OFS Capital (NASDAQ:OFS) Q1 2021 Earnings Conference Call May 11, 2021 10:00 AM ET Company Participants Stephen Altebrando - VP, IR Bilal Rashid - Chairman and CEO Jeffrey Cerny - CFO Conference Call Participants Operator Good morning and welcome to the OFS Capital Corporation's First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this e ...

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, 2020 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. ...

OFS Capital (NASDAQ:OFS) Q4 2020 Results Conference Call March 5, 2021 10:00 AM ET Company Participants Stephen Altebrando - VP of IR Bilal Rashid - Chairman & CEO Jeffrey Cerny - CFO & Treasurer Conference Call Participants Mickey Schleien - Ladenburg Thalmann Operator Good day, and welcome to the OFS Capital Corporation Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask question ...

Financial Data and Key Metrics Changes - The company increased its distribution to $0.18 per share, a 6% increase from the prior quarter, reflecting confidence in long-term business outlook and increased earnings [7] - Net asset value (NAV) per share increased approximately 11% over the prior quarter to $11.18, driven by higher fair value marks on investments [8][17] - Net investment income per share was $0.20 for the quarter, an increase over the previous quarter [10][19] - Total investment income for the quarter was approximately $10.5 million, a decrease of $500,000 from the second quarter [18] Business Line Data and Key Metrics Changes - The portfolio consists of 74 investments totaling approximately $456.3 million on a fair value basis, with 91% in senior secured loans [22] - 89% of loan investments were floating rate loans, with LIBOR floors on approximately 88% of the floating rate loan portfolio [22] - The overall weighted average yield to cost on performing debt and structured finance note investments remained constant at approximately 10.1% [23] Market Data and Key Metrics Changes - Approximately 91% of the loan portfolio was senior secured at the end of the third quarter, compared to 79% two years ago, indicating a shift towards more secure investments [9] - The company has been focusing on noncyclical sectors with minimal exposure to oil and gas and metals and mining [9] Company Strategy and Development Direction - The company is cautiously increasing origination activity after significantly reducing it during the second quarter due to the pandemic [10] - The company aims to support portfolio companies in pursuing growth opportunities, both organically and through acquisitions [8][21] - The company has a strong liquidity position, with over 88% of its debt maturing in 2024 or later, providing operational flexibility [11][27] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the performance of portfolio companies and the increase in pipeline activity, while remaining cautious amid ongoing uncertainty [15] - The company is focused on preserving strong liquidity and a healthy balance sheet while navigating the current economic environment [20][26] - Management highlighted the importance of the advisor's experience and alignment of interests with shareholders, as the advisor owns 22% of the outstanding shares [13][28] Other Important Information - The company closed a $25 million unsecured bond, providing additional flexible capital for new investments and debt repayment [12] - The company has made both new investments and add-ons to existing companies pursuing growth opportunities [26] Q&A Session Summary Question: Consideration of Share Buyback Instead of Dividend Increase - Management confirmed that the Board has instituted a share buyback program and is evaluating it continuously, while also considering the current share price relative to NAV [32]

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, 2020 or 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 Organizatio ...

[PART I. FINANCIAL INFORMATION](index=9&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section provides the unaudited consolidated financial statements and management's discussion and analysis for OFS Capital Corporation as of June 30, 2020, and for the three and six-month periods then ended [Item 1. Consolidated Financial Statements](index=9&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) This section presents the unaudited consolidated financial statements for OFS Capital Corporation as of June 30, 2020, and for the three and six-month periods then ended, including statements of assets, operations, changes in net assets, cash flows, and detailed notes [Consolidated Statements of Assets and Liabilities](index=9&type=section&id=Consolidated%20Statements%20of%20Assets%20and%20Liabilities) As of June 30, 2020, total assets decreased to $475.4 million from $538.2 million, primarily due to a decline in investment fair value, leading to a drop in net asset value per share from $12.46 to $10.10 | Financial Metric | June 30, 2020 (unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Total Investments at Fair Value | $435,762 | $516,931 | | Total Assets | $475,442 | $538,188 | | Total Liabilities | $340,045 | $371,561 | | Total Net Assets | $135,397 | $166,627 | | Net Asset Value Per Share | $10.10 | $12.46 | [Consolidated Statements of Operations](index=10&type=section&id=Consolidated%20Statements%20of%20Operations) For Q2 2020, total investment income decreased to $11.0 million, but a net increase in net assets of $7.7 million was reported due to significant net unrealized appreciation, contrasting with a six-month net decrease of $24.5 million | Metric (in thousands, except per share) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $10,981 | $12,900 | $23,851 | $25,245 | | Total Expenses, net | $8,374 | $8,040 | $17,272 | $15,557 | | Net Investment Income | $2,607 | $4,860 | $6,579 | $9,688 | | Net Gain (Loss) | $5,051 | $(1,507) | $(31,081) | $(2,603) | | Net Increase (Decrease) in Net Assets | $7,658 | $3,353 | $(24,502) | $7,085 | | Net Investment Income Per Share | $0.19 | $0.36 | $0.49 | $0.73 | | Net Increase (Decrease) in Net Assets Per Share | $0.57 | $0.25 | $(1.83) | $0.53 | [Consolidated Statements of Changes in Net Assets](index=12&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Net%20Assets) For the six months ended June 30, 2020, net assets decreased by $31.2 million, driven by a $24.5 million net decrease from operations and $6.8 million in dividends declared | Description (in thousands) | Six Months Ended June 30, 2020 | | :--- | :--- | | Net Assets at January 1, 2020 | $166,627 | | Net Decrease from Operations | $(24,502) | | Dividends Declared | $(6,824) | | Common Stock Issued (Reinvestment) | $96 | | Net Assets at June 30, 2020 | $135,397 | [Consolidated Statements of Cash Flows](index=14&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended June 30, 2020, net cash from operating activities was $45.9 million, a significant reversal from the prior year, resulting in an overall cash increase of $18.3 million | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net Cash Provided (Used) in Operating Activities | $45,872 | $(44,403) | | Net Cash Provided (Used) by Financing Activities | $(27,538) | $15,635 | | Net Increase (Decrease) in Cash | $18,334 | $(28,768) | | Cash at End of Period | $31,781 | $9,404 | [Consolidated Schedules of Investments](index=15&type=section&id=Consolidated%20Schedules%20of%20Investments) The schedules detail the company's $435.8 million investment portfolio as of June 30, 2020, primarily comprising senior secured loans across diverse industries, with specific non-accrual assets identified | Investment Type | Fair Value (June 30, 2020) | % of Total Fair Value | | :--- | :--- | :--- | | Senior secured debt investments | $325,659 | 74.7% | | Subordinated debt investments | $35,755 | 8.2% | | Preferred equity | $11,757 | 2.7% | | Common equity, warrants and other | $32,561 | 7.5% | | Structured Finance Notes | $30,030 | 6.9% | | **Total Investments** | **$435,762** | **100.0%** | - As of June 30, 2020, the top three industry concentrations by fair value were Manufacturing, Wholesale Trade, and Health Care and Social Assistance[90](index=90&type=chunk)[91](index=91&type=chunk) - As of June 30, 2020, five portfolio company investments were on non-accrual status: Community Intervention Services, Inc., Online Tech Stores, LLC, 3rd Rock Gaming Holdings, LLC, Master Cutlery, LLC, and Southern Technical Institute, LLC[22](index=22&type=chunk)[24](index=24&type=chunk)[29](index=29&type=chunk) [Notes to Consolidated Financial Statements](index=39&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes explain accounting policies, fair value measurements, related party transactions, outstanding debt facilities, and unfunded commitments, highlighting the impact of COVID-19 on valuations - OFS Advisor manages the company's operations and receives a base management fee (1.75% of total assets, with certain reductions) and a two-part incentive fee[76](index=76&type=chunk)[77](index=77&type=chunk) For Q1 2020, OFS Advisor waived **$441 thousand** in Income Incentive Fees[84](index=84&type=chunk) - Due to significant market liquidity declines from the COVID-19 pandemic, the company adjusted its valuation process, resulting in the transfer of certain securities between Level 2 and Level 3 fair value categories[101](index=101&type=chunk)[102](index=102&type=chunk) | Debt Facility | Outstanding Principal (June 30, 2020) | | :--- | :--- | | SBA Debentures | $133,770 | | BNP Facility | $30,650 | | PWB Credit Facility | $21,100 | | Unsecured Notes | $152,850 | - The company has unfunded commitments of **$4.3 million** to two portfolio companies as of June 30, 2020[118](index=118&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=63&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the COVID-19 pandemic's impact on portfolio performance, including a decline in net investment income, partial valuation recovery, and liquidity management, while maintaining compliance with regulatory ratios - The COVID-19 pandemic has severely impacted global economic activity, causing significant volatility and negative pressure in financial markets, which presents material uncertainty and risks to the company's portfolio companies and its own financial condition[145](index=145&type=chunk)[155](index=155&type=chunk) - Net investment income per share declined to **$0.19** in Q2 2020 from **$0.36** in Q2 2019, primarily due to a shift to lower-yielding loans, new non-accrual loans, and higher interest costs[148](index=148&type=chunk) - The company's asset coverage ratio was **166%** as of June 30, 2020, remaining in compliance with the **150%** minimum requirement under the 1940 Act[153](index=153&type=chunk)[252](index=252&type=chunk) [Portfolio Composition and Investment Activity](index=67&type=section&id=Portfolio%20Composition%20and%20Investment%20Activity) As of June 30, 2020, the $435.8 million investment portfolio was 90% senior secured loans, with investment activity significantly slowed due to COVID-19, and a decreased weighted average yield - As of June 30, 2020, **80%** of Portfolio Company Investments at fair value were senior securities, which management believes provides greater downside protection against the impact of the COVID-19 pandemic[169](index=169&type=chunk) | Investment Activity (in millions) | Six Months Ended June 30, 2020 | | :--- | :--- | | Total Investments in New and Existing Portfolio Companies | $58.9 | | Total Proceeds from Principal Payments and Sales | $121.8 | | **Net Proceeds** | **$62.9** | - The weighted average yield on total debt and Structured Finance Note investments decreased to **9.01%** at June 30, 2020, from **9.94%** at December 31, 2019, primarily due to new non-accrual loans[172](index=172&type=chunk)[176](index=176&type=chunk) [Risk Monitoring](index=72&type=section&id=Risk%20Monitoring) Credit quality deteriorated in H1 2020, with debt investments rated 'Special Mention' or worse increasing to 19.7% of fair value, and non-accrual loans rising significantly to $21.2 million | Risk Category | % of Debt Investments (Fair Value) - June 30, 2020 | % of Debt Investments (Fair Value) - Dec 31, 2019 | | :--- | :--- | :--- | | 1-3 (Low to Average Risk) | 80.3% | 89.8% | | 4 (Special Mention) | 17.7% | 10.1% | | 5-7 (Substandard to Loss) | 2.0% | 0.1% | - The aggregate fair value of loans on non-accrual status increased to **$21.2 million** as of June 30, 2020, from **$0.9 million** at December 31, 2019, with Online Tech Stores, LLC and 3rd Rock Gaming Holding, LLC being placed on non-accrual during the period[188](index=188&type=chunk) [Results of Operations](index=73&type=section&id=Results%20of%20Operations) Q2 2020 saw decreased investment income and higher interest expense, but a net gain of $5.1 million due to unrealized appreciation, contrasting with a six-month net loss of $31.1 million from COVID-19 impacts - Recurring interest income decreased by **$1.9 million** for Q2 2020 compared to Q2 2019, due to a lower average loan balance and a **189 basis point** decrease in the recurring earned yield[196](index=196&type=chunk) - Interest expense increased for the three and six months ended June 30, 2020, compared to the prior year, due to higher average borrowings from the issuance of Unsecured Notes and borrowings under the BNP Facility[199](index=199&type=chunk) - The portfolio's net gain of **$5.1 million** in Q2 2020 was primarily driven by a combined **$7.9 million** appreciation in the equity of Pfanstiehl Holdings, Inc. and Southern Technical Institute, LLC, and a **$9.0 million** improvement in the fair value of Structured Finance Notes and broadly syndicated loans[208](index=208&type=chunk) [Liquidity and Capital Resources](index=78&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2020, the company had $31.8 million in cash and substantial unused credit facility capacity, with long-dated debt maturities, and subsequently reduced its PWB Credit Facility commitment - As of June 30, 2020, the company had **$31.8 million** in cash, an unused commitment of **$78.9 million** under its PWB Credit Facility, and an unused commitment of **$119.4 million** under its BNP Facility, subject to borrowing base and covenants[220](index=220&type=chunk)[221](index=221&type=chunk) - On July 29, 2020, the company reduced its PWB Credit Facility commitment from **$100 million** to **$50 million**[221](index=221&type=chunk) - The company's financing is long-term, with approximately **90%** of total debt contractually maturing in 2024 and beyond, providing operational flexibility[255](index=255&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=83&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate volatility, with 87% of debt investments being floating-rate, and a 100 basis point interest rate increase projected to yield a $3.5 million annual net income increase | Basis Point Change | Annualized Impact on Net Income (in thousands) | | :--- | :--- | | +100 | $3,469 | | +50 | $808 | | -25 | $(242) | | -100 | $(242) | - As of June 30, 2020, **87%** of the company's debt investments (at fair value) bore floating interest rates, many of which are subject to a minimum base rate floor[264](index=264&type=chunk)[265](index=265&type=chunk) [Item 4. Controls and Procedures](index=84&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[270](index=270&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[271](index=271&type=chunk) [PART II. OTHER INFORMATION](index=85&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides additional information including legal proceedings, updated risk factors related to the COVID-19 pandemic and LIBOR phase-out, and details on equity security sales and repurchases [Item 1. Legal Proceedings](index=85&type=section&id=Item%201.%20Legal%20Proceedings) As of June 30, 2020, the company reports that it is not currently subject to any material pending legal proceedings - The company, along with its affiliates OFS Advisor and OFS Services, is not currently subject to any material pending legal proceedings[273](index=273&type=chunk) [Item 1A. Risk Factors](index=85&type=section&id=Item%201A.%20Risk%20Factors) This section highlights heightened risks due to the COVID-19 pandemic's adverse economic impact and the uncertainty surrounding the planned phase-out of LIBOR by the end of 2021 - The COVID-19 pandemic has caused a global economic slowdown and is expected to continue to adversely impact the company, with the severity and duration being difficult to predict[276](index=276&type=chunk) - The planned phase-out of LIBOR by the end of 2021 creates uncertainty that may adversely affect the value of the company's portfolio of LIBOR-indexed, floating-rate debt securities[277](index=277&type=chunk)[278](index=278&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=86&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q2 2020, the company issued 7,165 shares via its Distribution Reinvestment Plan, made no share repurchases, and extended its $10.0 million stock repurchase program through May 2022 - In Q2 2020, **7,165 shares** of common stock were issued to stockholders through the company's DRIP[283](index=283&type=chunk) - No shares were repurchased under the Stock Repurchase Program during the three months ended June 30, 2020[285](index=285&type=chunk) The program was extended to May 22, 2022, with approximately **$10.0 million** remaining authorized for repurchases[287](index=287&type=chunk) [Item 5. Other Information](index=87&type=section&id=Item%205.%20Other%20Information) Subsequent to quarter-end, on July 29, 2020, the company reduced its PWB Credit Facility commitment from $100 million to $50 million to reduce unused commitment fees - On July 29, 2020, the company reduced the total commitment under its PWB Credit Facility with Pacific Western Bank from **$100 million** to **$50 million**[290](index=290&type=chunk)

OFS Capital (NASDAQ:OFS) Q2 2020 Earnings Conference Call July 31, 2020 10:00 AM ET Company Participants Steve Altebrando - Vice President, Investor Relations Bilal Rashid - Chairman & Chief Executive Officer Jeff Cerny - Chief Financial Officer & Treasurer Conference Call Participants Mickey Schleien - Ladenburg Operator Good day and welcome to the OFS Capital Corporation Second Quarter 2020 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, ...

OFS Capital Corporation (NASDAQ:OFS) Q1 2020 Earnings Conference Call May 8, 2020 1:00 PM ET Company Participants Steve Altebrando - Vice President, Investor Relations Bilal Rashid - Chairman & Chief Executive Officer Jeff Cerny - Chief Financial Officer & Treasurer Conference Call Participants Mickey Schleien - Ladenburg Operator Good day, and welcome to the OFS Capital Corporation First Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's pr ...

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, 2020 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 o ...

PART I [Business](index=5&type=section&id=Item%201.%20Business) OFS Capital operates as an externally managed BDC, investing in U.S. middle-market companies for income and capital appreciation, and is taxed as a RIC [General Overview](index=5&type=section&id=General%20Overview) OFS Capital operates as a BDC, aiming for current income and capital appreciation, with a $516.9 million portfolio primarily in senior secured loans, managed externally, and taxed as a RIC - The company's investment objective is to provide stockholders with both **current income and capital appreciation**, primarily through debt investments in U.S. middle-market companies[16](index=16&type=chunk) Portfolio Composition at Fair Value (December 31, 2019) | Investment Type | Fair Value (in millions) | Portfolio Companies | | :--- | :--- | :--- | | Debt Investments | $451.8 | 79 | | - Senior Secured Loans | 90% of Debt Portfolio | N/A | | - Subordinated Loans | 10% of Debt Portfolio | N/A | | Equity Investments (in companies with debt) | $43.5 | 15 | | Equity-Only Investments | N/A | 6 | | Structured Finance Notes | $21.6 | 4 | - The company has reduced its required **asset coverage ratio from 200% to 150%**, effective May 3, 2019, allowing for increased leverage[22](index=22&type=chunk) - The company has elected to be treated as a **Regulated Investment Company (RIC)**, which generally eliminates corporate-level taxes on income distributed to stockholders[24](index=24&type=chunk) [Investment Strategy and Market](index=8&type=section&id=Investment%20Strategy%20and%20Market) The company targets U.S. middle-market companies, primarily investing in senior secured and subordinated loans, with a rigorous due diligence and active portfolio monitoring process - The company targets U.S. middle-market companies, typically defined as having revenues between **$15 million and $300 million** and annual EBITDA between **$3 million and $50 million**[45](index=45&type=chunk)[47](index=47&type=chunk) - Investment types include **senior secured first-lien, unitranche, second-lien, broadly syndicated, and subordinated (mezzanine) loans**, along with equity securities, warrants, and Structured Finance Notes[67](index=67&type=chunk)[68](index=68&type=chunk)[72](index=72&type=chunk)[73](index=73&type=chunk) - The company employs a **rigorous due diligence process** focusing on prospective company characteristics, industry overview, financial analysis, and legal documentation[48](index=48&type=chunk)[49](index=49&type=chunk)[50](index=50&type=chunk)[51](index=51&type=chunk) Debt Investment Risk Ratings (December 31, 2019) | Risk Category | Fair Value (in millions) | | :--- | :--- | | 2 (Below Average Risk) | $18.0 | | 3 (Average) | $387.7 | | 4 (Special Mention) | $45.5 | | 5 (Substandard) | $0.0 | | 6 (Doubtful) | $0.7 | [Management and Other Agreements](index=13&type=section&id=Management%20and%20Other%20Agreements) OFS Capital is externally managed by OFS Advisor, subject to a base management fee of 1.75% of assets (reduced for OFSCC-FS) and a two-part incentive fee, with administrative services provided by OFS Services - The base management fee is **1.75% annually** on average total assets (excluding cash, and goodwill/intangibles from the SBIC Acquisition)[77](index=77&type=chunk) - OFS Advisor agreed to reduce its base management fee to **1.00%** on assets held by the OFSCC-FS subsidiary, effective January 1, 2020[78](index=78&type=chunk) - The incentive fee has two parts: Part One is based on pre-incentive fee net investment income exceeding a **2.0% quarterly hurdle rate**, and Part Two is **20% of cumulative realized capital gains** net of losses and unrealized depreciation[79](index=79&type=chunk)[85](index=85&type=chunk) Advisory Fees Paid (2017-2019) | Fee Type | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Base Management Fee | $8.3 million | $6.3 million | $5.0 million | | Incentive Fee | $4.8 million | $4.4 million | $3.0 million | - Administrative services are provided by OFS Services, an affiliate, under an Administration Agreement, with the company reimbursing for allocable overhead, including officer salaries[102](index=102&type=chunk)[103](index=103&type=chunk) [Regulation](index=19&type=section&id=Regulation) As a BDC, OFS Capital is subject to 1940 Act regulations, including a 70% qualifying asset rule and a 150% asset coverage ratio, while its SBIC subsidiary is SBA-regulated, and the company maintains RIC tax status by meeting specific income and distribution tests - As a BDC, at least **70% of the company's assets** must be "qualifying assets," typically securities of private or small public U.S. companies[113](index=113&type=chunk) - The company's applicable **asset coverage ratio for senior securities was reduced from 200% to 150%**, effective May 3, 2019, allowing it to borrow up to **$2 for every $1 of investor equity**[119](index=119&type=chunk)[121](index=121&type=chunk) - The company's subsidiary, SBIC I LP, is licensed by the SBA and can issue up to **$150 million in SBA-guaranteed debentures**, subject to SBA regulations regarding eligible small business investments[130](index=130&type=chunk)[131](index=131&type=chunk)[132](index=132&type=chunk) - To maintain its RIC status, the company must meet a **90% gross income test** from qualifying sources and asset diversification tests, and distribute at least **90% of its investment company taxable income annually**[151](index=151&type=chunk)[154](index=154&type=chunk)[157](index=157&type=chunk) - The company has an SEC exemptive order permitting it to **co-invest with certain funds managed by OFS Advisor**, subject to approval by a required majority of independent directors[111](index=111&type=chunk)[127](index=127&type=chunk) [Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including dependence on its external advisor, conflicts of interest, leverage and financing risks, inherent credit risk in middle-market investments, regulatory compliance, market volatility, and potential trading below net asset value [Risks Related to Our Business and Structure](index=30&type=section&id=Risks%20Related%20to%20Our%20Business%20and%20Structure) The company's success depends on OFS Advisor's professionals, with leverage magnifying gains and losses, and valuation uncertainty from illiquid assets; risks also include SBIC compliance, credit losses, maintaining RIC status, market disruptions, and cybersecurity threats - The company is dependent on the **senior professionals of its external advisor, OFS Advisor**, and has no internal management or employees[176](index=176&type=chunk) - The use of borrowed money magnifies potential gains or losses; the company's asset coverage ratio was **180%** as of December 31, 2019, with the Board approving a reduction to **150%** effective May 3, 2019[189](index=189&type=chunk)[190](index=190&type=chunk)[198](index=198&type=chunk) - Many portfolio investments are not publicly traded and are **valued in good faith by the board**, leading to uncertainty in the net asset value[183](index=183&type=chunk)[184](index=184&type=chunk) - Failure to maintain **RIC tax status** would subject the company to corporate-level income tax, substantially reducing net assets and distributable income[210](index=210&type=chunk) [Risks Related to OFS Advisor and its Affiliates](index=41&type=section&id=Risks%20Related%20to%20OFS%20Advisor%20and%20its%20Affiliates) Conflicts of interest arise from OFS Advisor managing other funds with similar strategies, potentially leading to non-arm's length agreements and a fee structure that may incentivize higher leverage or riskier investments, while the advisor's limited liability and resignation option pose operational risks - OFS Advisor manages other entities with similar investment strategies, such as **HPCI and OCCI**, creating potential conflicts in allocating investment opportunities[251](index=251&type=chunk) - The base management fee, calculated on total assets including leverage, may incentivize OFS Advisor to **increase borrowings**[272](index=272&type=chunk) - The incentive fee structure may encourage OFS Advisor to make **riskier or more speculative investments** to generate higher returns and capital gains[273](index=273&type=chunk)[275](index=275&type=chunk) - The Investment Advisory and Administration Agreements were negotiated between related parties and may not be as favorable as if negotiated with an **unaffiliated third party**[264](index=264&type=chunk) [Risks Related to Our Investments](index=47&type=section&id=Risks%20Related%20to%20Our%20Investments) Investments in private and middle-market companies are speculative, carrying high credit risk, especially for leveraged, subordinated, and 'covenant-lite' loans, exacerbated by illiquidity, portfolio concentration, and uncertainty from the LIBOR transition - Investments in middle-market companies are speculative and involve a **high degree of risk of credit loss**, as these companies are susceptible to economic slowdowns[291](index=291&type=chunk)[296](index=296&type=chunk) - The portfolio may include **"covenant-lite" loans**, which offer fewer protections for lenders and may lead to a greater risk of loss compared to loans with traditional financial maintenance covenants[295](index=295&type=chunk) - The company is a non-diversified investment company, meaning its portfolio may be **concentrated in a limited number of companies and industries**, subjecting it to significant loss if one defaults or an industry experiences a downturn[314](index=314&type=chunk)[315](index=315&type=chunk) - The planned phase-out of LIBOR by the end of 2021 creates **uncertainty for the company's floating-rate debt securities** and may adversely affect their value[337](index=337&type=chunk)[338](index=338&type=chunk) [Risks Related to Our Securities](index=55&type=section&id=Risks%20Related%20to%20Our%20Securities) The company's common stock may trade at a significant discount to NAV, limiting equity capital raising, while Unsecured Notes are effectively subordinated to secured debt and structurally subordinated to subsidiary liabilities - Shares of BDCs, including OFS Capital, frequently trade at a **discount to their net asset value (NAV)**; as of December 31, 2019, NAV was **$12.46 per share**, while the average closing price for 2019 was **$11.74**[347](index=347&type=chunk) - The company's Unsecured Notes are **effectively subordinated to any secured debt** and **structurally subordinated to all liabilities of its subsidiaries**[348](index=348&type=chunk)[350](index=350&type=chunk) - The indenture for the Unsecured Notes offers **limited protection to holders** and does not restrict the company from incurring additional debt or paying dividends, provided asset coverage tests are met[351](index=351&type=chunk) [Properties](index=58&type=section&id=Item%202.%20Properties) The company does not own any real estate; its headquarters and other offices are provided by its administrator, OFS Services, under the Administration Agreement - The company does not own or lease any material physical properties; its office facilities are provided by OFS Services under the Administration Agreement[359](index=359&type=chunk) [Legal Proceedings](index=58&type=section&id=Item%203.%20Legal%20Proceedings) As of December 31, 2019, the company and its affiliates were not subject to any material pending legal proceedings, with incidental proceedings not expected to have a material effect - The company and its affiliates are not currently subject to any **material pending legal proceedings**[360](index=360&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=59&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) This section details the company's common stock trading on Nasdaq under "OFS", including historical stock price, NAV, distributions, a stock repurchase program (no 2019 repurchases), performance comparison, fee structure, and outstanding senior securities Fiscal 2019 Quarterly Stock and Distribution Data | Quarter | NAV Per Share | High Price | Low Price | Distribution per Share | | :--- | :--- | :--- | :--- | :--- | | Q4 2019 | $12.46 | $12.01 | $10.99 | $0.34 | | Q3 2019 | $12.74 | $12.27 | $10.98 | $0.34 | | Q2 2019 | $12.95 | $12.80 | $11.85 | $0.34 | | Q1 2019 | $13.04 | $12.52 | $10.77 | $0.34 | - The Board authorized a **$10.0 million stock repurchase program** on May 22, 2018, with no shares repurchased during the year ended December 31, 2019[366](index=366&type=chunk)[367](index=367&type=chunk)[368](index=368&type=chunk) Total Annual Expenses (as a % of net assets) | Expense Category | Percentage | | :--- | :--- | | Base management fees | 5.38% | | Incentive fees | 2.73% | | Interest payments on borrowed funds | 10.91% | | Other expenses | 2.76% | | **Total annual expenses** | **21.78%** | | Base management fee reduction | (0.08)% | | **Total annual expenses, net of fee waiver** | **21.70%** | Senior Securities Outstanding (December 31, 2019) | Security | Amount Outstanding (in thousands) | | :--- | :--- | | BNP Facility | $56,450 | | 5.95% Notes due 2026 | $54,325 | | 6.50% Notes due 2025 | $48,525 | | 6.375% Notes due 2025 | $50,000 | | PWB Credit Facility | $0 | | SBA debentures (SBIC I LP) | $149,880 | | **Total Senior Securities** | **$359,180** | [Selected Consolidated Financial Data](index=67&type=section&id=Item%206.%20Selected%20Consolidated%20Financial%20Data) This section summarizes five years of key financial data, showing 2019 total investment income of **$52.5 million**, net investment income of **$19.1 million** ($1.43 per share), a **$9.6 million** net decrease in net assets from operations due to unrealized depreciation, and growth in total investments to **$516.9 million** with total debt at **$352.5 million** Selected Financial Data (Years Ended December 31) | Metric (in thousands, except per share) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total investment income | $52,521 | $42,834 | $33,426 | | Net investment income | $19,098 | $18,385 | $15,877 | | Net increase in net assets from operations | $9,553 | $9,572 | $7,910 | | Net asset value per share | $12.46 | $13.10 | $14.12 | | Net investment income per share | $1.43 | $1.38 | $1.28 | | Distributions declared per share | $1.36 | $1.73 | $1.36 | | Investments, at fair value | $516,931 | $396,797 | $277,499 | | Total assets | $538,188 | $441,421 | $357,778 | | Debt | $352,478 | $254,826 | $164,823 | | Total net assets | $166,627 | $175,023 | $188,336 | - The weighted average yield on performing debt and Structured Finance Note investments decreased to **10.40% in 2019 from 11.50% in 2018**[392](index=392&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=69&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses 2019 financial performance, noting investment income growth to **$52.5 million** driven by portfolio expansion and leverage, offset by increased expenses and a **$9.5 million** net loss on investments from unrealized depreciation, with the portfolio at **$516.9 million** and total debt at **$359.2 million** [Portfolio Composition and Investment Activity](index=74&type=section&id=Portfolio%20Composition%20and%20Investment%20Activity) As of December 31, 2019, the investment portfolio's fair value was **$516.9 million**, primarily senior secured debt, with the weighted average yield decreasing to **10.40%**; new investments totaled **$198.8 million**, and four loans were on non-accrual status Portfolio Composition by Investment Type (Fair Value) | Investment Type | Dec 31, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :--- | :--- | :--- | | Senior secured debt | $408,724 | $319,017 | | Subordinated debt | $43,091 | $44,540 | | Preferred equity | $17,729 | $14,613 | | Common equity and warrants | $25,777 | $18,627 | | **Total Direct Investments** | **$495,321** | **$396,797** | - The weighted average yield on performing debt and Structured Finance Notes decreased from **11.5% at year-end 2018 to 10.40% at year-end 2019**, primarily due to deploying capital into new, lower-yielding originations and a decrease in LIBOR[426](index=426&type=chunk) - During 2019, the company invested **$193.2 million in debt** and **$5.6 million in equity** in new and existing portfolio companies, plus **$23.4 million in Structured Finance Notes**[431](index=431&type=chunk) - At year-end 2019, **four loans were on non-accrual status** with an aggregate amortized cost of **$22.2 million** and fair value of **$0.7 million**[428](index=428&type=chunk) [Results of Operations](index=78&type=section&id=Results%20of%20Operations) For 2019, total investment income increased by **$9.7 million to $52.5 million**, driven by portfolio growth, while total expenses rose by **$9.0 million to $33.4 million** due to higher interest and management fees, resulting in **$19.1 million** net investment income and a **$9.5 million** net loss on investments from unrealized depreciation Consolidated Operating Results (in thousands) | Line Item | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total investment income | $52,521 | $42,834 | $33,426 | | Total expenses, net | $33,423 | $24,449 | $17,549 | | **Net investment income** | **$19,098** | **$18,385** | **$15,877** | | Net loss on investments | ($9,545) | ($8,813) | ($7,967) | | **Net increase in net assets** | **$9,553** | **$9,572** | **$7,910** | - The increase in 2019 investment income was driven by a **$103 million increase in the average outstanding loan balance**[445](index=445&type=chunk)[447](index=447&type=chunk) - The increase in 2019 expenses was primarily due to a **$6.6 million rise in interest expense** from increased borrowings, including the new BNP Facility and Unsecured Notes[451](index=451&type=chunk)[452](index=452&type=chunk) - The net loss on investments in 2019 was primarily driven by a **$9.0 million unrealized loss** on the senior secured debt of Constellis Holdings, LLC[461](index=461&type=chunk) [Liquidity and Capital Resources](index=83&type=section&id=Liquidity%20and%20Capital%20Resources) As of December 31, 2019, the company had **$13.4 million** cash and **$162.6 million** in available credit facilities, with total debt outstanding at **$359.2 million** and an asset coverage ratio of **180%**, planning future growth through equity and additional borrowings Sources of Liquidity (December 31, 2019) | Source | Amount (in millions) | | :--- | :--- | | Cash and cash equivalents | $13.4 | | PWB Credit Facility Availability | $69.0 | | BNP Facility Unused Commitment | $93.6 | Debt Outstanding (December 31, 2019) | Debt Instrument | Principal Outstanding (in thousands) | | :--- | :--- | | SBA Debentures | $149,880 | | PWB Credit Facility | $0 | | BNP Facility | $56,450 | | Unsecured Notes | $152,850 | | **Total** | **$359,180** | - The company's **asset coverage ratio was 180%** as of December 31, 2019, well above the **150% regulatory requirement**, with SBA debentures excluded per an SEC exemptive order[475](index=475&type=chunk)[476](index=476&type=chunk) - The company has **$4.8 million in unfunded commitments** to four portfolio companies as of year-end 2019[516](index=516&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=90&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company is primarily exposed to interest rate risk, with **93% of debt investments floating-rate** (LIBOR-indexed) and a sensitivity analysis showing a **$3.4 million** increase in net annual income for a 100 basis point rate rise and a **$2.9 million** decrease for a 100 basis point fall - As of December 31, 2019, **93% of the company's debt investments at fair value were floating-rate**, making its income sensitive to interest rate changes[521](index=521&type=chunk) Annualized Impact of Hypothetical Interest Rate Changes (in thousands) | Basis Point Change | Net Increase (Decrease) in Income | | :--- | :--- | | +200 | $6,928 | | +100 | $3,368 | | -100 | ($2,861) | | -200 | ($3,005) | [Financial Statements and Supplementary Data](index=91&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for 2019 and prior years, including reports from independent accounting firms, statements of assets and liabilities, operations, changes in net assets, cash flows, a detailed schedule of investments, and comprehensive notes covering accounting policies, fair value, related party transactions, and debt Consolidated Statement of Assets and Liabilities (December 31, 2019) | | Amount (in thousands) | | :--- | :--- | | **Assets** | | | Total investments at fair value | $516,931 | | Cash and cash equivalents | $13,447 | | **Total Assets** | **$538,188** | | **Liabilities** | | | Total debt (net of costs) | $352,478 | | **Total Liabilities** | **$371,561** | | **Total Net Assets** | **$166,627** | | Net Asset Value per share | $12.46 | - The company's independent registered public accounting firm for fiscal year 2019 was **KPMG LLP**, providing an **unqualified opinion** on financial statements and internal control effectiveness[530](index=530&type=chunk)[531](index=531&type=chunk) - All of the company's investments are classified as **Level 2 or Level 3 in the fair value hierarchy**, with the vast majority (**$442.3 million out of $516.9 million**) classified as **Level 3**, indicating reliance on unobservable inputs for valuation[667](index=667&type=chunk) [Controls and Procedures](index=159&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019, an assessment audited by KPMG LLP with an unqualified opinion, and no material changes were reported in Q4 2019 - Management concluded that the company's **disclosure controls and procedures were effective** as of December 31, 2019[741](index=741&type=chunk) - Management concluded that the company's **internal control over financial reporting was effective** as of December 31, 2019, an assessment audited by **KPMG LLP** which issued an **unqualified opinion**[744](index=744&type=chunk)[745](index=745&type=chunk) PART III [Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership](index=160&type=section&id=Items%2010-14) Information for Items 10-14, covering directors, executive officers, corporate governance, compensation, security ownership, related transactions, and principal accountant fees, is incorporated by reference from the company's definitive 2020 Proxy Statement - Information regarding **Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accountant Fees (Item 14)** is incorporated by reference from the forthcoming 2020 Proxy Statement[749](index=749&type=chunk)[750](index=750&type=chunk)[751](index=751&type=chunk)[752](index=752&type=chunk)[753](index=753&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=161&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists financial statements, schedules, and exhibits filed with the 10-K, including corporate governance documents, debt agreements, management agreements, and CEO/CFO certifications pursuant to the Sarbanes-Oxley Act - This section provides a comprehensive list of all documents filed with the 10-K, including **corporate governance documents, debt agreements, management agreements, and required certifications**[755](index=755&type=chunk)[756](index=756&type=chunk)[757](index=757&type=chunk)