OFS Capital (NASDAQ:OFS) Q4 2022 Earnings Conference Call March 3, 2023 10:00 AM ET Company Participants Steve Altebrando – Vice President-Capital Markets Bilal Rashid – Chairman and Chief Executive Officer Jeff Cerny – Chief Financial Officer Conference Call Participants David Miyazaki – Confluence Investment Management David Prosky – Private Investor Operator Good morning, and welcome to the OFS Capital Corporation Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in lis ...

Jeff Cerny Chief Financial Officer » Subject to the Investment Company Act of 1940, which among other things, places limitations on the incurrence of leverage | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |---------------------------------------------------|-------|---------------|-------|---------------|-------|---------------|-------|---------------------------------------------------|-------|--------------| | SBA debentures1 | | | | | | | | $ 50,697 $ 50,649 $ 50,601 $ 50,553 $ 69,3 ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K (Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 814-00813 OFS Capital Corporation (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 46-1339639 (State or jurisdiction of incorporation or organization) 10 S. ...

Financial Data and Key Metrics Changes - Adjusted net investment income increased to $0.33 per share in Q3 2022, up from $0.24 per share in Q2 2022, primarily due to rising interest rate coupons on the loan portfolio [10][20] - Net asset value per share decreased to $13.58 from $14.57 in the previous quarter, but remains approximately 9% above its prepandemic level at the end of 2019 [15][22] - Total investment income for the quarter was $13.4 million, up from $10.4 million in the prior quarter, reflecting increases in interest, dividend, and fee income [25] Business Line Data and Key Metrics Changes - Approximately 99% of the loan portfolio is senior secured, with 94% being floating rate, benefiting from the rising interest rate environment [12][31] - The income yield on the investment portfolio was 11.1%, a significant increase of 250 basis points from the last quarter [34] Market Data and Key Metrics Changes - Three-month LIBOR increased by almost 1.5% to 3.75% as of September 30, 2022, with the Fed increasing rates by an additional 75 basis points recently [31] - The company has a debt-to-equity ratio of approximately 1.66x, which increased modestly quarter-over-quarter due to unrealized depreciation on investments [28] Company Strategy and Development Direction - The company focuses on capital preservation with 99% of its loan portfolio being senior secured and aims to maintain a long-term debt-to-equity ratio of approximately 1.3 to 1.4x [27][29] - The company remains cautious with new originations but is evaluating incremental funding opportunities for portfolio companies that identify growth prospects [30] Management's Comments on Operating Environment and Future Outlook - Management believes the balance sheet positioning will continue to provide tailwinds in the rising interest rate environment, with operational flexibility due to long-term debt maturing in 2025 or later [9][37] - The company views the recent decline in net asset value as a one-off situation related to a specific investment and maintains confidence in the overall quality and fundamentals of its portfolio [22][36] Other Important Information - The company has invested over $1.9 billion since 2011 with a cumulative net realized loss of just 1.9%, generating attractive yields on its portfolio [39] - The adviser managing the company has a strong alignment of interest with shareholders, holding a 22% ownership stake in the BDC [41] Q&A Session Summary Question: What is the outlook for the company's performance in the current economic environment? - Management expressed confidence in the balance sheet positioning and the ability to navigate the rising interest rate environment, expecting continued benefits from the floating rate nature of the loan portfolio [9][36] Question: How does the company view its recent decline in net asset value? - Management characterized the decline as a one-off situation related to a specific investment in the post-secondary for-profit education sector, which is not expected to recur [22][36]

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 September 30, 2022 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 Sta ...

Financial Data and Key Metrics Changes - The net asset value per share decreased to $14.57 from an all-time high of $15.52 last quarter, primarily due to unrealized depreciation from declines in broader capital markets [13][21] - Net investment income was reported at $0.47 per share, with adjusted net investment income at $0.24 per share, reflecting a decline primarily due to lower fees related to loan origination and dividend income [15][18] - Total investment income for the quarter was $10.4 million, down from $10.9 million in the prior quarter, mainly due to decreased dividend and fee income [24] Business Line Data and Key Metrics Changes - The company slowed origination activities in the last quarter, reflecting a cautious approach due to economic uncertainty, while continuing to opportunistically buy assets [15][19] - The income yield on the investment portfolio remained stable at 9.1% [32] Market Data and Key Metrics Changes - The S&P 500 declined by 16.4% and the High Yield Bond Index declined by 11.5% during the last quarter, impacting the company's net asset value [14] - The three-month LIBOR increased by 133 basis points to 2.3% by the end of the second quarter, with further increases anticipated [30] Company Strategy and Development Direction - The company is positioned to benefit from rising interest rates, with a portfolio primarily composed of floating rate loans and long-term fixed rate debt [8][34] - The focus on capital preservation is emphasized, with 98% of the loan portfolio being senior secured [35] - The company has a long-term debt-to-equity ratio target of approximately 1.3 to 1.4 times [27] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the uncertain economic environment influenced by inflation, rising interest rates, and geopolitical conflicts, but expressed confidence in the portfolio's fundamentals [8][10] - The company expects a path to increased adjusted net investment income in the third quarter due to the positioning of its balance sheet [20] Other Important Information - The company announced a stable distribution of $0.29 per share, maintaining the distribution after seven consecutive increases [26] - 100% of the outstanding debt matures in 2025 or later, with 49% being unsecured [12][26] Q&A Session Summary - No questions were raised during the Q&A session, and the call concluded without any inquiries from participants [40]

Financial Performance - As of June 30, 2022, the net asset value (NAV) per common share decreased by 6.1% to $14.57 from $15.52 at March 31, 2022, primarily due to net losses of $15.1 million, or $1.12 per common share [147]. - For the quarter ended June 30, 2022, net investment income increased to $0.47 per share, up $0.25 from the previous quarter, driven by a $3.0 million reversal of previously accrued Capital Gains Fee [148]. - Total investment income was $10.4 million, a decrease of $0.5 million compared to the previous quarter, primarily due to a $1.0 million decrease in dividend and fee income, offset by a $0.5 million increase in interest income [191]. - Net investment income for the quarter ended June 30, 2022, was $6.2 million, compared to $3.0 million in the prior quarter, reflecting improved operational efficiency [190]. - The total net gain (loss) on investments for the six months ended June 30, 2022, was a loss of $9.6 million, compared to a gain of $23.1 million in the prior year [203]. - For the six months ended June 30, 2022, total investment income was $21.4 million, a decrease of $0.5 million compared to the same period in the prior year [194]. Investment Portfolio - The fair value of the debt investment portfolio totaled $356.0 million across 66 portfolio companies, with 98% being senior secured loans [167]. - The total portfolio company investments reached a fair value of $457.8 million as of June 30, 2022, compared to $431.9 million on December 31, 2021 [177]. - Approximately 98% of the loan portfolio consisted of senior secured loans, providing greater downside protection against economic changes [178]. - The three largest industries by fair value in the portfolio were Manufacturing (27.2%), Health Care and Social Assistance (15.3%), and Professional, Scientific, and Technical Services (9.4%), totaling 51.9% of the portfolio [179]. - The company placed two loans with an aggregate amortized cost of $15.8 million on non-accrual status during the quarter ended June 30, 2022 [184]. Debt and Financing - The weighted-average debt interest costs increased to 4.3% from 4.2% in the previous quarter, mainly due to rising LIBOR rates [149]. - As of June 30, 2022, approximately 93% of the debt investments, totaling $331.0 million in fair value, bore interest at variable rates, with 83% being LIBOR-based [157]. - The company amended its PWB Credit Facility to increase the maximum amount from $25.0 million to $35.0 million and extended the maturity date of the BNP Facility to June 20, 2027 [155]. - The BNP Facility allows borrowings up to $150.0 million, with $134.1 million drawn as of June 30, 2022, and an effective interest rate of 4.67% [233]. - The company had an unused commitment of $35.0 million under the PWB Credit Facility and $15.9 million under the BNP Facility as of June 30, 2022 [216]. Cash and Liquidity - As of June 30, 2022, the company held cash of $14.8 million, including $7.5 million held by SBIC I LP [215]. - The company had $14.8 million in cash and cash equivalents, with additional unfunded commitments of $35.0 million and $15.9 million under the PWB and BNP Facilities, respectively [244]. - Cash from net investment income decreased by $1.2 million for the six months ended June 30, 2022, compared to the same period in 2021 [219]. Market Conditions and Risks - Persistent inflationary pressures are expected to affect profit margins of portfolio companies due to global supply chain issues and rising energy prices [259]. - The company is subject to financial market risks due to ongoing geopolitical conflicts and the COVID-19 pandemic, which have introduced significant volatility [252]. - Fair value of investments may fluctuate due to the lack of readily available market values, impacting the company's financial position [253]. - Interest rate sensitivity analysis indicates potential changes in earnings based on fluctuations in interest rates, with varying impacts depending on the rate changes [257]. Dividends and Distributions - The company maintains a variable dividend policy aiming to distribute 90-100% of taxable quarterly income [250]. - The Board declared a distribution of $0.29 per share for Q3 2022, payable on September 30, 2022 [251]. - The company is required to distribute at least 90% of its ICTI to maintain its RIC status, avoiding a 4% excise tax on undistributed earnings [248].

OFS Capital Corporation (NASDAQ:OFS) Q1 2022 Earnings Conference Call May 6, 2022 10:00 AM ET Company Participants Steve Altebrando - VP, Capital Markets Bilal Rashid - Chairman and CEO Jeff Cerny - CFO and Treasurer Conference Call Participants Mickey Schleien - Ladenburg Operator Good morning, And welcome to the OFS Capital Corporation First Quarter 2022 Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask que ...

Overview of OFS Capital Corporation - OFS Capital's investment portfolio totals $557 million [10] - Senior secured loans constitute 97% of the loan portfolio [10] - The net asset value stands at $208 million, or $15.52 per share [10] - Since 2011, OFS Capital has invested approximately $1.8 billion, with a cumulative net realized loss rate of about 1.9% [10] Q1 2022 Highlights - The company declared a distribution of $0.29 for the second quarter of 2022 [13] - Net asset value per share increased by 2.2% to $15.52 from the fourth quarter of 2021 [13] - Non-accruals represent 2.1% of the portfolio [14] Access to Resources and Performance - OFS benefits from shared services provided by CIM Group, which owns and operates $31.1 billion of assets [17] - OFS Capital Management has $3.1 billion in Assets Under Management and owns 22% of OFS Capital's common shares [17] - $11.77 per share in distributions paid since 2012 IPO [17]

FORM 10-Q Filing Information [Registrant Information](index=1&type=section&id=Registrant%20Information) OFS Capital Corporation, a non-accelerated filer, submitted its Q1 2022 Form 10-Q, reporting 13,425,429 common shares outstanding - **OFS Capital Corporation** is a non-accelerated filer and not an emerging growth company or shell company[2](index=2&type=chunk)[3](index=3&type=chunk) Registrant Information Metrics | Metric | Value | | :--- | :--- | | Commission file number | 814-00813 | | Quarterly period ended | March 31, 2022 | | Common Stock outstanding (May 2, 2022) | 13,425,429 shares | Table of Contents Defined Terms Forward-Looking Statements [Risks and Uncertainties](index=5&type=section&id=Risks%20and%20Uncertainties) This section outlines various risks and uncertainties, including operational challenges, personnel dependency, interest rate impacts, and global events - Key risks include operational challenges as a BDC/SBIC, dependence on key personnel, ability to maintain referral relationships, and potential conflicts of interest with OFS Advisor and affiliates[9](index=9&type=chunk) - The company is exposed to the impact of interest and inflation rates on its business and portfolio companies, as well as interest rate volatility, including the transition from LIBOR[9](index=9&type=chunk) - Global events such as the COVID-19 pandemic and the ongoing conflict between Russia and Ukraine are identified as potential factors that could materially impact financial condition and results[9](index=9&type=chunk) PART I. FINANCIAL INFORMATION [Item 1. Consolidated Financial Statements](index=7&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) This section presents the unaudited consolidated financial statements, including statements of assets, operations, cash flows, and investment schedules [Consolidated Statements of Assets and Liabilities](index=7&type=section&id=Consolidated%20Statements%20of%20Assets%20and%20Liabilities) - Total investments at fair value increased by **$49.8 million** from December 31, 2021, to March 31, 2022[13](index=13&type=chunk) - Cash significantly decreased by **$32.6 million**, while revolving lines of credit increased by **$14.65 million**[13](index=13&type=chunk) Consolidated Statements of Assets and Liabilities (in thousands) | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Total investments at fair value | $556,914 | $507,099 | | Cash | $10,473 | $43,048 | | Total assets | $571,735 | $569,048 | | Revolving lines of credit | $114,650 | $100,000 | | SBA debentures (net) | $50,553 | $69,365 | | Unsecured notes (net) | $175,586 | $175,446 | | Total liabilities | $363,349 | $365,304 | | Total net assets | $208,386 | $203,744 | | Net asset value per share | $15.52 | $15.18 | [Consolidated Statements of Operations](index=8&type=section&id=Consolidated%20Statements%20of%20Operations) - Net investment income increased by **$455 thousand (17.8%)** year-over-year, and net increase in net assets from operations more than doubled, primarily driven by higher net gain on investments[14](index=14&type=chunk) - Loss on extinguishment of debt significantly decreased from **$2.3 million** in Q1 2021 to **$0.144 million** in Q1 2022[14](index=14&type=chunk) Consolidated Statements of Operations (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Total investment income | $10,946 | $10,491 | | Total expenses | $7,941 | $7,941 | | Net investment income | $3,005 | $2,550 | | Net gain on investments | $5,500 | $3,923 | | Loss on extinguishment of debt | $(144) | $(2,299) | | Net increase in net assets from operations | $8,361 | $4,174 | | Net investment income per common share | $0.22 | $0.19 | | Net increase in net assets per common share | $0.62 | $0.31 | | Distributions declared per common share | $0.28 | $0.20 | [Consolidated Statements of Changes in Net Assets](index=9&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Net%20Assets) - Total net assets increased by **$4.642 million** during Q1 2022, driven by net investment income and unrealized appreciation, partially offset by dividends[15](index=15&type=chunk) Consolidated Statements of Changes in Net Assets (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Balances at December 31, 2021/2020 | $203,744 | $158,956 | | Net investment income | $3,005 | $2,550 | | Net realized gain on investments, net of taxes | $217 | $91 | | Net unrealized appreciation on investments, net of taxes | $5,283 | $3,832 | | Dividends declared | $(3,758) | $(2,682) | | Balances at March 31, 2022/2021 | $208,386 | $160,470 | [Consolidated Statements of Cash Flows](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) - The company experienced a significant net cash outflow of **$32.575 million** in Q1 2022, primarily due to cash used in operating activities for portfolio investments and repayments of SBA debentures[17](index=17&type=chunk) - Cash at the end of the period decreased from **$43.048 million** at the beginning of the period to **$10.473 million**[17](index=17&type=chunk) Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $(24,384) | $5,823 | | Net cash used in financing activities | $(8,191) | $(1,890) | | Net increase (decrease) in cash | $(32,575) | $3,933 | | Cash at end of period | $10,473 | $41,641 | [Consolidated Schedules of Investments](index=11&type=section&id=Consolidated%20Schedules%20of%20Investments) - As of March 31, 2022, the company held loans to **63 portfolio companies** (**97% senior secured, 3% subordinated**) and equity investments in **17 companies**, plus **20 Structured Finance Notes**[82](index=82&type=chunk) - The largest industry concentrations by fair value as of March 31, 2022, were Manufacturing (**25.5%**), Professional, Scientific, and Technical Services (**14.1%**), and Health Care and Social Assistance (**13.2%**)[83](index=83&type=chunk)[84](index=84&type=chunk)[85](index=85&type=chunk) Investment Portfolio Composition (in thousands) | Investment Type | Amortized Cost (March 31, 2022) | Fair Value (March 31, 2022) | | :-------------------------------- | :------------------------------ | :-------------------------- | | Senior secured debt investments | $371,941 | $361,317 | | Subordinated debt investments | $13,906 | $9,353 | | Preferred equity | $9,552 | $6,195 | | Common equity, warrants and other | $12,827 | $89,672 | | Total Portfolio Company Investments | $408,226 | $466,537 | | Structured Finance Notes | $93,575 | $90,377 | | Total investments | $501,801 | $556,914 | [Notes to Consolidated Financial Statements](index=35&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) [Note 1. Organization](index=35&type=section&id=Note%201.%20Organization) - OFS Capital Corporation is an externally managed, closed-end, non-diversified management investment company, regulated as a BDC and elected to be treated as a RIC for tax purposes[55](index=55&type=chunk) - The company's investment objective is to provide stockholders with current income and capital appreciation primarily through debt investments and, to a lesser extent, equity investments[56](index=56&type=chunk) - Investments are made directly or through subsidiaries: SBIC I LP (SBA-licensed), OFSCC-FS (special-purpose vehicle for senior secured loans with BNP Facility debt financing), and OFSCC-MB (holds equity investments taxed as pass-through entities)[58](index=58&type=chunk)[59](index=59&type=chunk)[60](index=60&type=chunk)[61](index=61&type=chunk) [Note 2. Summary of Significant Accounting Policies](index=35&type=section&id=Note%202.%20Summary%20of%20Significant%20Accounting%20Policies) - The financial statements are prepared in accordance with GAAP for interim financial information and SEC reporting requirements, with results for interim periods not necessarily indicative of the full year[62](index=62&type=chunk) - The company changed its estimate of the useful life for the SBIC license intangible asset to March 1, 2024, due to continued early redemptions of SBA debentures[66](index=66&type=chunk) - Concentration of credit risk primarily involves cash deposits with high credit quality institutions and debt instruments, with potential loss equal to recorded investment plus unfunded loan commitments[67](index=67&type=chunk) [Note 3. Related Party Transactions](index=37&type=section&id=Note%203.%20Related%20Party%20Transactions) - OFS Advisor manages day-to-day operations and provides investment advisory services, receiving a base management fee and an incentive fee (Income Incentive Fee and Capital Gains Fee)[68](index=68&type=chunk)[70](index=70&type=chunk)[72](index=72&type=chunk)[76](index=76&type=chunk) - Effective January 1, 2022, OFS Advisor reduced its base management fee attributable to OFSCC-FS Assets to **1.00% annualized**, renewable annually and non-recoupable[71](index=71&type=chunk) Related Party Expenses (in thousands) | Expense (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--------------------- | :-------------------------------- | :-------------------------------- | | Base management fees | $2,020 | $1,834 | | Capital Gains Fee | $1,072 | $0 | | Administration fee expense | $451 | $568 | | Distributions paid to affiliates | $846 | $607 | [Note 4. Investments](index=39&type=section&id=Note%204.%20Investments) - As of March 31, 2022, the company had **63 portfolio companies** (**97% senior secured, 3% subordinated debt**) and equity investments in **17 companies**, plus **20 Structured Finance Notes**[82](index=82&type=chunk) - Loans on non-accrual status had an aggregate amortized cost of **$18.888 million** and fair value of **$7.758 million** at March 31, 2022, remaining stable from December 31, 2021[91](index=91&type=chunk) Geographic Investment Composition (in thousands) | Geographic Composition | Amortized Cost (March 31, 2022) | Fair Value (March 31, 2022) | | :--------------------- | :------------------------------ | :-------------------------- | | United States | $395,242 | $453,512 | | Canada | $21,484 | $21,525 | | Cayman Islands | $85,075 | $81,877 | | Total investments | $501,801 | $556,914 | [Note 5. Fair Value of Financial Instruments](index=47&type=section&id=Note%205.%20Fair%20Value%20of%20Financial%20Instruments) - Investments are carried at fair value determined by the Board, using a hierarchy (Level 1, 2, 3) based on observability of inputs, with most investments categorized as Level 2 or Level 3[92](index=92&type=chunk)[93](index=93&type=chunk)[94](index=94&type=chunk) - A senior security with a fair value of **$6.773 million** was transferred from Level 3 to Level 2 during Q1 2022 due to the availability of reliable Indicative Prices[95](index=95&type=chunk) Fair Value of Financial Instruments by Level (in thousands) | Security Type | Fair Value at March 31, 2022 (Level 2) | Fair Value at March 31, 2022 (Level 3) | Fair Value at December 31, 2021 (Level 2) | Fair Value at December 31, 2021 (Level 3) | | :---------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Debt investments | $69,105 | $301,565 | $65,591 | $279,056 | | Equity investments | $0 | $95,867 | $0 | $87,251 | | Structured Finance Notes | $0 | $90,377 | $0 | $75,201 | | Total | $69,105 | $487,809 | $65,591 | $441,508 | [Note 6. Commitments and Contingencies](index=55&type=section&id=Note%206.%20Commitments%20and%20Contingencies) - The company had outstanding commitments to fund investments totaling **$44.763 million** as of March 31, 2022, an increase from **$43.690 million** at December 31, 2021[109](index=109&type=chunk) - The company is involved in legal proceedings in the normal course of business, but management believes the final disposition should not have a material adverse effect on its financial position[110](index=110&type=chunk) [Note 7. Borrowings](index=55&type=section&id=Note%207.%20Borrowings) - SBIC I LP redeemed **$19.0 million** of SBA debentures in Q1 2022, reducing outstanding debentures to **$50.920 million** at March 31, 2022[114](index=114&type=chunk) - The PWB Credit Facility was amended on April 22, 2022, to increase available credit from **$25.0 million** to **$35.0 million** and extend maturity to February 28, 2024[116](index=116&type=chunk) Average Borrowing Balances and Effective Interest Rates (Q1 2022, in thousands) | Borrowing Type | Average Outstanding Balance (Q1 2022) | Effective Interest Rate (Q1 2022) | | :--------------- | :------------------------------------ | :-------------------------------- | | SBA Debentures | $63,375 | 3.12% | | BNP Facility | $106,850 | 2.56% | | PWB Credit Facility | $506 | 14.23% | | Unsecured Notes | $180,000 | 5.40% | | Total Average Borrowings | $350,731 | 4.19% | [Note 8. Financial Highlights](index=58&type=section&id=Note%208.%20Financial%20Highlights) - Net asset value per share increased from **$15.18** at the beginning of Q1 2022 to **$15.52** at the end, driven by total operations[123](index=123&type=chunk) Financial Highlights (per share and percentages) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net asset value per share at end of period | $15.52 | $11.95 | | Per share market value, end of period | $13.00 | $8.78 | | Total return based on market value | 21.8% | 25.6% | | Total return based on net asset value | 4.4% | 3.2% | | Ratio of total expenses to average net assets | 15.4% | 19.9% | | Ratio of net investment income to average net assets | 5.8% | 6.4% | | Portfolio turnover | 5.4% | 11.4% | [Note 9. Capital Transactions](index=58&type=section&id=Note%209.%20Capital%20Transactions) - The company intends to distribute substantially all net investment income quarterly to maintain RIC tax treatment, with distributions potentially limited by BDC asset coverage requirements and SBA regulations for SBIC I LP[126](index=126&type=chunk)[127](index=127&type=chunk) - The Stock Repurchase Program, authorizing up to **$10.0 million** in common stock repurchases, was extended until May 22, 2024; no shares were repurchased in Q1 2022[129](index=129&type=chunk)[131](index=131&type=chunk) Distributions Declared (in thousands) | Distribution Date | Per Share | Cash Distribution (in thousands) | DRIP Shares Issued | | :---------------- | :-------- | :------------------------------- | :----------------- | | March 31, 2022 | $0.28 | $3,719 | 3,016 | | March 31, 2021 | $0.20 | $2,655 | 3,103 | [Note 10. Consolidated Schedule of Investments In and Advances To Affiliates](index=60&type=section&id=Note%2010.%20Consolidated%20Schedule%20of%20Investments%20In%20and%20Advances%20To%20Affiliates) - Total control and affiliate investments had a net change in unrealized appreciation of **$10.108 million** in Q1 2022, primarily driven by Pfanstiehl Holdings, Inc. and Contract Datascan Holdings, Inc[133](index=133&type=chunk) Affiliate Investment Performance and Fair Value (Q1 2022, in thousands) | Portfolio Company | Investment Type | Net Realized Gain (Loss) (Q1 2022) | Net Change in Unrealized Appreciation/(Depreciation) (Q1 2022) | Fair Value (March 31, 2022) | | :------------------ | :-------------- | :--------------------------------- | :------------------------------------------------------------- | :-------------------------- | | MTE Holding Corp. | Subordinated Loan | $0 | $0 | $0 | | | Common Equity | $278 | $(1,684) | $0 | | Contract Datascan Holdings, Inc. | Preferred Equity | $0 | $2,195 | $4,943 | | | Common Equity | $0 | $184 | $209 | | Pfanstiehl Holdings, Inc. | Common Equity | $0 | $9,568 | $75,308 | | Total Control and Affiliate Investments | | $278 | $10,108 | $84,376 | [Note 11. Subsequent Events](index=62&type=section&id=Note%2011.%20Subsequent%20Events) - On April 22, 2022, the PWB Credit Facility was amended to increase available credit to **$35.0 million** and extend its maturity to February 28, 2024[136](index=136&type=chunk) - On May 3, 2022, the Board declared a distribution of **$0.29 per share** for Q2 2022 and extended the Stock Repurchase Program for an additional two years[137](index=137&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=63&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial condition and operational results for Q1 2022, covering key metrics, portfolio activity, and liquidity [Overview](index=63&type=section&id=Overview) - NAV per common share increased **2.2%** to **$15.52** at March 31, 2022, primarily due to **$5.5 million** in net gains on the investment portfolio[140](index=140&type=chunk) - Net investment income per share decreased by **$0.11** quarter-over-quarter, mainly due to a **$2.6 million** decrease in dividend and fee income and a lower weighted-average performing income yield (**9.0% vs 11.1%**)[141](index=141&type=chunk) - Weighted-average debt interest costs decreased to **4.2%** (from **4.6%** quarter-over-quarter) due to redemption of higher-rate Unsecured Notes and issuance of new lower-rate notes[142](index=142&type=chunk) - Portfolio experienced net gains of **$5.5 million** in Q1 2022, driven by a **$9.6 million** increase in fair value of common equity in Pfanstiehl Holdings, Inc. and **$2.4 million** in Contract Datascan Holdings, Inc., offset by unrealized losses on broadly syndicated loans and Structured Finance Notes[144](index=144&type=chunk) Key Financial Metrics (per common share) | Metric | March 31, 2022 | December 31, 2021 | | :------------------------------------------ | :------------- | :---------------- | | Net asset value per common share | $15.52 | $15.18 | | Net investment income per common share (QoQ) | $0.22 | $0.33 | | Net increase in net assets per common share (QoQ) | $0.62 | $1.27 | | Distributions paid per common share (QoQ) | $0.28 | $0.25 | [Critical Accounting Policies and Significant Estimates](index=64&type=section&id=Critical%20Accounting%20Policies%20and%20Significant%20Estimates) - Critical accounting policies include revenue recognition and fair value estimates, which are discussed with the Audit Committee[149](index=149&type=chunk) - The company is evaluating the impact of adopting the SEC's new Rule 2a-5 for determining fair value, with compliance intended by September 2022[150](index=150&type=chunk) Fair Value of Investments and Range of Fair Value (in thousands) | Investment Type | Fair Value at March 31, 2022 | Range of Fair Value (Low-end) | Range of Fair Value (High-end) | | :-------------------------- | :--------------------------- | :---------------------------- | :----------------------------- | | Debt investments | $370,670 | $366,769 | $371,078 | | Structured Finance Notes | $90,377 | $88,108 | $92,647 | | Equity investments | $95,867 | $90,059 | $101,662 | | Total | $556,914 | $544,936 | $568,857 | [Related Party Transactions](index=65&type=section&id=Related%20Party%20Transactions) - The company has business relationships with OFS Advisor (investment advisory), OFS Services (administrative services), and OFSAM (license agreement for 'OFS' name)[153](index=153&type=chunk)[155](index=155&type=chunk) - OFS Advisor's base management fee for OFSCC-FS Assets was reduced to **1.00% annualized**, renewed for 2022[154](index=154&type=chunk) - The company received an SEC order on August 4, 2020, allowing greater flexibility for co-investment transactions with Affiliated Funds, subject to independent director approval[155](index=155&type=chunk) [Portfolio Composition and Investment Activity](index=66&type=section&id=Portfolio%20Composition%20and%20Investment%20Activity) [Portfolio Composition](index=66&type=section&id=Portfolio%20Composition) - As of March 31, 2022, the debt investment portfolio totaled **$370.7 million** across **63 companies** (**97% senior secured, 3% subordinated**), with equity investments of **$95.9 million** in **17 companies** and **$90.4 million** in Structured Finance Notes[159](index=159&type=chunk) - Pfanstiehl Holdings, Inc. common equity, with a fair value of **$75.3 million** (including **$75.1 million** unrealized gain), represented **13.5%** of the total portfolio and **36.1%** of total net assets, appreciating **$9.6 million** in Q1 2022[167](index=167&type=chunk) Portfolio Composition by Entity (in thousands) | Entity | Amortized Cost (March 31, 2022) | Fair Value (March 31, 2022) | | :-------------------------- | :------------------------------ | :-------------------------- | | OFS Capital Corporation (Parent) | $184,827 | $174,071 | | SBIC I LP | $114,351 | $182,546 | | OFSCC-FS | $197,897 | $195,671 | | OFSCC-MB | $4,726 | $4,626 | | Total investments | $501,801 | $556,914 | [Portfolio Yields](index=67&type=section&id=Portfolio%20Yields) - Weighted-average portfolio yields decreased quarter-over-quarter primarily due to a decrease in prepayment fees and related fee accelerations on payoffs[164](index=164&type=chunk) Weighted-Average Portfolio Yields | Yield Metric | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Weighted-average performing current yield: Debt investments | 7.5% | 9.2% | | Weighted-average performing current yield: Structured Finance Notes | 14.2% | 15.5% | | Weighted-average performing income yield: Interest-bearing investments | 9.0% | 11.1% | | Weighted-average realized yield: Total portfolio | 8.2% | 9.9% | [Structured Finance Notes](index=69&type=section&id=Structured%20Finance%20Notes) Structured Finance Notes Composition (in thousands) | Structured Finance Note Type | Amortized Cost (March 31, 2022) | Fair Value (March 31, 2022) | | :--------------------------- | :------------------------------ | :-------------------------- | | Subordinated notes | $60,329 | $57,051 | | Mezzanine debt | $16,246 | $16,326 | | Loan accumulation facilities | $17,000 | $17,000 | | Total Structured Finance Notes | $93,575 | $90,377 | [Investment Activity](index=69&type=section&id=Investment%20Activity) - Notable new investments in Q1 2022 included 24 Seven Holdco, LLC (**$8.9 million** senior secured loan), Atlantis Holding, LLC (**$8.1 million** senior secured loan), and Idera (**$4.0 million** senior secured loan)[169](index=169&type=chunk) Investment Activity (in millions) | Investment Activity (in millions) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Investments in new Portfolio Companies | $33.0 | $36.2 | | Investments in existing Portfolio Companies | $15.1 | $26.1 | | Investments in Structured Finance Notes | $22.1 | $6.2 | | Total investments | $70.2 | $68.5 | | Total proceeds from principal payments, equity distributions and investments sold | $22.7 | $49.2 | [Risk Monitoring](index=70&type=section&id=Risk%20Monitoring) - Risk ratings for debt securities remained stable in Q1 2022 compared to Q4 2021, with the majority (**94.7%**) classified as 'Average' risk[172](index=172&type=chunk) Debt Investment Risk Ratings (at Fair Value) | Risk Category | Debt Investments, at Fair Value (March 31, 2022) | Debt Investments, at Fair Value (December 31, 2021) | | :-------------------- | :----------------------------------------------- | :------------------------------------------------ | | 3 (Average) | $351,014 (94.7%) | $324,370 (94.2%) | | 4 (Special Mention) | $11,898 (3.2%) | $12,550 (3.6%) | | 5 (Substandard) | $7,322 (2.0%) | $7,027 (2.0%) | | 6 (Doubtful) | $436 (0.1%) | $699 (0.2%) | | Total | $370,670 (100.0%) | $344,646 (100.0%) | [Non-Accrual Loans](index=70&type=section&id=Non-Accrual%20Loans) - No new loans were placed on non-accrual status during Q1 2022[173](index=173&type=chunk) Non-Accrual Loan Metrics (in millions) | Metric | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Aggregate amortized cost of non-accrual loans | $18.9 million | $19.1 million | | Fair value of non-accrual loans | $7.8 million | $7.7 million | [Results of Operations](index=70&type=section&id=Results%20of%20Operations) [Comparison of the three months ended March 31, 2022 and December 31, 2021](index=71&type=section&id=Comparison%20of%20the%20three%20months%20ended%20March%2031,%202022%20and%20December%2031,%202021) - Total investment income decreased by **$4.3 million** quarter-over-quarter, primarily due to a **$2.6 million** decrease in dividend and fee income[179](index=179&type=chunk) - Interest income decreased by **$1.7 million** quarter-over-quarter, mainly due to a lower weighted-average performing income yield (**9.0% vs 11.1%**) from redeploying payoffs into lower-yielding senior secured loans[180](index=180&type=chunk) - Interest expense decreased by **$0.6 million** quarter-over-quarter due to the issuance of lower-rate Unsecured Notes and redemption of higher-rate notes[183](index=183&type=chunk) - Incentive fees decreased by **$2.3 million** quarter-over-quarter as pre-incentive fee net investment income did not exceed the performance hurdle[185](index=185&type=chunk) Consolidated Statements of Operations Comparison (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended December 31, 2021 | | :------------------------------------------ | :-------------------------------- | :----------------------------------- | | Total investment income | $10,946 | $15,267 | | Total expenses | $7,941 | $10,837 | | Net investment income | $3,005 | $4,430 | | Net gain on investments | $5,500 | $14,722 | | Loss on extinguishment of debt | $(144) | $(2,068) | | Net increase in net assets from operations | $8,361 | $17,084 | [Net realized and unrealized gain (loss) on investments](index=72&type=section&id=Net%20realized%20and%20unrealized%20gain%20(loss)%20on%20investments) - Net gains on investments were **$5.5 million** in Q1 2022, primarily from a **$10.0 million** increase in fair values of directly originated debt and equity investments, notably Pfanstiehl Holdings, Inc. (**$9.6 million**)[188](index=188&type=chunk)[189](index=189&type=chunk) - Q1 2022 saw unrealized losses of **$1.0 million** on broadly syndicated loans and **$3.4 million** on Structured Finance Notes due to widening credit market spreads[188](index=188&type=chunk) Net Realized and Unrealized Gain (Loss) on Investments (in thousands) | Investment Type | Three Months Ended March 31, 2022 | Three Months Ended December 31, 2021 | | :-------------------------- | :-------------------------------- | :----------------------------------- | | Senior secured debt | $(1,198) | $5,432 | | Subordinated debt | $(424) | $335 | | Preferred equity | $2,391 | $3,556 | | Common equity, warrants and other | $8,269 | $6,870 | | Structured Finance Notes | $(3,449) | $(658) | | Total net gain on investments | $5,500 | $14,722 | [Loss on Extinguishment of Debt](index=73&type=section&id=Loss%20on%20Extinguishment%20of%20Debt) - In Q1 2022, the company recognized a **$0.1 million** loss on extinguishment of debt from redeeming **$19.0 million** of SBA debentures[191](index=191&type=chunk) - In Q1 2021, a **$2.3 million** loss was recognized from redeeming **$9.8 million** of SBA debentures and **$98.5 million** of Unsecured Notes[192](index=192&type=chunk) [Non-GAAP Financial Measure – Adjusted Net Investment Income](index=73&type=section&id=Non-GAAP%20Financial%20Measure%20%E2%80%93%20Adjusted%20Net%20Investment%20Income) - Adjusted Net Investment Income (Adjusted NII) is a non-GAAP measure that excludes the capital gains incentive fee to provide a clearer view of operations, as net investment income does not include net capital gains[193](index=193&type=chunk)[194](index=194&type=chunk) - The Capital Gains Fee of **$1.1 million** in Q1 2022 was primarily due to **$55.0 million** in net unrealized appreciation, partially offset by **$40.1 million** in cumulative net realized losses[195](index=195&type=chunk) Adjusted Net Investment Income (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended March 31, 2022 | Three Months Ended December 31, 2021 | | :-------------------------------------- | :-------------------------------- | :----------------------------------- | | Net investment income | $3,005 ($0.22/share) | $4,430 ($0.33/share) | | Capital Gains Fee | $1,072 ($0.08/share) | $1,814 ($0.14/share) | | Adjusted NII | $4,077 ($0.30/share) | $6,244 ($0.47/share) | [Liquidity and Capital Resources](index=75&type=section&id=Liquidity%20and%20Capital%20Resources) [Sources and Uses of Cash](index=75&type=section&id=Sources%20and%20Uses%20of%20Cash) - Cash from net investment income decreased by **$0.3 million** in Q1 2022 compared to Q1 2021[203](index=203&type=chunk) - Net purchases and originations of portfolio investments resulted in a **$24.8 million** cash outflow in Q1 2022, compared to a **$5.1 million** inflow in Q1 2021[204](index=204&type=chunk) Cash Flow Activities (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Cash from net investment income | $428 | $761 | | Net (purchases and originations)/repayments and sales of portfolio investments | $(24,812) | $5,062 | | Net cash provided by (used in) operating activities | $(24,384) | $5,823 | | Distributions paid to stockholders | $(3,719) | $(2,655) | | Net (borrowings) payments under lines of credit | $14,650 | $(12,500) | | Repayment of SBA debentures | $(19,000) | $(9,765) | | Net cash used in financing activities | $(8,191) | $(1,890) | | Increase (decrease) in cash | $(32,575) | $3,933 | [Borrowings](index=76&type=section&id=Borrowings) - SBIC I LP redeemed **$19.0 million** of SBA debentures in Q1 2022, reducing outstanding debentures to **$50.9 million**[207](index=207&type=chunk) - The PWB Credit Facility was amended on April 22, 2022, to increase maximum availability to **$35.0 million** and extend maturity to February 28, 2024[211](index=211&type=chunk) - The BNP Facility had **$111.4 million** outstanding at March 31, 2022, with an effective interest rate of **2.74%** and a maturity of June 20, 2024[216](index=216&type=chunk) [Other Liquidity Matters](index=77&type=section&id=Other%20Liquidity%20Matters) - The company's asset coverage ratio was **171%** at March 31, 2022, exceeding the **150%** minimum requirement for BDCs[224](index=224&type=chunk) - As of March 31, 2022, approximately **81%** of investments were qualifying assets under the 1940 Act, allowing for up to **30%** in opportunistic, non-qualifying assets[220](index=220&type=chunk) - The Stock Repurchase Program was extended until May 22, 2024, with **$9.99 million** remaining for repurchases; no shares were repurchased in Q1 2022[223](index=223&type=chunk) [Contractual Obligations and Off-Balance Sheet Arrangements](index=78&type=section&id=Contractual%20Obligations%20and%20Off-Balance%20Sheet%20Arrangements) - At March 31, 2022, the company had **$10.5 million** cash, **$21.8 million** unfunded PWB Credit Facility, and **$38.6 million** unfunded BNP Facility to meet short-term obligations[226](index=226&type=chunk) - Long-term obligations include the BNP Facility (**$111.4 million** outstanding, matures 2024) and SBA debentures (**$50.9 million** outstanding, mature 2025)[226](index=226&type=chunk)[227](index=227&type=chunk) - The company believes its long-dated financing, with **67%** of total debt maturing in 2025 and beyond, provides operational flexibility[227](index=227&type=chunk) [Distributions](index=79&type=section&id=Distributions) - To maintain RIC tax treatment, the company must distribute annually at least **90%** of its ICTI and aims to distribute **98%** of ordinary income and **98.2%** of net capital gains to avoid excise tax[230](index=230&type=chunk) - The Board maintains a variable dividend policy, targeting quarterly distributions of **90-100%** of taxable quarterly income, with potential for additional special dividends[231](index=231&type=chunk) [Recent Developments](index=79&type=section&id=Recent%20Developments) - On April 22, 2022, the PWB Credit Facility was amended to increase available credit to **$35.0 million** and extend its maturity to February 28, 2024[232](index=232&type=chunk) - On May 3, 2022, the Board declared a distribution of **$0.29 per share** for Q2 2022 and extended the Stock Repurchase Program for an additional two years[233](index=233&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=80&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details the company's exposure to market risks, including interest rate fluctuations and investment valuation uncertainties [Investment Valuation Risk](index=80&type=section&id=Investment%20Valuation%20Risk) - Most portfolio investments lack a readily available market value and are valued at fair value by the Board, based on independent third-party valuations[235](index=235&type=chunk) - The fair value of investments may fluctuate significantly and differ from realized values due to inherent uncertainty and illiquidity, potentially leading to lower values in forced liquidation[235](index=235&type=chunk) [Interest Rate Risk](index=80&type=section&id=Interest%20Rate%20Risk) - As of March 31, 2022, **93%** of debt investments bore floating interest rates (primarily LIBOR-based, transitioning to alternative rates), with **90%** subject to a minimum base rate or floor (weighted average floor of **0.85%**)[236](index=236&type=chunk) - SBA debentures and Unsecured Notes bear fixed rates, while the PWB Credit Facility and BNP Facility have floating rates (Prime Rate and LIBOR, respectively)[237](index=237&type=chunk) Interest Rate Sensitivity Analysis (in thousands) | Basis Point Change | Interest Income Change (in thousands) | Interest Expense Change (in thousands) | Net Change (in thousands) | | :----------------- | :------------------------------------ | :------------------------------------- | :------------------------ | | +25 | $801 | $(240) | $561 | | +125 | $4,171 | $(1,385) | $2,786 | | -25 | $(170) | $317 | $147 | | -125 | $(424) | $611 | $187 | [Item 4. Controls and Procedures](index=81&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, confirmed the effectiveness of disclosure controls and procedures as of March 31, 2022 - Disclosure controls and procedures were evaluated as effective at the reasonable assurance level as of March 31, 2022[241](index=241&type=chunk) - No material changes in internal control over financial reporting occurred during the fiscal quarter ended March 31, 2022[242](index=242&type=chunk) PART II—OTHER INFORMATION [Item 1. Legal Proceedings](index=82&type=section&id=Item%201.%20Legal%20Proceedings) No material legal proceedings are pending against the company or its affiliates, and incidental proceedings are not expected to be adverse - No material pending legal proceedings are threatened against OFS Capital Corporation, OFS Advisor, or OFS Services as of March 31, 2022[245](index=245&type=chunk) - Management expects that any incidental legal proceedings will not have a material adverse effect on the company's financial position[245](index=245&type=chunk) [Item 1A. Risk Factors](index=82&type=section&id=Item%201A.%20Risk%20Factors) Investing in common stock is highly speculative, with new risks from global economic and political conditions potentially impacting operations - Investing in the common stock is speculative and involves a high degree of risk[246](index=246&type=chunk) - A new material risk factor emphasizes that global economic, political, and market conditions (e.g., Russia-Ukraine conflict, COVID-19 pandemic) may adversely affect the business, financial condition, and results of operations[248](index=248&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=82&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company issued 3,016 common shares via DRIP in Q1 2022; the stock repurchase program was extended but no shares were repurchased - **3,016 shares** of common stock, valued at approximately **$39,201**, were issued to stockholders through the DRIP in Q1 2022, not subject to registration requirements[249](index=249&type=chunk) - The Stock Repurchase Program was extended until May 22, 2024, with **$9.992 million** remaining for repurchases; no shares were repurchased in Q1 2022[251](index=251&type=chunk)[252](index=252&type=chunk) [Item 3. Defaults Upon Senior Securities](index=83&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable to the company for the reporting period [Item 4. Mine Safety Disclosures](index=83&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company for the reporting period [Item 5. Other Information](index=83&type=section&id=Item%205.%20Other%20Information) This item is not applicable to the company for the reporting period [Item 6. Exhibits](index=84&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the report, including corporate governance documents and CEO/CFO certifications - Exhibits include corporate governance documents (Certificate of Incorporation, Bylaws) and certifications from the CEO and CFO[257](index=257&type=chunk) Signatures