OFS Capital(OFS)

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OFS Capital(OFS) - 2021 Q2 - Quarterly Report
2021-08-06 20:52
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 June 30, 2021 or ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report Securities registered pursuant to Section 12(b) of the Act: ...
OFS Capital(OFS) - 2021 Q2 - Earnings Call Transcript
2021-08-06 15:31
OFS Capital (NASDAQ:OFS) Q2 2021 Results Earnings Conference Call August 6, 2021 10:00 AM ET Company Participants Steve Altebrando - VP, IR Bilal Rashid - Chairman and CEO Jeffrey Cerny - CFO and Treasurer Conference Call Participants Mickey Schleien - Ladenburg Operator Good day. And welcome to the OFS Capital Second 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. [Operato ...
OFS Capital(OFS) - 2021 Q1 - Quarterly Report
2021-05-11 21:05
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, 2021 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 ...
OFS Capital(OFS) - 2021 Q1 - Earnings Call Transcript
2021-05-11 16:40
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 ...
OFS Capital(OFS) - 2020 Q4 - Annual Report
2021-03-05 21:33
Part I [Business](index=3&type=section&id=Item%201.%20Business) The company operates as a BDC investing in U.S middle-market companies to generate income and capital appreciation, with a portfolio valued at $442.3 million at year-end 2020 - 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[12](index=12&type=chunk) - A significant portion of the company's investment strategy is executed through its SBIC subsidiary, SBIC I LP, which held **approximately 46%** of the company's total consolidated assets at year-end 2020[13](index=13&type=chunk)[131](index=131&type=chunk) Portfolio Composition at Fair Value (December 31, 2020) | Investment Type | Fair Value (in millions) | Number of Portfolio Companies/Notes | | :--- | :--- | :--- | | Debt Investments | $321.4 | 49 | | Equity Investments | $64.5 | 23 | | Structured Finance Notes | $56.4 | 12 | - The company's asset coverage ratio was **176%** as of December 31, 2020, above the required minimum of 150% which became effective May 3, 2019[16](index=16&type=chunk)[17](index=17&type=chunk) - OFS Advisor manages the company's investment activities for a base management fee of **1.75%** of total assets and a two-part incentive fee based on net investment income and capital gains[19](index=19&type=chunk)[71](index=71&type=chunk)[72](index=72&type=chunk) [Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) The company faces substantial risks from the COVID-19 pandemic, its dependence on an external manager, leverage, and the speculative nature of its investments in private companies and CLOs - The **COVID-19 pandemic** has adversely affected and may continue to affect the business, results, and financial condition of the company and its portfolio companies, potentially leading to reduced dividends[175](index=175&type=chunk)[180](index=180&type=chunk) - The company is **dependent on the senior professionals of its external advisor**, OFS Advisor, and its affiliates for its success[183](index=183&type=chunk) - The use of leverage magnifies potential gains and losses, and the company's required asset coverage ratio was reduced from 200% to **150%**, allowing for increased leverage and associated risk[197](index=197&type=chunk)[205](index=205&type=chunk) - **Significant potential conflicts of interest** exist, as OFS Advisor manages other funds with similar or overlapping investment strategies[239](index=239&type=chunk)[240](index=240&type=chunk) - Investments in private and middle-market companies are inherently risky, speculative, and illiquid, and investments in Structured Finance Notes (CLOs) carry additional risks including **subordination and the potential for total loss**[286](index=286&type=chunk)[292](index=292&type=chunk)[309](index=309&type=chunk) - The company's common stock may trade **below its net asset value per share**, which limits its ability to raise additional equity capital without stockholder approval[334](index=334&type=chunk) [Unresolved Staff Comments](index=59&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the Securities and Exchange Commission - Not applicable[361](index=361&type=chunk) [Properties](index=59&type=section&id=Item%202.%20Properties) The company does not own any material real estate, as its office facilities are provided by its administrator, OFS Services - The company does not own any real estate, as its office facilities are provided by OFS Services pursuant to the Administration Agreement[362](index=362&type=chunk) [Legal Proceedings](index=59&type=section&id=Item%203.%20Legal%20Proceedings) The company and its affiliates were not subject to any material pending legal proceedings as of December 31, 2020 - The company is not currently subject to any material pending legal proceedings[363](index=363&type=chunk) [Mine Safety Disclosures](index=60&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the company's operations - Not applicable[365](index=365&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=61&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's stock trades on Nasdaq and experienced significant volatility in 2020, trading at a substantial discount to NAV, while a $10 million repurchase program remains unused Quarterly Stock Price and Distribution Data (Fiscal 2020) | Quarter | NAV Per Share | High Price | Low Price | Premium/(Discount) to NAV (Low) | Cash Distribution Per Share | | :--- | :--- | :--- | :--- | :--- | :--- | | Q1 | $9.71 | $11.97 | $3.70 | -61.9% | $0.34 | | Q2 | $10.10 | $5.70 | $3.52 | -65.1% | $0.17 | | Q3 | $11.18 | $5.08 | $4.04 | -63.9% | $0.17 | | Q4 | $11.85 | $7.58 | $3.97 | -66.5% | $0.18 | - A stock repurchase program is authorized to acquire up to **$10.0 million** of common stock through May 22, 2022, though no shares were repurchased during 2020 or 2019[371](index=371&type=chunk)[374](index=374&type=chunk) - Total annual expenses are estimated to be **19.06%** of net assets attributable to common stock after a base management fee reduction from the advisor[381](index=381&type=chunk) [Selected Consolidated Financial Data](index=71&type=section&id=Item%206.%20Selected%20Consolidated%20Financial%20Data) Key financial data for the past five years shows declines in investment income, net investment income per share, and net asset value per share in 2020 compared to prior years Key Financial Metrics (2018-2020) | Metric (Per Share) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Asset Value (Year-End) | $11.85 | $12.46 | $13.10 | | Net Investment Income | $0.92 | $1.43 | $1.38 | | Net Increase in Net Assets | $0.28 | $0.71 | $0.72 | | Distributions Declared | $0.86 | $1.36 | $1.73 | Statement of Operations Data (in thousands) | Line Item | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Investment Income | $45,475 | $52,521 | $42,834 | | Total Expenses, Net | $33,180 | $33,470 | $24,449 | | Net Investment Income | $12,295 | $19,098 | $18,385 | | Net Increase in Net Assets | $3,694 | $9,553 | $9,572 | - The weighted average yield on total investments decreased year-over-year, from 10.49% in 2018 to 9.59% in 2019, and further to **8.56% in 2020**[397](index=397&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=73&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the 2020 performance decline to the COVID-19 pandemic, which led to lower net investment income, portfolio losses, and a shift to lower-yielding assets - Net investment income per share **decreased by $0.51** in 2020 compared to 2019, primarily due to a decline in the net interest margin and placing loans on non-accrual status[404](index=404&type=chunk) - The portfolio experienced **net losses of $6.7 million** in 2020, driven by unrealized losses in two debt investments, partially offset by an unrealized gain in an equity investment[405](index=405&type=chunk)[406](index=406&type=chunk) - As of December 31, 2020, the company had **$37.7 million in cash** and could access an additional $111 million from its credit facilities[513](index=513&type=chunk)[516](index=516&type=chunk) - Subsequent to year-end, the company issued **$100.0 million of 4.75% notes** due 2026 to redeem higher-coupon notes, reducing interest costs[559](index=559&type=chunk)[561](index=561&type=chunk) Debt Investment Risk Category Breakdown (Fair Value) | Risk Category | Dec 31, 2020 (%) | Dec 31, 2019 (%) | | :--- | :--- | :--- | | 1 (Low Risk) | 0.0% | 0.0% | | 2 (Below Average) | 0.0% | 4.0% | | 3 (Average) | 82.2% | 85.8% | | 4 (Special Mention) | 14.1% | 10.1% | | 5 (Substandard) | 3.6% | 0.0% | | 6 (Doubtful) | 0.1% | 0.1% | | 7 (Loss) | 0.0% | 0.0% | [Quantitative and Qualitative Disclosures about Market Risk](index=99&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risk is interest rate volatility, as 96% of its debt investments are floating-rate while most of its borrowings are fixed-rate - The company is primarily exposed to interest rate risk, as **96% of its debt investments were floating-rate** as of December 31, 2020, while its SBA debentures and Unsecured Notes were fixed-rate[565](index=565&type=chunk)[566](index=566&type=chunk) Annualized Impact of Hypothetical Interest Rate Changes | Basis Point Change | Net Change in Income (in thousands) | | :--- | :--- | | +100 | $505 | | +50 | $43 | | -25 | $(40) | [Financial Statements and Supplementary Data](index=100&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for 2020 and 2019, with the auditor highlighting the valuation of Level 3 investments as a critical audit matter - The financial statements for the two-year period ended December 31, 2020, were audited by KPMG LLP, which issued an opinion that they are **presented fairly in all material respects**[572](index=572&type=chunk) - The auditor identified the valuation of portfolio company investments using unobservable inputs as a **critical audit matter** due to the high degree of judgment required for Level 3 assets[577](index=577&type=chunk)[578](index=578&type=chunk) Consolidated Balance Sheet Summary (in thousands) | | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Investments, at Fair Value | $442,323 | $516,931 | | Total Assets | $483,813 | $538,188 | | Total Liabilities | $324,857 | $371,561 | | Total Net Assets | $158,956 | $166,627 | - The Consolidated Schedule of Investments provides a detailed listing of each investment, including its industry, interest rate, maturity, principal, amortized cost, and fair value[593](index=593&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=169&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants - Not applicable[778](index=778&type=chunk) [Controls and Procedures](index=169&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, 2020 - Management concluded that the company's disclosure controls and procedures were **effective** at the reasonable assurance level as of December 31, 2020[780](index=780&type=chunk) - Based on an assessment using the COSO 2013 framework, management concluded that the company's internal control over financial reporting was **effective** as of December 31, 2020[782](index=782&type=chunk)[783](index=783&type=chunk) [Other Information](index=169&type=section&id=Item%209B.%20Other%20Information) There is no other information to report in this section - None[785](index=785&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=170&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive compensation, and corporate governance is incorporated by reference from the company's 2021 Proxy Statement - Information required by Items 10, 11, 12, 13, and 14 is **incorporated by reference** from the company's definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[788](index=788&type=chunk)[789](index=789&type=chunk)[790](index=790&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=171&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report, including key corporate and financing agreements - This item lists all documents filed as part of the report, including financial statements, schedules, and exhibits required by Regulation S-K[795](index=795&type=chunk) - Exhibits filed include key corporate governance documents, indentures for multiple note offerings, management and administration agreements, and required CEO/CFO certifications[796](index=796&type=chunk)[797](index=797&type=chunk)[798](index=798&type=chunk) [Form 10-K Summary](index=174&type=section&id=Item%2016.%20Form%2010-K%20Summary) There is no Form 10-K summary provided in this report - None[800](index=800&type=chunk)
OFS Capital(OFS) - 2020 Q4 - Earnings Call Transcript
2021-03-05 17:44
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 ...
OFS Capital(OFS) - 2020 Q3 - Earnings Call Transcript
2020-11-06 20:03
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]
OFS Capital(OFS) - 2020 Q3 - Quarterly Report
2020-11-06 17:40
[PART I. FINANCIAL INFORMATION](index=9&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Consolidated Financial Statements](index=9&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) This section presents OFS Capital Corporation's unaudited consolidated financial statements for Q3 and nine months ended September 30, 2020 [Consolidated Statements of Assets and Liabilities](index=9&type=section&id=Consolidated%20Statements%20of%20Assets%20and%20Liabilities) Total assets and net assets decreased as of September 30, 2020, with NAV per share declining to $11.18 from $12.46 since December 31, 2019 Consolidated Balance Sheet Summary (in thousands) | Metric | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Investments at Fair Value | $456,328 | $516,931 | | Total Assets | $481,675 | $538,188 | | Total Liabilities | $331,763 | $371,561 | | Total Net Assets | $149,912 | $166,627 | | Net Asset Value Per Share | $11.18 | $12.46 | [Consolidated Statements of Operations](index=10&type=section&id=Consolidated%20Statements%20of%20Operations) Total investment income and net investment income decreased in Q3 2020 and for the nine months ended September 30, 2020, primarily due to net realized and unrealized losses on investments Operating Results Summary (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $10,487 | $13,858 | $34,338 | $39,103 | | Net Investment Income | $2,712 | $4,853 | $9,291 | $14,541 | | Net Gain (Loss) on Investments | $15,313 | $(3,091) | $(15,619) | $(5,694) | | Net Increase (Decrease) in Net Assets | $16,761 | $1,762 | $(7,741) | $8,847 | | Net Investment Income per Share | $0.20 | $0.36 | $0.69 | $1.09 | | Net Increase (Decrease) in Net Assets per Share | $1.25 | $0.13 | $(0.58) | $0.66 | [Consolidated Schedules of Investments](index=15&type=section&id=Consolidated%20Schedules%20of%20Investments) The investment portfolio's fair value decreased to $456.3 million as of September 30, 2020, with senior secured debt comprising 73.8% of the total Portfolio Composition by Investment Type (September 30, 2020, in thousands) | Investment Type | Fair Value (in thousands) | % of Total Fair Value | | :--- | :--- | :--- | | Senior secured debt investments | $336,960 | 73.8% | | Subordinated debt investments | $31,564 | 6.9% | | Preferred equity | $11,875 | 2.6% | | Common equity, warrants and other | $43,398 | 9.5% | | Structured Finance Notes | $32,531 | 7.2% | | **Total Investments** | **$456,328** | **100.0%** | - The investment portfolio was spread across **65 portfolio companies** and **9 Structured Finance Notes** as of September 30, 2020[91](index=91&type=chunk)[192](index=192&type=chunk) [Notes to Consolidated Financial Statements](index=39&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail accounting policies, related-party transactions, investment composition, a $1.1 million goodwill impairment, and $331.3 million in borrowings - In Q3 2020, management concluded that an impairment of goodwill was likely, resulting in a charge equal to the full carrying value of **$1.077 million**[74](index=74&type=chunk) - OFS Advisor waived **$441 thousand** in Income Incentive Fees for the three months ended March 31, 2020[87](index=87&type=chunk) Financial Highlights Per Share (Nine Months Ended) | Metric | September 30, 2020 | September 30, 2019 | | :--- | :--- | :--- | | Net Asset Value, beginning | $12.46 | $13.10 | | Net Investment Income | $0.69 | $1.09 | | Total from Operations | $(0.58) | $0.66 | | Distributions | $(0.68) | $(1.02) | | Net Asset Value, end | $11.18 | $12.74 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=65&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses declining net investment income per share, portfolio net gains, sufficient liquidity, and adjustments to fair value models amid the COVID-19 pandemic - **Net investment income per share declined to $0.20** in Q3 2020 from $0.36 in Q3 2019, primarily due to a **$0.24 per share decline in net interest margin** caused by a shift to lower-yielding loans and placing loans with an aggregate cost of **$37.1 million** on non-accrual status[160](index=160&type=chunk) - The portfolio saw **net gains of $15.3 million** in Q3 2020, largely due to a **$7.9 million appreciation** in the common equity of Pfanstiehl Holdings, Inc. and a **$5.0 million appreciation** in Structured Finance Notes and broadly syndicated loans[161](index=161&type=chunk) - The company believes it has **sufficient liquidity**, with the ability to access **$100 million** from its credit facilities while remaining in compliance with asset coverage requirements as of September 30, 2020[166](index=166&type=chunk) - In response to market dislocation from COVID-19, the company adjusted its fair value models, initially shifting the weighting of its valuation methods from 50/50 to 10/90 (Synthetic/Reunderwriting) at March 31, 2020, and fully reverting to a **50/50 weighting by September 30, 2020**, as market correlations normalized[174](index=174&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=85&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk, with 88% of debt investments being floating-rate and a sensitivity analysis showing the impact of rate changes - As of September 30, 2020, **88% of the company's debt investments** by fair value were floating rate, with a majority subject to a minimum base rate floor[280](index=280&type=chunk) Annualized Impact of Hypothetical Interest Rate Changes (in thousands) | Basis Point Change | Net Change in Income | | :--- | :--- | | +100 | $575 | | +50 | $2 | | -25 | $(455) | [Item 4. Controls and Procedures](index=85&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal controls during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were **effective** as of September 30, 2020[285](index=285&type=chunk) - No material changes to the internal control over financial reporting occurred during the fiscal quarter ended September 30, 2020[286](index=286&type=chunk) [PART II. OTHER INFORMATION](index=87&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=87&type=section&id=Item%201.%20Legal%20Proceedings) The company is not subject to any material pending legal proceedings as of September 30, 2020, with incidental proceedings not expected to materially affect financial condition - The company is not currently subject to any material pending legal proceedings[289](index=289&type=chunk) [Item 1A. Risk Factors](index=87&type=section&id=Item%201A.%20Risk%20Factors) New and heightened risks from the COVID-19 pandemic, including impacts on operations and asset values, are highlighted, alongside risks from Structured Finance Notes and LIBOR transition uncertainty - The COVID-19 pandemic has introduced significant new risks and exacerbated existing ones, potentially leading to difficulty collecting payments, declining asset values, and the need to restructure loans[291](index=291&type=chunk)[292](index=292&type=chunk) - The company's investments in the equity tranche of Collateralized Loan Obligations (CLOs), referred to as Structured Finance Notes, are junior in payment priority and subject to a **risk of total loss** due to the high leverage of CLOs[300](index=300&type=chunk) - There is significant uncertainty regarding the transition away from LIBOR by the end of 2021, which could adversely affect the value of the company's LIBOR-indexed, floating-rate debt securities and may require renegotiation of credit agreements[309](index=309&type=chunk)[310](index=310&type=chunk)[314](index=314&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=91&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company issued 6,708 common shares via its DRIP in Q3 2020 but made no repurchases under its extended $10.0 million Stock Repurchase Program - In Q3 2020, **6,708 shares of common stock** were issued via the company's DRIP[315](index=315&type=chunk) - No shares were repurchased under the Stock Repurchase Program in Q3 2020; the program was extended until May 22, 2022, with approximately **$10.0 million** remaining authorized for repurchases[317](index=317&type=chunk)[318](index=318&type=chunk) [Item 3. Defaults Upon Senior Securities](index=91&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable as no defaults upon senior securities occurred during the reporting period - Not applicable[319](index=319&type=chunk) [Item 4. Mine Safety Disclosures](index=91&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[320](index=320&type=chunk) [Item 5. Other Information](index=92&type=section&id=Item%205.%20Other%20Information) This item is not applicable as no other information was required to be reported - Not applicable[321](index=321&type=chunk) [Item 6. Exhibits](index=93&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with Form 10-Q, including supplemental indentures, a loan agreement amendment, and CEO/CFO certifications - Exhibits filed include supplemental indentures, an amendment to a loan agreement, and CEO/CFO certifications[322](index=322&type=chunk)
OFS Capital(OFS) - 2020 Q2 - Quarterly Report
2020-07-31 19:34
[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(OFS) - 2020 Q2 - Earnings Call Transcript
2020-07-31 17:15
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, ...