OFS Capital(OFS) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements 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 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 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 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][192] Notes to Consolidated Financial Statements 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] - OFS Advisor waived $441 thousand in Income Incentive Fees for the three months ended March 31, 2020[87] 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 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] - 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] - 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] - 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] 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 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] - No material changes to the internal control over financial reporting occurred during the fiscal quarter ended September 30, 2020[286] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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][292] - 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] - 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][310][314] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - 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][318] Item 3. Defaults Upon Senior Securities This item is not applicable as no defaults upon senior securities occurred during the reporting period - Not applicable[319] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[320] Item 5. Other Information This item is not applicable as no other information was required to be reported - Not applicable[321] Item 6. Exhibits 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]