80% at March 31, 2019, from 11.50% at December 31, 2018.
As of March 31, 2019, and December 31, 2018, floating rate loans at fair value were 88% and 87% of our debt portfolio of direct investments in the debt securities of portfolio companies, respectively, and fixed rate loans at fair value were 12% and 13% of this portfolio, respectively.

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Investment Activity
The following is a summary of our direct investment activity for the three months ended March 31, 2019 (dollar amounts in millions).
 
 
Debt
Investments
 
Equity
Investments
Investments in new portfolio companies
 
$
31.5

 
$
4.1

Investments in existing portfolio companies
 


 


Follow-on investments
 
9.9

 

Delayed draw and revolver funding
 
2.8

 

Total investments in existing portfolio companies
 
12.7

 

Total investments in new and existing portfolio
companies
 
$
44.2

 
$
4.1

Number of new portfolio company investments
 
3

 
2

Number of existing portfolio company
investments
 
7

 

 
 
 
 
 
Proceeds/distributions from principal payments/
equity investments
 
$
6.0

 
$

Proceeds from investments sold or redeemed
 
16.3

 

Total proceeds from principal payments, equity
distributions and investments sold
 
$
22.3

 
$

Notable investments in new portfolio companies during the three months ended March 31, 2019, include Chemical Resources Holdings, Inc. ($13.6 million senior secured loan and $1.8 million in common equity) and TTG Healthcare, LLC ($11.9 million senior secured loan and $2.3 million preferred equity).
The weighted-average yield of direct debt investments in new portfolio companies during the three months ended March 31, 2019 was 11.9%.
We also invested $15.3 million in Structure Finance Notes with a weighted average annual effective yield of 16.50% during the three months ended March 31, 2019.
The following is a summary of our direct investment activity for the three months ended March 31, 2018 (dollar amounts in millions).
 
 
Debt
Investments
 
Equity
Investments
Investments in new portfolio companies
 
$
68.4

 
$
4.6

Investments in existing portfolio companies
 
 
 
 
Follow-on investments
 
23.5

 
0.3

Delayed draw and revolver funding
 
1.4

 

Total investments in existing portfolio companies
 
24.9

 
0.3

Total investments in new and existing portfolio
companies
 
$
93.3

 
$
4.9

Number of new portfolio company investments
 
7

 
4

Number of existing portfolio company
investments
 
5

 
1

 
 
 
 
 
Proceeds/distributions from principal payments/
equity investments
 
13.0

 

Proceeds from investments sold or redeemed
 
27.1

 
1.1

Total proceeds from principal payments, equity
distributions and investments sold
 
40.1

 
1.1

Notable investments in new portfolio companies during the three months ended March 31, 2018, included Online Tech Stores, LLC ($16.1 million subordinated loan) and 3rd Rock Gaming, LLC ($21.6 million senior secured loan and $2.5 million common equity).

53


Our level of investment activity may vary substantially from period to period depending on various factors, including, but not limited to, the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.
We categorize direct investments in the debt securities of portfolio companies 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, 2018. The following table shows the classification of our direct investments in the debt securities of portfolio companies by credit risk rating as of March 31, 2019 and December 31, 2018 (dollar amounts in thousands):
 
 
Debt Investments, at Fair Value
Risk Category
 
March 31, 2019
 
December 31, 2018
1 (Low Risk)
 
$

 
%
 
$

 
%
2 (Below Average Risk)
 
3,788

 
1.0

 
3,788

 
1.0

3 (Average)
 
328,390

 
85.1

 
329,635

 
90.7

4 (Special Mention)
 
52,835

 
13.7

 
29,284

 
8.1

5 (Substandard)
 

 

 

 

6 (Doubtful)
 
732

 
0.2

 
850

 
0.2

7 (Loss)
 

 

 

 

 
 
$
385,745

 
100.0
%
 
$
363,557

 
100.0
%
Changes in the distribution of our debt investments across risk categories were a result of new debt investments, the receipt of amortization payments on existing debt investments, repayment of certain debt investments in full, changes in the fair value of our existing debt investments, realized gains on the sale of investments, as well as the change in PM Acquisitions, LLC, Envocore Holdings, LLC and MAI Holdings, Inc. from risk category 3 to risk category 4, with an total amortized cost and fair value of $27.4 million and $23.9 million, respectively, and other investment activity.
Non-Accrual Loans
When there is reasonable doubt that principal, cash interest, or PIK interest will be collected, loan investments are placed on non-accrual status and the Company will generally cease recognizing cash interest, PIK interest, or Net Loan Fee amortization, as applicable. Interest accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal, interest and when, in the judgment of management, the investments are estimated to be fully collectible as to all principal. The aggregate amortized cost and fair value of loans on non-accrual status with respect to all interest and Net Loan Fee amortization was $12,403 and $732, respectively, at March 31, 2019, and $12,403 and $850, respectively, at December 31, 2018.
In August 2018, the Elgin Fasteners Group senior secured loan became contractually due. The lending group entered into a forbearance agreement with respect to the maturity date through September 26, 2019, subject to other terms and conditions. The investment will continue to accrue interest as the borrower has continued to make interest and amortization payments.

54


Results of Operations
Key Financial Measures
The following is a discussion of the key financial measures that management employs in reviewing the performance of our operations.
Total Investment Income. We generate revenue in the form of interest income on direct debt investments in portfolio companies and Structured Finance Notes, as well as dividend income from our equity investments. Our direct debt investments in portfolio companies typically have a term of three to eight years and bear interest at fixed and floating rates. As of March 31, 2019, floating rate and fixed rate loans comprised 88% and 12%, respectively, of our direct debt investments in portfolio companies at fair value; however, in accordance with our investment strategy, we expect that over time the proportion of fixed rate loans will continue to increase. In some cases, our direct debt investments in portfolio companies provide for PIK interest, or PIK dividends (meaning interest or dividends paid in the form of additional principal amount of the loan or equity security instead of in cash). We also generate revenue in the form of management, valuation, and other contractual fees, which is recognized as the related services are rendered. In the general course of business, we receive certain fees from portfolio companies that are non-recurring in nature. Such non-recurring fees include prepayment fees on certain loans repaid prior to their scheduled due date, which are recognized as earned when received, and syndication fees for sourcing, structuring, and arranging the lending group, which are recognized as earned upon closing of the investment. Net Loan Fees are capitalized, and accreted or amortized over the life of the loan as interest income. When we receive principal payments on a loan in an amount that exceeds its amortized cost, we will also recognize the excess principal payment as income in the period it is received.
Expenses. Our primary operating expenses include interest expense due under our outstanding borrowings, the payment of fees to OFS Advisor under the Investment Advisory Agreement, our allocable portion of overhead expenses under the Administration Agreement and other operating costs described below. Additionally, we will pay interest expense on any outstanding debt under any new credit facility or other debt instrument we may enter into. We will bear all other out-of-pocket costs and expenses of our operations and transactions, whether incurred by us directly or on our behalf by a third party, including:
the cost of calculating our net asset value, including the cost of any third-party valuation services;
the cost of effecting sales and repurchases of shares of our common stock and other securities;
fees payable to third parties relating to making investments, including out-of-pocket fees and expenses associated with performing due diligence and reviews of prospective investments;
transfer agent and custodial fees;
out-of-pocket fees and expenses associated with marketing efforts;
federal and state registration fees and any stock exchange listing fees;
U.S. federal, state and local taxes;
independent directors’ fees and expenses;
brokerage commissions;
fidelity bond, directors’ and officers’ liability insurance and other insurance premiums;
direct costs, such as printing, mailing and long-distance telephone;
fees and expenses associated with independent audits and outside legal costs;
costs associated with our reporting and compliance obligations under the 1940 Act and other applicable U.S. federal and state securities laws; and
other expenses incurred by either OFS Services or us in connection with administering our business.
Net Gain (Loss) on Investments. Net gain (loss) on investments consists of the sum of: (a) realized gains and losses from the sale of debt or equity securities, or the redemption of equity securities; and (b) net unrealized appreciation or depreciation on debt and equity investments. In the period in which a realized gain or loss is recognized, such gain or loss will generally be offset by the reversal of accumulated net unrealized appreciation or depreciation, and the net gain recognized in that period will generally be smaller. The accumulated net unrealized appreciation or depreciation on debt securities is also reversed when those investments are redeemed or paid off prior to maturity. In such instances, the reversal of accumulated unrealized appreciation or depreciation will be reported as a net loss or gain, respectively, and may be partially offset by the acceleration of any premium or discount on the debt security, which is reported in interest income, and any prepayment fees on the debt security, which is reported in fee income.

55


We do not believe that our historical operating performance is necessarily indicative of our future results of operations that we expect to report in future periods. We are primarily focused on investments in middle-market companies in the United States, including debt investments and, to a lesser extent, equity investments, including warrants and other minority equity securities, which differs to some degree from our historical investment concentration, in senior secured loans to middle-market companies in the United States. Moreover, as a BDC and a RIC, we will also be subject to certain constraints on our operations, including, but not limited to, limitations imposed by the 1940 Act and the Code. In addition, SBIC I L.P. is subject to regulation and oversight by SBA. For the reasons described above, the results of operations described below may not necessarily be indicative of the results we expect to report in future periods.
Net increase in net assets resulting from operations can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, annual comparisons of net increase in net assets resulting from operations may not be meaningful.
Comparison of the three months ended March 31, 2019, and 2018
Consolidated operating results for the three months ended March 31, 2019 and 2018, are as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Investment income
 
 
 
 
Interest income:
 
 
 
 
Cash interest income (including accretion of interest on Structured Finance Notes)

$
10,980


$
7,713

Net Loan Fee amortization

178


275

Other interest income

76


94

Total interest income

11,234


8,082

PIK income:






PIK interest income

161


373

Preferred equity PIK dividends

215


339

Total PIK income

376


712

Dividend income:






Common equity dividends

173


163

Total dividend income

173


163

Fee income:






Management, valuation and syndication

562


33

Prepayment and other fees



13

Total fee income

562


46

Total investment income

12,345


9,003

Total expenses, net

7,517


5,187

Net investment income

4,828


3,816

Net loss on investments

(1,096
)

(323
)
Net increase in net assets resulting from operations

$
3,732


$
3,493

Interest and PIK income by debt investment type for the three months ended March 31, 2019 and 2018, is summarized below (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Interest income and PIK interest income:
 
 
 
 
Senior secured debt investments

$
9,547


$
6,615

Subordinated debt investments

1,380


2,214

Structured Finance Notes
 
468

 

Total interest income and PIK interest income
 
11,395

 
8,829

Plus purchased premiums (less Net Loan Fees) accelerations
 
25

 
(12
)
Recurring interest income and PIK interest income
 
$
11,420

 
$
8,817


56


Investment Income
We consider our interest income on direct debt investments to portfolio companies, other than acceleration of Net Loan Fees recognized upon the repayment of a loan, PIK interest income, and the accretable yield on Structured Finance Notes to be recurring in nature. Such recurring interest income and PIK interest income increased by $2.6 million for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to a $3.6 million increase from an approximately $106.0 million increase in the average outstanding performing loan balance and a ($1.0) million decrease resulting from a 96 basis point decrease in the recurring earned yield on our portfolio.
Syndication fees, prepayment fees and the acceleration of Net Loan Fees generally result from periodic transactions transactions rather than from holding portfolio investments and are considered to be non-recurring. Syndication fees of $505,000 included in management, valuation and syndication fees for the three months ended March 31, 2019, resulted from approximately $60.5 million in loan originations during that period in which OFS Advisor sourced, structured, and arranged the lending group, and for which we were additionally compensated.
Fee income increased $0.5 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily due to an increase in syndication fees.
Expenses
Operating expenses for the three months ended March 31, 2019 and 2018, are presented below (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Interest expense
$
3,455

 
$
1,634

Management fees
1,843

 
1,360

Incentive fee
1,163

 
736

Professional fees
535

 
201

Administration fee
437

 
583

Other expenses
84

 
695

Total expenses before incentive fee waiver
7,517

 
5,209

Incentive fee waiver


(22
)
Total expenses, net of incentive fee waiver
$
7,517


$
5,187

Interest expense for the three months ended March 31, 2019 increased over the corresponding period in the prior year primarily due to the issuance of the Unsecured Notes. Interest expense incurred on our debt during the three months ended March 31, 2019 and 2018 is summarized below (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
SBA Debentures
 
$
1,267

 
$
1,267

PWB Credit Facility
 
462

 
367

Unsecured Notes Due April 2025
 
860

 

Unsecured Notes Due October 2025
 
866

 

Total interest expense
 
$
3,455

 
$
1,634

Management fee expense for the three months ended March 31, 2019, increased over the corresponding period in the prior year due to an increase in our average total assets, resulting from the issuance of the Unsecured Notes.
The $0.4 million increase in incentive fee expense for the three ended March 31, 2019, compared to the corresponding period in the prior year was attributable to an increase in net investment income resulting from the increase in the size of the portfolio. On May 1, 2018, OFS Advisor irrevocably waived Income Incentive Fees of approximately $22,000 related to net investment income that it would otherwise be entitled to under the Investment Advisory Agreement for the three months ended March 31, 2018.
Professional fees for the three months ended March 31, 2019, increased over the corresponding period in the prior year due to out-of-scope fees relating to the 2018 audit, as well as the retention of additional third-party valuation services, which did not occur during the three months ended March 31, 2018.
Administration fee expense for the three months ended March 31, 2019 decreased $0.1 million over the corresponding period in the prior year primarily due to an decrease in our allocable portion of OFS Services’s overhead. The three months

57


ended March 31, 2018 included OFS Services's overhead costs in connection with a foreign debt transaction that we elected not to pursue due to regulatory changes and market conditions, which did not reoccur during the three months ended March 31, 2019.
Other expenses for the three months ended March 31, 2019, decreased over the corresponding period in the prior year primarily due to legal and other offering costs incurred during the first quarter of 2018 in connection with a foreign debt transaction that we elected not to pursue due to regulatory changes and market conditions. Other expenses for the three months ended March 31, 2019 remained stable over the corresponding period in the prior year.
Net Gain (Loss) on Investments
Net gain (loss) by investment type for the three months ended March 31, 2019 and 2018, were as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Senior secured debt
$
(129
)

$
279

Subordinated debt
155


(1,400
)
Preferred equity
(1,729
)

(1,112
)
Common equity and warrants
228


1,910

Structured Finance Notes
379

 

Net gain (loss) on investments
$
(1,096
)

$
(323
)
Three months ended March 31, 2019
We recognized net losses of $0.1 million on senior secured debt during the three months ended March 31, 2019, primarily as a result of the unrealized depreciation of $1.9 million on MAI Holdings, Inc., and other loans partially offset by unrealized appreciation of $2.2 million on broadly syndicated loans due to net positive impact of mark-to-market adjustments in the first quarter. Additional unrealized losses of $0.5 million for the three months ended March 31, 2019 were primarily a result of net negative impact of portfolio company-specific performance factors. We also recognized a realized gain of $0.1 million as a result of the partial sale of our investment in Cenexel Clinical Research Holdings, Inc.
We recognized net gains of $0.2 million on subordinated debt during the three months ended March 31, 2019, primarily due to unrealized appreciation of $0.3 million recognized on our subordinated debt investment in Online Tech Stores, LLC. We recognized net losses of $0.1 million for the three months ended March 31, 2019, primarily as a result of net negative impact of portfolio company-specific performance factors.
We recognized net losses of $1.7 million on preferred equity investments for the three months ended March 31, 2019, primarily as a result of unrealized depreciation of $0.8 million recognized on our investment in TRS Services, LLC Class A units. Additional unrealized losses of $0.9 million in other preferred equity securities for the three months ended March 31, 2019 were primarily due to the net negative impact of portfolio company-specific performance factors.
We recognized net gains of $0.2 million on common equity and warrant investments for the three months ended March 31, 2019, primarily as a result of unrealized appreciation of $2.5 million across several portfolio company investments from the positive impact of portfolio company-specific performance factors, offset by unrealized depreciation of $2.3 million in Contract Datascan Holdings, Inc. as a result of negative portfolio company-specific performance factors.
We recognized net gains of $0.4 million on Structured Finance Notes for the three months ended March 31, 2019, primarily as a result of unrealized appreciation due to net positive impact of mark-to-market adjustments in the first quarter.
Three months ended March 31, 2018
We recognized net gains of $0.3 million on senior secured debt during the three months ended March 31, 2018, primarily as a result of realized gains of $0.4 million from the sale of five senior secured loans, offset by unrealized losses of $0.2 million, primarily as a result of the net negative impact of portfolio company-specific performance factors and the impact of changes to certain market loan indices.
We recognized net losses of $1.4 million on subordinated debt during the three months ended March 31, 2018, primarily as a result of the negative impact of portfolio company-specific performance factors, including an unrealized depreciation of $1.2 million recognized on our subordinated debt investment in Southern Technical Institute, LLC, which was placed on non-accrual during 2017 and written down to a fair value of $0 at March 31, 2018.

58


We recognized net losses of $1.1 million on preferred equity investments for the three months ended March 31, 2018, primarily as a result of the net negative impact of portfolio company-specific performance factors.
We recognized net gains of $1.9 million on common equity and warrant investments for the three months ended March 31, 2018, primarily as a result of the positive impact of portfolio company-specific performance factors.

Liquidity and Capital Resources
At March 31, 2019, we held cash of $15.2 million, which includes cash of $12.9 million held by SBIC I LP, our wholly owned SBIC. Our use of cash held by SBIC I LP is restricted by SBA regulation, including limitations on the amount of cash SBIC I LP can distribute to OFS Capital Corporation as parent company (the "Parent"). Any such distributions to the Parent from SBIC I LP are generally restricted under SBA regulations to a statutory measure of undistributed accumulated earnings of SBIC I LP. During the three months ended March 31, 2019, the Parent received $0.0 million in cash distributions from SBIC I LP. At March 31, 2019, the Parent had $13.2 million of cash available for general corporate activities, which includes $11.0 million held by SBIC I LP that was available to it for distribution. Additionally, the Parent had available borrowings of $14.3 million under its PWB Credit Facility at March 31, 2019. The Parent may make unsecured loans to SBIC I LP the aggregate of which cannot exceed $35 million at any given time, and no interest may be charged on the unpaid principal balance. There were no intercompany loans between the Parent and SBIC I LP as of March 31, 2019.
Sources and Uses of Cash
We generate cash through operations from net investment income and the net liquidation of portfolio investments, and use cash in our operations in the net purchase of portfolio investments. Significant variations may exist between net investment income and cash from net investment income, primarily due to the recognition of non-cash investment income, including 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 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 includes investment income that we have not received in cash. In addition, we must distribute substantially all our taxable income, which approximates, but will not always equal, the cash we generate from net investment income to maintain our RIC tax treatment. Historically, our distributions have been in excess of taxable income, and we have limited history of net taxable gains. We also obtain cash to fund investments or general corporate activities from the issuance of securities and our revolving line of credit. These principal sources and uses of cash and liquidity are presented below (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Cash from net investment income
 
$
1,713


$
2,153

Cash received from realized gains
 
22

 
374

Net (purchases and originations) repayments of portfolio investments
 
(44,002
)

(57,354
)
Net cash used in operating activities
 
(42,267
)

(54,827
)
 
 
 
 
 
Distributions paid to stockholders(1):
 
 
 
 
From net investment income
 
(4,496
)
 
(4,886
)
From realized gains
 

 
(4,490
)
Net borrowings under line of credit
 
23,750


23,350

Other financing
 


(173
)
Decrease in cash
 
$
(23,013
)
 
$
(41,026
)
(1)
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. The 2018 distribution from realized gains represents a special dividend of undistributed net long-term capital gains that we realized in 2017. See "Item 1–Financial Statements–Note 10."
Cash from net investment income
Cash from net investment income decreased $0.4 million for the three months ended March 31, 2019, compared to the three months ended March 31, 2018 principally due to an increase in collected net interest and fee income of $1.0 million and $0.5 million, respectively, offset by an increase in fees paid to OFS Advisor and affiliates of $1.1 million, as well as increase in other expenses paid of $0.8 million.

59


Cash received from realized gains
Cash received on realized gains may differ from realized gains in the statement of operations due to delays in the receipt of sale proceeds related to escrow and earn-out provisions in the investment sales transactions.
Net (purchases and originations) repayments of portfolio investments
During the three months ended March 31, 2019, net purchases and originations of portfolio investments were primarily due to $63.6 million of cash we used to purchase portfolio investments, offset by $22.7 million of cash we received from amortized cost repayments and sales on our portfolio investments. During the three months ended March 31, 2018, net repayments were due to $41.2 million of cash we received from principal payments and sales on our portfolio investments, offset by $98.2 million of cash we used to purchase portfolio investments. See "—Portfolio Composition and Investment ActivityInvestment Activity."
Borrowings
SBA Debentures
SBIC I LP has a SBIC license that allows it to obtain leverage by issuing SBA-guaranteed debentures, subject to issuance of a capital commitment by the SBA and customary procedures. These debentures are non-recourse to us, and bear interest payable semi-annually, and each debenture has a maturity date that is ten years following issuance. The interest rate was fixed at the first pooling date after issuance, which was March and September of each year, at a market-driven spread over U.S. Treasury Notes with ten-year maturities. SBA regulations currently limit the amount that an SBIC may borrow up to a maximum of $150 million when it has at least $75 million in regulatory capital, receives a leverage commitment from the SBA and has been through an examination by the SBA subsequent to licensing. For two or more SBICs under common control, the maximum amount of outstanding SBA-provided leverage cannot exceed $350 million. As of March 31, 2019 and 2018, SBIC I LP had fully drawn the $149.9 million of leverage commitments from the SBA.
On a stand-alone basis, SBIC I LP held $249.5 million, and $251.1 million in assets at March 31, 2019, and December 31, 2018, respectively, which accounted for approximately 54% and 57% of the Company’s total consolidated assets, respectively.
SBIC I LP is periodically examined and audited by the SBA’s staff to determine its compliance with SBA regulations. If SBIC I LP fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit SBIC I LP’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit SBIC I LP from making new investments.
We have received exemptive relief from the SEC effective November 26, 2013, which permits us to exclude SBA guaranteed debentures from the definition of senior securities in the statutory 200% asset coverage ratio under the 1940 Act, allowing for greater capital deployment.
PWB Credit Facility
We are party to a BLA with Pacific Western Bank, as lender, to provide us with a senior secured revolving credit facility, or PWB Credit Facility, which is available for general corporate purposes including investment funding. The maximum availability of the PWB Credit Facility is equal to 50% of the aggregate outstanding principal amount of eligible loans included in the borrowing base, which excludes subordinated loan investments (as defined in the BLA) and as otherwise specified in the BLA. The PWB Credit Facility is guaranteed by our subsidiaries OFS Capital WM and OFSCC-MB, Inc. and secured by all of our current and future assets excluding assets held by SBIC I LP and the Company’s partnership interests in SBIC I LP and OFS SBIC I, GP and certain other financing subsidiaries.
On April 10, 2019, we executed an amendment (the “Secured Revolver Amendment”) to our PWB Credit Facility. The Secured Revolver Amendment, among other things: (i) increases the maximum amount available under the PWB Credit Facility from $50.0 million to $100.0 million; (ii) changes the interest rate from a variable rate of Prime Rate plus a 0.75% margin to a variable rate of Prime Rate plus a 0.25% margin (with a floor of 5.25%); (iii) extends the maturity date from January 31, 2020 to February 28, 2021; (iv) increases the minimum quarterly net investment income covenant from $2.0 million to $3.0 million; (v) reduces the statutory asset coverage ratio test from 200% to 150%; and (vi) adds a total liabilities to Net Asset Value (as defined in the Secured Revolver Amendment) covenant of 300%.
In connection with the Secured Revolver Amendment, we incurred a 1.0% upfront fee on the $50.0 million incremental increase in the maximum amount available under the PWB Credit Facility, which equates to $500,000.
As of March 31, 2019, we had $35.8 million outstanding at a variable interest rate of 5.50% per annum, and $14.2 million available for use under the PWB Credit Facility.

60


The BLA contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, a minimum tangible net asset value, a minimum quarterly net investment income after incentive fees, and a statutory asset coverage test. 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 March 31, 2019, the Company was in compliance with the applicable covenants.
Unsecured Notes
In April 2018, we publicly offered the Unsecured Notes Due April 2025 with aggregate principal of $50.0 million. The total net proceeds to the Company from the Unsecured Notes Due April 2025, after deducting underwriting discounts and offering costs of $1.8 million were $48.2 million. In October and November 2018, the Company publicly offered the Unsecured Notes Due October 2025 with aggregate principal of $48.5 million, which included a partial exercise of the underwriters overallotment option. The total net proceeds to the Company from the Unsecured Notes Due October 2025, after deducting underwriting discounts and offering expenses of $1.7 million, were $46.8 million. The combined Unsecured Notes totaled $98.5 million in aggregate principal debt, with net proceeds of $95.0 million to the Company.
The Unsecured Notes are direct unsecured obligations and rank equal in right of payment with all of our current and future unsecured indebtedness. Because the Unsecured Notes are not secured by any of our assets, they are effectively subordinated to all existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest), to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under the PWB Credit Facility.
As of March 31, 2019, the Unsecured Notes had the following terms and balances (amounts in thousands):
Unsecured Notes
Principal
 
Stated Interest Rate (1)
 
Effective Interest Rate (2)
 
Maturity (3)
 
Interest Expense (4)
Unsecured Notes Due April 2025
$
50,000

 
6.375
%
 
6.875
%
 
4/30/2025
 
$
860

Unsecured Notes Due October 2025
48,525

 
6.50
%
 
7.01
%
 
10/31/2025
 
866

Total
$
98,525

 
 
 
 
 
 
 
$
1,726

(1)
The weighted-average fixed cash interest rate on the Unsecured Notes as of March 31, 2019 was 6.44%.
(2)
The effective interest rate on the Unsecured Notes includes deferred debt issuance cost amortization.
(3)
The Unsecured Notes Due April 2025 may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after April 30, 2020. The Unsecured Notes Due October 2025 may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after October 31, 2020.
(4)
Interest expense includes deferred issuance costs amortization.
Other Liquidity Matters 
We expect to fund the growth of our investment portfolio utilizing borrowings under SBA debentures, follow-on equity offerings, and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act. We cannot assure stockholders that our plans to raise capital will be successful. In addition, we intend to distribute to our stockholders substantially all of our taxable income in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments or make additional investments in our portfolio companies. The illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
In addition, as a BDC, we generally will be required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities (including SBIC I LP’s SBA-guaranteed debt), to total senior securities, which include all of our borrowings (excluding SBA-guaranteed debt) and any outstanding preferred stock (of which we had none at March 31, 2019), of at least 200% (or 150% on and after May 3, 2019). We received an exemptive order from the SEC to permit us to exclude the debt of SBIC I LP guaranteed by the SBA from the definition of Senior Securities in the statutory asset coverage ratio under the 1940 Act. This requirement limits the amount that we may borrow. To fund growth in our investment portfolio in the future, we anticipate the need to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all.
On March 23, 2018, the Consolidated Appropriations Act of 2018, which includes the SBCAA, was signed into law. The SBCAA amends the 1940 Act to permit a BDC to reduce the required minimum asset coverage ratio applicable to it from 200% to 150%, subject to certain requirements described therein.

61


On May 3, 2018, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. As a result, the asset coverage ratio test applicable to us will be decreased from 200% to 150%, effective May 3, 2019.
On May 22, 2018, the Board authorized the Company to initiate the Stock Repurchase Program under which the Company may acquire up to $10.0 million of its outstanding common stock. Under the 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 Stock Repurchase Program may be extended, modified or discontinued at any time for any reason. The Company expects the Stock Repurchase Program to be in place through May 22, 2020, 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. No shares of common stock were repurchased during the three months ended March 31, 2019.
As of March 31, 2019, the aggregate amount outstanding of the senior securities issued by the Company was $284.16 million, for which the Company’s asset coverage was 227%. The Small Business Administration Debentures are not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC effective November 26, 2013. The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by total senior securities representing indebtedness.
Contractual Obligations and Off-Balance Sheet Arrangements
The following table shows our contractual obligations as of March 31, 2019 (in thousands):
 

Payments due by period
Contractual Obligation (1)

Total

Less than
year

1-3 years (2)

3-5 years

After 5
years (2)
PWB Credit Facility

$
35,750


$


$
35,750


$


$

Unsecured Notes
 
98,525








98,525

SBA Debentures

149,880






21,000


128,880

Total

$
284,155


$


$
35,750


$
21,000


$
227,405

(1)
Excludes commitments to extend credit to our portfolio companies.
(2)
The PWB Credit Facility is scheduled to mature on February 28, 2021. The SBA debentures are scheduled to mature between September 2022 and 2025. The Unsecured Notes are scheduled to mature between April 2025 and October 2025.
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 in the balance sheet. We had $9.4 million in unfunded commitments to five portfolio companies at March 31, 2019.
Distributions
We are taxed as a RIC under the Code. In order to maintain our status 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 also 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

62


investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest and dividends or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation, and amortization expense.
Our board of directors maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount not less than 90-100% of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, we may also pay an additional special dividend, or fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was earned, while maintaining the option to spill over our excess taxable income to a following year. Each year, a statement on Form 1099-DIV identifying the source of the distribution is mailed to the Company’s stockholders. 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.
Recent Developments
On April 30, 2019, our Board declared a distribution of $0.34 per share for the second quarter of 2019, payable on June 28, 2019, to stockholders of record as of June 21, 2019.
On April 10, 2019, the BLA was amended to, among other things: (i) increase the maximum amount available from $50.0 million to $100.0 million; (ii) change the interest rate from a variable rate of Prime Rate plus a 0.75% margin to a variable rate of Prime Rate plus a 0.25% margin (with a floor of 5.25%); (iii) extend the maturity date from January 31, 2020 to February 28, 2021; (iv) increase the minimum quarterly net investment income covenant from $2.0 million to $3.0 million; (v) reduce the statutory asset coverage ratio test from 200% to 150%; and (vi) add a total liabilities to Net Asset Value (as defined in the Secured Revolver Amendment) covenant of 300%.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in interest rates. As of March 31, 2019, 88% of our debt investments bore interest at floating interest rates, at fair value. The interest rates on our debt investments bearing floating interest rates are usually based on a floating LIBOR, and the debt investments typically contain interest rate re-set provisions that adjust applicable interest rates to current market rates on a periodic basis. A significant portion of our loans that are subject to the floating LIBOR rates are also subject to a minimum base rate, or floor, that we charge on our loans if the current market rates are below the respective floors. As of March 31, 2019, all of our floating rate loans were based on a floating LIBOR (not subject to a floor).
Our outstanding SBA debentures and Unsecured Notes bear interest at fixed rates. Our PWB Credit Facility has a floating interest rate provision based on the Prime Rate with a 5.25% interest rate floor, which resulted in an effective interest rate of 6.25% as of March 31, 2019.
Assuming that the interim and unaudited consolidated balance sheet as of March 31, 2019 were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following tables show the annualized impact of hypothetical base rate changes in interest rates (in thousands).

63



Basis point increase

Interest income

Interest expense

Net increase
50

$
2,006


$
(191
)

$
1,815

100

3,840


(383
)

3,457

150

5,675


(574
)

5,101

200

7,509


(765
)

6,744

250

9,343


(957
)

8,386

Basis point decrease

Interest income

Interest expense

Net decrease
50

$
(1,662
)

$
191


$
(1,471
)
100

(3,479
)

383


(3,096
)
150

(5,186
)



(5,186
)
200

(5,839
)



(5,839
)
250

(6,268
)



(6,268
)

Item 4. Controls and Procedures
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 March 31, 2019. 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 March 31, 2019, 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 
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


64



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 March 31, 2019. 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, 2018, 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 from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, which 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
During the three month period ended March 31, 2019, we issued 3,797 shares of common stock to stockholders in connection with our DRIP. These issuances were not subject to the registration requirements of the Securities Act. The aggregate value of the shares of our common stock issued under our distribution reinvestment plan was approximately $45,000.
Issuer Purchases of Equity Securities
On May 22, 2018, the Board authorized the Company to initiate the Stock Repurchase Program under which the Company may acquire up to $10.0 million of its outstanding common stock. Under the 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 Stock Repurchase Program may be extended, modified or discontinued at any time for any reason. The Company expects the Stock Repurchase Program to be in place through May 22, 2020, 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.
During the three months ended March 31, 2019, we repurchased -0- shares of common stock on the open market for under the Stock Repurchase Program. The following table provides information regarding the Stock Repurchase Program (amount in thousands except shares):
Period
 
Total Number of Shares Purchased (1)
 
Cost of Shares Purchased
 
Average Price Paid Per Share
 
Maximum Number (or Appropriate Dollar Value) of Shares that May Yet Be Purchased Under the Stock Repurchase Program
January 1, 2019 through March 31, 2019
 

 
$

 
$

 
$
9,997

(1)
Excludes shares purchased on the open market and reissued in order to satisfy the DRIP obligation.
Item 3. Defaults Upon Senior Securities
Not applicable.

Item 4. Mine Safety Disclosures
Not applicable.

65



Item 5. Other Information
Not applicable.



66


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):
 
 
 
Incorporated by Reference
 
Exhibit
Number
 
Description
Form and SEC File No.
Filing Date with SEC
Filed with this 10-Q
 
 
 
 
 
 
11.1
 
Computation of Per Share Earnings
 
 
+
 
 
 
 
 
 
31.1
 
 
 
*
 
 
 
 
 
 
31.2
 
 
 
*
 
 
 
 
 
 
32.1
 
 
 
 
 
 
 
 
 
32.2
 
 
 
+
Included in the consolidated statements of operations contained in this report
*
Filed herewith
Furnished herewith


67


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Dated: May 3, 2019
OFS CAPITAL CORPORATION
 
 
 
 
By:
/s/ Bilal Rashid
 
Name:
Bilal Rashid
 
Title:
Chief Executive Officer
 
 
 
 
By:
/s/ Jeffrey A. Cerny
 
Name:
Jeffrey A. Cerny
 
Title:
Chief Financial Officer

68