OFS Capital(OFS) - 2021 Q4 - Annual Report

PART I Item 1. Business OFS Capital Corporation is an externally managed BDC investing in U.S. middle-market debt and equity, regulated by the 1940 Act - OFS Capital Corporation is an externally managed BDC focused on providing current income and capital appreciation through debt and equity investments in U.S. middle-market companies[14] - The investment portfolio as of December 31, 2021, consisted of 95% senior secured loans and 5% subordinated loans, totaling $344.6 million in 58 portfolio companies, along with $87.3 million in equity investments and $75.2 million in Structured Finance Notes[15] - The company's asset coverage ratio was 173% as of December 31, 2021, and 176% as of December 31, 2020, following the Board's approval to decrease the minimum asset coverage ratio from 200% to 150%, effective May 3, 2019[20][21] Investment Advisory Agreement Expenses (in thousands) | Year Ended December 31, | 2021 | 2020 | 2019 | | :---------------------- | :--- | :--- | :--- | | Base management fees | $7,669 | $7,605 | $8,271 | | Income Incentive Fee | $2,352 | $2,025 | $4,760 | | Income Incentive Fee waiver | — | $(441) | — | | Capital Gains Fee | $1,916 | — | — | Item 1A. Risk Factors This section outlines significant risks, including economic conditions, leverage, illiquid investment valuation, key personnel, and regulatory compliance - Global economic, political, and market conditions, including the COVID-19 pandemic, have adversely affected and may continue to affect the company's business, results of operations, and financial condition, as well as those of its portfolio companies[176][178] - The company finances investments with borrowed money, which magnifies potential gains or losses and increases investment risk. The asset coverage ratio was reduced from 200% to 150% effective May 3, 2019, allowing for increased leverage[200][201][207][208] Effect of Leverage on Returns to Common Stockholders (Hypothetical) | Assumed Return on Our Portfolio (Net of Expenses) | (10)% | (5)% | —% | 5% | 10% | | :------------------------------------------------ | :---- | :--- | :--- | :-- | :--- | | Corresponding return to common stockholder | (40.0)% | (24.8)% | (9.6)% | 5.6% | 20.8% | - A significant portion of portfolio investments are recorded at fair value, determined in good faith by the Board, leading to inherent uncertainty in valuation due to the illiquid nature of these securities[194] - The company is highly dependent on OFSC senior professionals and OFS Advisor for its future success, and their departure or inability to maintain relationships could adversely affect investment opportunities and operations[187][188][189][190][191] Item 1B. Unresolved Staff Comments This item is not applicable, indicating no unresolved SEC staff comments - The company has no unresolved staff comments[370] Item 2. Properties The company does not own or lease material properties; facilities are provided by OFS Services under an Administration Agreement - The company does not own or lease any material real estate or physical properties[371] - Headquarters and other office facilities are provided by OFS Services through an Administration Agreement[371] Item 3. Legal Proceedings As of December 31, 2021, no material legal proceedings are pending or threatened against the company or its affiliates - As of December 31, 2021, the company, OFS Advisor, and OFS Services are not subject to any material pending legal proceedings[372] - Any incidental legal proceedings are not expected to have a material effect on the company's business, financial condition, results of operations, or cash flows[372] Item 4. Mine Safety Disclosures This item is not applicable, requiring no mine safety disclosures - The company has no mine safety disclosures to report[373] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section details common stock market performance, NAV, distributions, repurchases, fees, and senior securities - OFS Capital Corporation's common stock trades on the Nasdaq Global Select Market under the symbol 'OFS'. As of March 1, 2022, the last reported sale price was $9.85 per share, with 13,422,413 shares outstanding[4][376] Common Stock Performance and Distributions | Period | NAV Per Share | High Sales Price | Low Sales Price | Cash Distribution per Share | | :-------------- | :------------ | :--------------- | :-------------- | :-------------------------- | | Fiscal 2022 Q1* | * | $10.88 | $9.50 | $0.28 | | Fiscal 2021 Q4 | $15.18 | $11.40 | $10.38 | $0.25 | | Fiscal 2021 Q3 | $14.16 | $10.55 | $8.80 | $0.24 | | Fiscal 2021 Q2 | $13.42 | $10.30 | $8.77 | $0.22 | | Fiscal 2021 Q1 | $11.96 | $9.15 | $6.82 | $0.20 | | Fiscal 2020 Q4 | $11.85 | $7.58 | $3.97 | $0.18 | | Fiscal 2020 Q3 | $11.18 | $5.08 | $4.04 | $0.17 | | Fiscal 2020 Q2 | $10.10 | $5.70 | $3.52 | $0.17 | | Fiscal 2020 Q1 | $9.71 | $11.97 | $3.70 | $0.34 | - The Board authorized a Stock Repurchase Program to acquire up to $10.0 million of common stock, extended through May 22, 2022. In 2021, 700 thousand shares were repurchased at an average price of $6.70 per share[380][383] Total Annual Expenses (as a percentage of net assets attributable to common stock) | Expense Category | 2021 (%) | | :--------------------------------------------------- | :------- | | Base management fees payable under the Investment Advisory Agreement | 4.23 | | Incentive fees payable under the Investment Advisory Agreement | 1.16 | | Interest payments on borrowed funds | 7.86 | | Other expenses | 2.38 | | Total annual expenses | 15.63 | | Base management fee reduction | (0.46) | | Total annual expenses, net of fee reduction | 15.17 | Senior Securities Outstanding (in thousands) | Class and Year | Total Amount Outstanding | | :---------------------- | :----------------------- | | 4.75% Notes due 2026 | $125,000 | | 4.95% Notes due 2028 | $55,000 | | SBA debentures (SBIC I LP) | $69,920 | | BNP Facility | $100,000 | | Total Senior Securities | $349,920 | Item 6. Reserved This item is reserved and contains no information - Item 6 is reserved and contains no information[411] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial condition and operations, covering key metrics, COVID-19 impact, accounting policies, portfolio, liquidity, and capital Key Performance Metrics | Metric | 2021 | 2020 | 2019 | | :---------------------------------------------- | :------ | :------ | :------ | | Net asset value per common share | $15.18 | $11.85 | $12.46 | | Net investment income per common share | $1.00 | $0.92 | $1.43 | | Net increase in net assets from operations per common share | $4.24 | $0.28 | $0.71 | | Distributions paid per common share | $0.91 | $0.86 | $1.36 | - NAV per common share increased 28% to $15.18 at December 31, 2021, from $11.85 at December 31, 2020, primarily due to $48.0 million in net gains on the investment portfolio[417] - The weighted average realized yield on interest-bearing investments increased to 9.7% in 2021 from 9.5% in 2020, while weighted-average debt interest costs decreased to 5.1% from 5.4%[419] Consolidated Operating Results (in thousands) | Category | 2021 | 2020 | 2019 | | :-------------------------------------- | :------ | :------ | :------ | | Total investment income | $47,763 | $45,475 | $52,521 | | Total expenses, net of incentive fee waivers | $34,313 | $33,180 | $33,423 | | Net investment income | $13,450 | $12,295 | $19,098 | | Net gain (loss) on investments | $48,005 | $(6,704) | $(9,545) | | Loss on extinguishment of debt | $(4,591) | $(820) | — | | Loss on impairment of goodwill | — | $(1,077) | — | | Net increase in net assets from operations | $56,864 | $3,694 | $9,553 | - As of December 31, 2021, the company had $43.0 million in cash and cash equivalents, and unused commitments of $25.0 million under its PWB Credit Facility and $50.0 million under its BNP Facility[535][537] Item 7A. Quantitative and Qualitative Disclosures about Market Risk This section details exposure to market risks, including interest rate fluctuations and investment valuation, with hypothetical rate change analysis - The company is exposed to financial market risks, including changes in interest rates and investment valuations, with the COVID-19 pandemic introducing significant volatility[587] - As of December 31, 2021, 92% of debt investments bore floating interest rates (mostly LIBOR-based with floors, transitioning to alternative rates) and 8% bore fixed rates[589] Annualized Impact of Hypothetical Base Rate Changes in Interest Rates (in thousands) | Basis point increase | Interest income | Interest expense | Net change | | :------------------- | :-------------- | :--------------- | :--------- | | 25 | $96 | $(284) | $(188) | | 50 | $209 | $(537) | $(328) | | 75 | $447 | $(791) | $(344) | | 100 | $1,123 | $(1,044) | $79 | | 125 | $1,938 | $(1,298) | $640 | | Basis point decrease | Interest income | Interest expense | Net change | | 25 | $(76) | $178 | $102 | | 50 | $(96) | $178 | $82 | | 75 | $(116) | $178 | $62 | | 100 | $(136) | $178 | $42 | | 125 | $(157) | $178 | $21 | - Most investments lack a readily available market value and are valued at fair value by the Board, based on independent third-party valuations, leading to inherent valuation uncertainty[588] ITEM 8. Financial Statements This section presents audited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes for 2021-2019 - The consolidated financial statements for 2021, 2020, and 2019 were audited by KPMG LLP and present the financial position, results of operations, and cash flows in conformity with U.S. GAAP[598] Consolidated Statements of Assets and Liabilities (in thousands) | Category | Dec 31, 2021 | Dec 31, 2020 | | :------------------------ | :----------- | :----------- | | Total investments at fair value | $507,099 | $442,323 | | Cash | $43,048 | $37,708 | | Total assets | $569,048 | $483,813 | | Total liabilities | $365,304 | $324,857 | | Total net assets | $203,744 | $158,956 | | Net asset value per share | $15.18 | $11.85 | Consolidated Statements of Operations (in thousands) | Category | 2021 | 2020 | 2019 | | :-------------------------------------- | :------ | :------ | :------ | | Total investment income | $47,763 | $45,475 | $52,521 | | Total expenses, net of Income Incentive Fee waiver | $34,313 | $33,180 | $33,423 | | Net investment income | $13,450 | $12,295 | $19,098 | | Net gain (loss) on investments | $48,005 | $(6,704) | $(9,545) | | Net increase in net assets from operations | $56,864 | $3,694 | $9,553 | Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 2021 | 2020 | 2019 | | :-------------------------------------- | :-------- | :-------- | :-------- | | Net cash provided by (used in) operating activities | $(12,009) | $80,625 | $(101,636) | | Net cash provided (used) by financing activities | $17,349 | $(56,364) | $76,911 | | Net increase (decrease) in cash | $5,340 | $24,261 | $(24,725) | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no changes in or disagreements with accountants on accounting and financial disclosure - There are no changes in or disagreements with accountants on accounting and financial disclosure[813] Item 9A. Controls and Procedures Management assessed disclosure controls and internal control over financial reporting as effective at December 31, 2021 - The company's disclosure controls and procedures were evaluated as effective at the reasonable assurance level as of December 31, 2021[815] - Management concluded that the internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework[818] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended December 31, 2021[819] Item 9B. Other Information This item indicates no other information to disclose - There is no other information to disclose under this item[820] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable, requiring no disclosures on foreign jurisdictions preventing inspections - The company has no disclosures regarding foreign jurisdictions that prevent inspections[821] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement[823] Item 11. Executive Compensation Executive compensation information is incorporated by reference from the 2022 Proxy Statement - Executive compensation information is incorporated by reference from the 2022 Proxy Statement[824] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and related stockholder matters are incorporated by reference from the 2022 Proxy Statement - Security ownership information for beneficial owners and management is incorporated by reference from the 2022 Proxy Statement[825] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2022 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement[826] Item 14. Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the 2022 Proxy Statement - Principal accounting fees and services information is incorporated by reference from the 2022 Proxy Statement[827] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all exhibits and financial statement schedules, including corporate documents and agreements, mostly incorporated by reference - The report includes financial statements, financial statement schedules (Schedule 12-14 Investments in and Advances to Affiliates), and exhibits required by Item 601 of Regulation S-K[830][831] - Exhibits include corporate governance documents, various agreements (e.g., Investment Advisory, Administration, License), and debt-related indentures[831][832][833][834] Item 16. Form 10-K Summary This item indicates no Form 10-K Summary is provided - No Form 10-K Summary is provided[835]