OFS Capital(OFS) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Consolidated Financial Statements This section presents OFS Capital Corporation's unaudited consolidated financial statements, including statements of assets and liabilities, operations, changes in net assets, cash flows, and detailed investment schedules, for the periods ended September 30, 2019 Consolidated Statements of Assets and Liabilities Total assets increased to $518.3 million by September 30, 2019, driven by investment fair value, while total liabilities also grew, leading to a decrease in net asset value per share to $12.74 Consolidated Balance Sheet Highlights (in thousands) | Metric | September 30, 2019 (unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Total Investments, at fair value | $502,161 | $396,797 | | Total Assets | $518,287 | $441,421 | | Total Liabilities | $347,881 | $266,398 | | Total Net Assets | $170,406 | $175,023 | | Net Asset Value per share | $12.74 | $13.10 | Consolidated Statements of Operations Total investment income rose to $13.9 million in Q3 2019, yielding $4.9 million in net investment income, but a $3.1 million net loss on investments led to a lower net increase in net assets Operating Results (in thousands, except per share data) | Metric | Q3 2019 (unaudited) | Q3 2018 (unaudited) | Nine Months 2019 (unaudited) | Nine Months 2018 (unaudited) | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $13,858 | $10,982 | $39,103 | $30,263 | | Total Expenses | $9,005 | $6,292 | $24,562 | $17,199 | | Net Investment Income | $4,853 | $4,690 | $14,541 | $13,064 | | Net Gain (Loss) on Investments | ($3,091) | $489 | ($5,694) | $603 | | Net Increase in Net Assets | $1,762 | $5,179 | $8,847 | $13,667 | | Net Investment Income per Share | $0.36 | $0.35 | $1.09 | $0.98 | | Net Increase in Net Assets per Share | $0.13 | $0.39 | $0.66 | $1.02 | Consolidated Statements of Changes in Net Assets Net assets decreased by $4.6 million to $170.4 million for the nine months ended September 30, 2019, primarily due to distributions and unrealized depreciation offsetting net investment income Changes in Net Assets - Nine Months Ended Sep 30, 2019 (in thousands) | Description | Amount | | :--- | :--- | | Balances at January 1, 2019 | $175,023 | | Net Investment Income | $14,541 | | Net Realized Loss on Investments | ($843) | | Net Unrealized Depreciation on Investments | ($4,851) | | Distributions to Stockholders | ($13,631) | | Other | $167 | | Balances at September 30, 2019 | $170,406 | Consolidated Statements of Cash Flows The company experienced a net cash outflow of $30.2 million for the nine months ended September 30, 2019, driven by operating activities and partially offset by financing activities Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Activity | 2019 (unaudited) | 2018 (unaudited) | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($95,349) | ($95,927) | | Net Cash Provided by Financing Activities | $65,151 | $29,018 | | Net Decrease in Cash | ($30,198) | ($66,909) | | Cash at Beginning of Period | $38,172 | $72,952 | | Cash at End of Period | $7,974 | $6,043 | Consolidated Schedules of Investments Total investments at fair value increased to $502.2 million by September 30, 2019, comprising debt, equity, and structured finance notes across 69 companies, with the majority in non-control/non-affiliate investments Investment Portfolio Composition as of Sep 30, 2019 (Fair Value, in thousands) | Investment Category | Fair Value | % of Total Investments | | :--- | :--- | :--- | | Non-control/Non-affiliate Investments | $368,634 | 73.4% | | Affiliate Investments | $124,227 | 24.7% | | Control Investment | $9,300 | 1.9% | | Total Investments | $502,161 | 100.0% | Investment Type Breakdown as of Sep 30, 2019 (Fair Value, in thousands) | Investment Type | Fair Value | % of Total Investments | | :--- | :--- | :--- | | Senior Secured Debt | $393,857 | 78.4% | | Subordinated Debt | $44,079 | 8.8% | | Preferred Equity | $18,566 | 3.7% | | Common Equity and Warrants | $23,465 | 4.7% | | Structured Finance Notes | $22,194 | 4.4% | | Total | $502,161 | 100.0% | Notes to Consolidated Financial Statements The notes detail accounting policies, related-party transactions, investment composition, fair value measurements, debt facilities, and capital transactions, including management fees, Level 3 asset valuation, and distribution policy - The company operates as a BDC and has elected to be treated as a RIC for tax purposes, making investments directly and through subsidiaries like SBIC I LP and OFSCC-FS[56][57][59] - OFS Advisor receives a 1.75% annual base management fee and a two-part incentive fee, with a partial waiver on the base management fee for assets in OFSCC-FS under certain leverage conditions[71][73] - As of September 30, 2019, $450.1 million (89.6%) of the company's $502.2 million investment portfolio was classified as Level 3, valued using significant unobservable inputs[107] - Total debt outstanding includes SBA debentures ($147.9 million), Unsecured Notes ($95.6 million), the PWB Credit Facility ($45.8 million), and the BNP Facility ($46.7 million)[113][117][118] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operating results, covering investment strategy, portfolio composition, key financial metrics, liquidity, capital resources, and recent debt issuance Portfolio Composition and Investment Activity The investment portfolio's fair value reached $502.2 million by September 30, 2019, primarily in debt, with $142.2 million invested in direct debt and $23.4 million in Structured Finance Notes during the period Investment Activity - Nine Months Ended Sep 30, 2019 (in millions) | Activity | Debt Investments | Equity Investments | | :--- | :--- | :--- | | Investments in new portfolio companies | $97.7 | $4.1 | | Investments in existing portfolio companies | $44.5 | $— | | Total Investments | $142.2 | $4.1 | | Total Proceeds (Repayments/Sales) | $61.2 | $— | - The company also invested $23.4 million in Structured Finance Notes with a weighted average annual effective yield of 15.94% during the nine months ended September 30, 2019[173] - Debt investments with a fair value of $41.0 million were downgraded from risk category 3 to categories 4 and 5, while investments with a fair value of $17.1 million were upgraded from category 4 to 3 during the first nine months of 2019[181] Results of Operations Total investment income increased to $13.9 million in Q3 2019, but rising expenses, primarily interest, led to a stable net investment income of $4.9 million and a $3.1 million net loss on investments Comparison of Operating Results (in thousands) | Metric | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $13,858 | $10,982 | $39,103 | $30,263 | | Total Expenses, net | $9,005 | $6,292 | $24,562 | $17,199 | | Net Investment Income | $4,853 | $4,690 | $14,541 | $13,064 | | Net Gain (Loss) on Investments | ($3,091) | $489 | ($5,694) | $603 | - The increase in expenses was primarily driven by interest expense, which rose to $4.5 million in Q3 2019 from $2.4 million in Q3 2018 due to the issuance of Unsecured Notes and borrowings under the new BNP Facility[196][198] Liquidity and Capital Resources As of September 30, 2019, the company maintained $8.0 million in cash and substantial borrowing capacity, with an asset coverage ratio of 189%, and further enhanced liquidity post-quarter by issuing $54.3 million in unsecured notes Contractual Obligations as of Sep 30, 2019 (in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | PWB Credit Facility | $45,825 | $— | $45,825 | $— | $— | | Unsecured Notes | $98,525 | $— | $— | $— | $98,525 | | SBA Debentures | $149,880 | $— | $14,000 | $47,375 | $88,505 | | BNP Facility | $46,650 | $— | $— | $46,650 | $— | | Total | $340,880 | $— | $59,825 | $94,025 | $187,030 | - The company's asset coverage ratio was 189% as of September 30, 2019, exceeding the required minimum of 150% which became effective May 3, 2019[240][238] - Subsequent to quarter-end, in October and November 2019, the company issued $54.3 million in 5.95% unsecured notes due 2026, raising net proceeds of approximately $52.3 million[248] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk, with 90% of debt investments being floating-rate, and a 100 basis point interest rate increase would yield an estimated $2.9 million annual net income increase Annualized Impact of Hypothetical Interest Rate Changes (in thousands) | Basis Point Change | Impact on Interest Income | Impact on Interest Expense | Net Impact on Income | | :--- | :--- | :--- | :--- | | +100 | $3,823 | ($879) | $2,944 | | -100 | ($4,288) | $532 | ($3,756) | - As of September 30, 2019, 90% of the company's debt investments bore floating interest rates, while its SBA debentures and Unsecured Notes were fixed-rate, and the PWB and BNP credit facilities are floating-rate[250][251] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of September 30, 2019, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[255] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[256] PART II. OTHER INFORMATION Legal Proceedings As of September 30, 2019, the company, its adviser, and administrator were not subject to any material pending legal proceedings - The company is not currently subject to any material pending legal proceedings[258] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018 - No material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018 have occurred[260] Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2019, the company issued 4,990 shares of common stock via its DRIP, valued at $58,000, while no shares were repurchased under its $10.0 million stock repurchase program - During Q3 2019, 4,990 shares of common stock were issued to stockholders through the DRIP, with an aggregate value of approximately $57,928[261] - No shares were repurchased under the company's stock repurchase program during the nine months ended September 30, 2019, with approximately $10.0 million remaining authorized for repurchase[262][263] Exhibits This section lists exhibits filed with the Form 10-Q, including the third supplemental indenture for the 5.95% Notes due 2026 and required CEO and CFO certifications - Exhibits filed include documents related to the 5.95% Notes Due 2026 and certifications from the CEO and CFO[267]