OFS Capital(OFS) - 2022 Q1 - Quarterly Report

FORM 10-Q Filing Information Registrant Information OFS Capital Corporation, a non-accelerated filer, submitted its Q1 2022 Form 10-Q, reporting 13,425,429 common shares outstanding - OFS Capital Corporation is a non-accelerated filer and not an emerging growth company or shell company[2][3] Registrant Information Metrics | Metric | Value | | :--- | :--- | | Commission file number | 814-00813 | | Quarterly period ended | March 31, 2022 | | Common Stock outstanding (May 2, 2022) | 13,425,429 shares | Table of Contents Defined Terms Forward-Looking Statements Risks and Uncertainties This section outlines various risks and uncertainties, including operational challenges, personnel dependency, interest rate impacts, and global events - Key risks include operational challenges as a BDC/SBIC, dependence on key personnel, ability to maintain referral relationships, and potential conflicts of interest with OFS Advisor and affiliates[9] - The company is exposed to the impact of interest and inflation rates on its business and portfolio companies, as well as interest rate volatility, including the transition from LIBOR[9] - Global events such as the COVID-19 pandemic and the ongoing conflict between Russia and Ukraine are identified as potential factors that could materially impact financial condition and results[9] PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements, including statements of assets, operations, cash flows, and investment schedules Consolidated Statements of Assets and Liabilities - Total investments at fair value increased by $49.8 million from December 31, 2021, to March 31, 2022[13] - Cash significantly decreased by $32.6 million, while revolving lines of credit increased by $14.65 million[13] Consolidated Statements of Assets and Liabilities (in thousands) | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Total investments at fair value | $556,914 | $507,099 | | Cash | $10,473 | $43,048 | | Total assets | $571,735 | $569,048 | | Revolving lines of credit | $114,650 | $100,000 | | SBA debentures (net) | $50,553 | $69,365 | | Unsecured notes (net) | $175,586 | $175,446 | | Total liabilities | $363,349 | $365,304 | | Total net assets | $208,386 | $203,744 | | Net asset value per share | $15.52 | $15.18 | Consolidated Statements of Operations - Net investment income increased by $455 thousand (17.8%) year-over-year, and net increase in net assets from operations more than doubled, primarily driven by higher net gain on investments[14] - Loss on extinguishment of debt significantly decreased from $2.3 million in Q1 2021 to $0.144 million in Q1 2022[14] Consolidated Statements of Operations (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Total investment income | $10,946 | $10,491 | | Total expenses | $7,941 | $7,941 | | Net investment income | $3,005 | $2,550 | | Net gain on investments | $5,500 | $3,923 | | Loss on extinguishment of debt | $(144) | $(2,299) | | Net increase in net assets from operations | $8,361 | $4,174 | | Net investment income per common share | $0.22 | $0.19 | | Net increase in net assets per common share | $0.62 | $0.31 | | Distributions declared per common share | $0.28 | $0.20 | Consolidated Statements of Changes in Net Assets - Total net assets increased by $4.642 million during Q1 2022, driven by net investment income and unrealized appreciation, partially offset by dividends[15] Consolidated Statements of Changes in Net Assets (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Balances at December 31, 2021/2020 | $203,744 | $158,956 | | Net investment income | $3,005 | $2,550 | | Net realized gain on investments, net of taxes | $217 | $91 | | Net unrealized appreciation on investments, net of taxes | $5,283 | $3,832 | | Dividends declared | $(3,758) | $(2,682) | | Balances at March 31, 2022/2021 | $208,386 | $160,470 | Consolidated Statements of Cash Flows - The company experienced a significant net cash outflow of $32.575 million in Q1 2022, primarily due to cash used in operating activities for portfolio investments and repayments of SBA debentures[17] - Cash at the end of the period decreased from $43.048 million at the beginning of the period to $10.473 million[17] Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $(24,384) | $5,823 | | Net cash used in financing activities | $(8,191) | $(1,890) | | Net increase (decrease) in cash | $(32,575) | $3,933 | | Cash at end of period | $10,473 | $41,641 | Consolidated Schedules of Investments - As of March 31, 2022, the company held loans to 63 portfolio companies (97% senior secured, 3% subordinated) and equity investments in 17 companies, plus 20 Structured Finance Notes[82] - The largest industry concentrations by fair value as of March 31, 2022, were Manufacturing (25.5%), Professional, Scientific, and Technical Services (14.1%), and Health Care and Social Assistance (13.2%)[83][84][85] Investment Portfolio Composition (in thousands) | Investment Type | Amortized Cost (March 31, 2022) | Fair Value (March 31, 2022) | | :-------------------------------- | :------------------------------ | :-------------------------- | | Senior secured debt investments | $371,941 | $361,317 | | Subordinated debt investments | $13,906 | $9,353 | | Preferred equity | $9,552 | $6,195 | | Common equity, warrants and other | $12,827 | $89,672 | | Total Portfolio Company Investments | $408,226 | $466,537 | | Structured Finance Notes | $93,575 | $90,377 | | Total investments | $501,801 | $556,914 | Notes to Consolidated Financial Statements Note 1. Organization - OFS Capital Corporation is an externally managed, closed-end, non-diversified management investment company, regulated as a BDC and elected to be treated as a RIC for tax purposes[55] - The company's investment objective is to provide stockholders with current income and capital appreciation primarily through debt investments and, to a lesser extent, equity investments[56] - Investments are made directly or through subsidiaries: SBIC I LP (SBA-licensed), OFSCC-FS (special-purpose vehicle for senior secured loans with BNP Facility debt financing), and OFSCC-MB (holds equity investments taxed as pass-through entities)[58][59][60][61] Note 2. Summary of Significant Accounting Policies - The financial statements are prepared in accordance with GAAP for interim financial information and SEC reporting requirements, with results for interim periods not necessarily indicative of the full year[62] - The company changed its estimate of the useful life for the SBIC license intangible asset to March 1, 2024, due to continued early redemptions of SBA debentures[66] - Concentration of credit risk primarily involves cash deposits with high credit quality institutions and debt instruments, with potential loss equal to recorded investment plus unfunded loan commitments[67] Note 3. Related Party Transactions - OFS Advisor manages day-to-day operations and provides investment advisory services, receiving a base management fee and an incentive fee (Income Incentive Fee and Capital Gains Fee)[68][70][72][76] - Effective January 1, 2022, OFS Advisor reduced its base management fee attributable to OFSCC-FS Assets to 1.00% annualized, renewable annually and non-recoupable[71] Related Party Expenses (in thousands) | Expense (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--------------------- | :-------------------------------- | :-------------------------------- | | Base management fees | $2,020 | $1,834 | | Capital Gains Fee | $1,072 | $0 | | Administration fee expense | $451 | $568 | | Distributions paid to affiliates | $846 | $607 | Note 4. Investments - As of March 31, 2022, the company had 63 portfolio companies (97% senior secured, 3% subordinated debt) and equity investments in 17 companies, plus 20 Structured Finance Notes[82] - Loans on non-accrual status had an aggregate amortized cost of $18.888 million and fair value of $7.758 million at March 31, 2022, remaining stable from December 31, 2021[91] Geographic Investment Composition (in thousands) | Geographic Composition | Amortized Cost (March 31, 2022) | Fair Value (March 31, 2022) | | :--------------------- | :------------------------------ | :-------------------------- | | United States | $395,242 | $453,512 | | Canada | $21,484 | $21,525 | | Cayman Islands | $85,075 | $81,877 | | Total investments | $501,801 | $556,914 | Note 5. Fair Value of Financial Instruments - Investments are carried at fair value determined by the Board, using a hierarchy (Level 1, 2, 3) based on observability of inputs, with most investments categorized as Level 2 or Level 3[92][93][94] - A senior security with a fair value of $6.773 million was transferred from Level 3 to Level 2 during Q1 2022 due to the availability of reliable Indicative Prices[95] Fair Value of Financial Instruments by Level (in thousands) | Security Type | Fair Value at March 31, 2022 (Level 2) | Fair Value at March 31, 2022 (Level 3) | Fair Value at December 31, 2021 (Level 2) | Fair Value at December 31, 2021 (Level 3) | | :---------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Debt investments | $69,105 | $301,565 | $65,591 | $279,056 | | Equity investments | $0 | $95,867 | $0 | $87,251 | | Structured Finance Notes | $0 | $90,377 | $0 | $75,201 | | Total | $69,105 | $487,809 | $65,591 | $441,508 | Note 6. Commitments and Contingencies - The company had outstanding commitments to fund investments totaling $44.763 million as of March 31, 2022, an increase from $43.690 million at December 31, 2021[109] - The company is involved in legal proceedings in the normal course of business, but management believes the final disposition should not have a material adverse effect on its financial position[110] Note 7. Borrowings - SBIC I LP redeemed $19.0 million of SBA debentures in Q1 2022, reducing outstanding debentures to $50.920 million at March 31, 2022[114] - The PWB Credit Facility was amended on April 22, 2022, to increase available credit from $25.0 million to $35.0 million and extend maturity to February 28, 2024[116] Average Borrowing Balances and Effective Interest Rates (Q1 2022, in thousands) | Borrowing Type | Average Outstanding Balance (Q1 2022) | Effective Interest Rate (Q1 2022) | | :--------------- | :------------------------------------ | :-------------------------------- | | SBA Debentures | $63,375 | 3.12% | | BNP Facility | $106,850 | 2.56% | | PWB Credit Facility | $506 | 14.23% | | Unsecured Notes | $180,000 | 5.40% | | Total Average Borrowings | $350,731 | 4.19% | Note 8. Financial Highlights - Net asset value per share increased from $15.18 at the beginning of Q1 2022 to $15.52 at the end, driven by total operations[123] Financial Highlights (per share and percentages) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net asset value per share at end of period | $15.52 | $11.95 | | Per share market value, end of period | $13.00 | $8.78 | | Total return based on market value | 21.8% | 25.6% | | Total return based on net asset value | 4.4% | 3.2% | | Ratio of total expenses to average net assets | 15.4% | 19.9% | | Ratio of net investment income to average net assets | 5.8% | 6.4% | | Portfolio turnover | 5.4% | 11.4% | Note 9. Capital Transactions - The company intends to distribute substantially all net investment income quarterly to maintain RIC tax treatment, with distributions potentially limited by BDC asset coverage requirements and SBA regulations for SBIC I LP[126][127] - The Stock Repurchase Program, authorizing up to $10.0 million in common stock repurchases, was extended until May 22, 2024; no shares were repurchased in Q1 2022[129][131] Distributions Declared (in thousands) | Distribution Date | Per Share | Cash Distribution (in thousands) | DRIP Shares Issued | | :---------------- | :-------- | :------------------------------- | :----------------- | | March 31, 2022 | $0.28 | $3,719 | 3,016 | | March 31, 2021 | $0.20 | $2,655 | 3,103 | Note 10. Consolidated Schedule of Investments In and Advances To Affiliates - Total control and affiliate investments had a net change in unrealized appreciation of $10.108 million in Q1 2022, primarily driven by Pfanstiehl Holdings, Inc. and Contract Datascan Holdings, Inc[133] Affiliate Investment Performance and Fair Value (Q1 2022, in thousands) | Portfolio Company | Investment Type | Net Realized Gain (Loss) (Q1 2022) | Net Change in Unrealized Appreciation/(Depreciation) (Q1 2022) | Fair Value (March 31, 2022) | | :------------------ | :-------------- | :--------------------------------- | :------------------------------------------------------------- | :-------------------------- | | MTE Holding Corp. | Subordinated Loan | $0 | $0 | $0 | | | Common Equity | $278 | $(1,684) | $0 | | Contract Datascan Holdings, Inc. | Preferred Equity | $0 | $2,195 | $4,943 | | | Common Equity | $0 | $184 | $209 | | Pfanstiehl Holdings, Inc. | Common Equity | $0 | $9,568 | $75,308 | | Total Control and Affiliate Investments | | $278 | $10,108 | $84,376 | Note 11. Subsequent Events - On April 22, 2022, the PWB Credit Facility was amended to increase available credit to $35.0 million and extend its maturity to February 28, 2024[136] - On May 3, 2022, the Board declared a distribution of $0.29 per share for Q2 2022 and extended the Stock Repurchase Program for an additional two years[137] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operational results for Q1 2022, covering key metrics, portfolio activity, and liquidity Overview - NAV per common share increased 2.2% to $15.52 at March 31, 2022, primarily due to $5.5 million in net gains on the investment portfolio[140] - Net investment income per share decreased by $0.11 quarter-over-quarter, mainly due to a $2.6 million decrease in dividend and fee income and a lower weighted-average performing income yield (9.0% vs 11.1%)[141] - Weighted-average debt interest costs decreased to 4.2% (from 4.6% quarter-over-quarter) due to redemption of higher-rate Unsecured Notes and issuance of new lower-rate notes[142] - Portfolio experienced net gains of $5.5 million in Q1 2022, driven by a $9.6 million increase in fair value of common equity in Pfanstiehl Holdings, Inc. and $2.4 million in Contract Datascan Holdings, Inc., offset by unrealized losses on broadly syndicated loans and Structured Finance Notes[144] Key Financial Metrics (per common share) | Metric | March 31, 2022 | December 31, 2021 | | :------------------------------------------ | :------------- | :---------------- | | Net asset value per common share | $15.52 | $15.18 | | Net investment income per common share (QoQ) | $0.22 | $0.33 | | Net increase in net assets per common share (QoQ) | $0.62 | $1.27 | | Distributions paid per common share (QoQ) | $0.28 | $0.25 | Critical Accounting Policies and Significant Estimates - Critical accounting policies include revenue recognition and fair value estimates, which are discussed with the Audit Committee[149] - The company is evaluating the impact of adopting the SEC's new Rule 2a-5 for determining fair value, with compliance intended by September 2022[150] Fair Value of Investments and Range of Fair Value (in thousands) | Investment Type | Fair Value at March 31, 2022 | Range of Fair Value (Low-end) | Range of Fair Value (High-end) | | :-------------------------- | :--------------------------- | :---------------------------- | :----------------------------- | | Debt investments | $370,670 | $366,769 | $371,078 | | Structured Finance Notes | $90,377 | $88,108 | $92,647 | | Equity investments | $95,867 | $90,059 | $101,662 | | Total | $556,914 | $544,936 | $568,857 | Related Party Transactions - The company has business relationships with OFS Advisor (investment advisory), OFS Services (administrative services), and OFSAM (license agreement for 'OFS' name)[153][155] - OFS Advisor's base management fee for OFSCC-FS Assets was reduced to 1.00% annualized, renewed for 2022[154] - The company received an SEC order on August 4, 2020, allowing greater flexibility for co-investment transactions with Affiliated Funds, subject to independent director approval[155] Portfolio Composition and Investment Activity Portfolio Composition - As of March 31, 2022, the debt investment portfolio totaled $370.7 million across 63 companies (97% senior secured, 3% subordinated), with equity investments of $95.9 million in 17 companies and $90.4 million in Structured Finance Notes[159] - Pfanstiehl Holdings, Inc. common equity, with a fair value of $75.3 million (including $75.1 million unrealized gain), represented 13.5% of the total portfolio and 36.1% of total net assets, appreciating $9.6 million in Q1 2022[167] Portfolio Composition by Entity (in thousands) | Entity | Amortized Cost (March 31, 2022) | Fair Value (March 31, 2022) | | :-------------------------- | :------------------------------ | :-------------------------- | | OFS Capital Corporation (Parent) | $184,827 | $174,071 | | SBIC I LP | $114,351 | $182,546 | | OFSCC-FS | $197,897 | $195,671 | | OFSCC-MB | $4,726 | $4,626 | | Total investments | $501,801 | $556,914 | Portfolio Yields - Weighted-average portfolio yields decreased quarter-over-quarter primarily due to a decrease in prepayment fees and related fee accelerations on payoffs[164] Weighted-Average Portfolio Yields | Yield Metric | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Weighted-average performing current yield: Debt investments | 7.5% | 9.2% | | Weighted-average performing current yield: Structured Finance Notes | 14.2% | 15.5% | | Weighted-average performing income yield: Interest-bearing investments | 9.0% | 11.1% | | Weighted-average realized yield: Total portfolio | 8.2% | 9.9% | Structured Finance Notes Structured Finance Notes Composition (in thousands) | Structured Finance Note Type | Amortized Cost (March 31, 2022) | Fair Value (March 31, 2022) | | :--------------------------- | :------------------------------ | :-------------------------- | | Subordinated notes | $60,329 | $57,051 | | Mezzanine debt | $16,246 | $16,326 | | Loan accumulation facilities | $17,000 | $17,000 | | Total Structured Finance Notes | $93,575 | $90,377 | Investment Activity - Notable new investments in Q1 2022 included 24 Seven Holdco, LLC ($8.9 million senior secured loan), Atlantis Holding, LLC ($8.1 million senior secured loan), and Idera ($4.0 million senior secured loan)[169] Investment Activity (in millions) | Investment Activity (in millions) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Investments in new Portfolio Companies | $33.0 | $36.2 | | Investments in existing Portfolio Companies | $15.1 | $26.1 | | Investments in Structured Finance Notes | $22.1 | $6.2 | | Total investments | $70.2 | $68.5 | | Total proceeds from principal payments, equity distributions and investments sold | $22.7 | $49.2 | Risk Monitoring - Risk ratings for debt securities remained stable in Q1 2022 compared to Q4 2021, with the majority (94.7%) classified as 'Average' risk[172] Debt Investment Risk Ratings (at Fair Value) | Risk Category | Debt Investments, at Fair Value (March 31, 2022) | Debt Investments, at Fair Value (December 31, 2021) | | :-------------------- | :----------------------------------------------- | :------------------------------------------------ | | 3 (Average) | $351,014 (94.7%) | $324,370 (94.2%) | | 4 (Special Mention) | $11,898 (3.2%) | $12,550 (3.6%) | | 5 (Substandard) | $7,322 (2.0%) | $7,027 (2.0%) | | 6 (Doubtful) | $436 (0.1%) | $699 (0.2%) | | Total | $370,670 (100.0%) | $344,646 (100.0%) | Non-Accrual Loans - No new loans were placed on non-accrual status during Q1 2022[173] Non-Accrual Loan Metrics (in millions) | Metric | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Aggregate amortized cost of non-accrual loans | $18.9 million | $19.1 million | | Fair value of non-accrual loans | $7.8 million | $7.7 million | Results of Operations Comparison of the three months ended March 31, 2022 and December 31, 2021 - Total investment income decreased by $4.3 million quarter-over-quarter, primarily due to a $2.6 million decrease in dividend and fee income[179] - Interest income decreased by $1.7 million quarter-over-quarter, mainly due to a lower weighted-average performing income yield (9.0% vs 11.1%) from redeploying payoffs into lower-yielding senior secured loans[180] - Interest expense decreased by $0.6 million quarter-over-quarter due to the issuance of lower-rate Unsecured Notes and redemption of higher-rate notes[183] - Incentive fees decreased by $2.3 million quarter-over-quarter as pre-incentive fee net investment income did not exceed the performance hurdle[185] Consolidated Statements of Operations Comparison (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended December 31, 2021 | | :------------------------------------------ | :-------------------------------- | :----------------------------------- | | Total investment income | $10,946 | $15,267 | | Total expenses | $7,941 | $10,837 | | Net investment income | $3,005 | $4,430 | | Net gain on investments | $5,500 | $14,722 | | Loss on extinguishment of debt | $(144) | $(2,068) | | Net increase in net assets from operations | $8,361 | $17,084 | Net realized and unrealized gain (loss) on investments - Net gains on investments were $5.5 million in Q1 2022, primarily from a $10.0 million increase in fair values of directly originated debt and equity investments, notably Pfanstiehl Holdings, Inc. ($9.6 million)[188][189] - Q1 2022 saw unrealized losses of $1.0 million on broadly syndicated loans and $3.4 million on Structured Finance Notes due to widening credit market spreads[188] Net Realized and Unrealized Gain (Loss) on Investments (in thousands) | Investment Type | Three Months Ended March 31, 2022 | Three Months Ended December 31, 2021 | | :-------------------------- | :-------------------------------- | :----------------------------------- | | Senior secured debt | $(1,198) | $5,432 | | Subordinated debt | $(424) | $335 | | Preferred equity | $2,391 | $3,556 | | Common equity, warrants and other | $8,269 | $6,870 | | Structured Finance Notes | $(3,449) | $(658) | | Total net gain on investments | $5,500 | $14,722 | Loss on Extinguishment of Debt - In Q1 2022, the company recognized a $0.1 million loss on extinguishment of debt from redeeming $19.0 million of SBA debentures[191] - In Q1 2021, a $2.3 million loss was recognized from redeeming $9.8 million of SBA debentures and $98.5 million of Unsecured Notes[192] Non-GAAP Financial Measure – Adjusted Net Investment Income - Adjusted Net Investment Income (Adjusted NII) is a non-GAAP measure that excludes the capital gains incentive fee to provide a clearer view of operations, as net investment income does not include net capital gains[193][194] - The Capital Gains Fee of $1.1 million in Q1 2022 was primarily due to $55.0 million in net unrealized appreciation, partially offset by $40.1 million in cumulative net realized losses[195] Adjusted Net Investment Income (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended March 31, 2022 | Three Months Ended December 31, 2021 | | :-------------------------------------- | :-------------------------------- | :----------------------------------- | | Net investment income | $3,005 ($0.22/share) | $4,430 ($0.33/share) | | Capital Gains Fee | $1,072 ($0.08/share) | $1,814 ($0.14/share) | | Adjusted NII | $4,077 ($0.30/share) | $6,244 ($0.47/share) | Liquidity and Capital Resources Sources and Uses of Cash - Cash from net investment income decreased by $0.3 million in Q1 2022 compared to Q1 2021[203] - Net purchases and originations of portfolio investments resulted in a $24.8 million cash outflow in Q1 2022, compared to a $5.1 million inflow in Q1 2021[204] Cash Flow Activities (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Cash from net investment income | $428 | $761 | | Net (purchases and originations)/repayments and sales of portfolio investments | $(24,812) | $5,062 | | Net cash provided by (used in) operating activities | $(24,384) | $5,823 | | Distributions paid to stockholders | $(3,719) | $(2,655) | | Net (borrowings) payments under lines of credit | $14,650 | $(12,500) | | Repayment of SBA debentures | $(19,000) | $(9,765) | | Net cash used in financing activities | $(8,191) | $(1,890) | | Increase (decrease) in cash | $(32,575) | $3,933 | Borrowings - SBIC I LP redeemed $19.0 million of SBA debentures in Q1 2022, reducing outstanding debentures to $50.9 million[207] - The PWB Credit Facility was amended on April 22, 2022, to increase maximum availability to $35.0 million and extend maturity to February 28, 2024[211] - The BNP Facility had $111.4 million outstanding at March 31, 2022, with an effective interest rate of 2.74% and a maturity of June 20, 2024[216] Other Liquidity Matters - The company's asset coverage ratio was 171% at March 31, 2022, exceeding the 150% minimum requirement for BDCs[224] - As of March 31, 2022, approximately 81% of investments were qualifying assets under the 1940 Act, allowing for up to 30% in opportunistic, non-qualifying assets[220] - The Stock Repurchase Program was extended until May 22, 2024, with $9.99 million remaining for repurchases; no shares were repurchased in Q1 2022[223] Contractual Obligations and Off-Balance Sheet Arrangements - At March 31, 2022, the company had $10.5 million cash, $21.8 million unfunded PWB Credit Facility, and $38.6 million unfunded BNP Facility to meet short-term obligations[226] - Long-term obligations include the BNP Facility ($111.4 million outstanding, matures 2024) and SBA debentures ($50.9 million outstanding, mature 2025)[226][227] - The company believes its long-dated financing, with 67% of total debt maturing in 2025 and beyond, provides operational flexibility[227] Distributions - To maintain RIC tax treatment, the company must distribute annually at least 90% of its ICTI and aims to distribute 98% of ordinary income and 98.2% of net capital gains to avoid excise tax[230] - The Board maintains a variable dividend policy, targeting quarterly distributions of 90-100% of taxable quarterly income, with potential for additional special dividends[231] Recent Developments - On April 22, 2022, the PWB Credit Facility was amended to increase available credit to $35.0 million and extend its maturity to February 28, 2024[232] - On May 3, 2022, the Board declared a distribution of $0.29 per share for Q2 2022 and extended the Stock Repurchase Program for an additional two years[233] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, including interest rate fluctuations and investment valuation uncertainties Investment Valuation Risk - Most portfolio investments lack a readily available market value and are valued at fair value by the Board, based on independent third-party valuations[235] - The fair value of investments may fluctuate significantly and differ from realized values due to inherent uncertainty and illiquidity, potentially leading to lower values in forced liquidation[235] Interest Rate Risk - As of March 31, 2022, 93% of debt investments bore floating interest rates (primarily LIBOR-based, transitioning to alternative rates), with 90% subject to a minimum base rate or floor (weighted average floor of 0.85%)[236] - SBA debentures and Unsecured Notes bear fixed rates, while the PWB Credit Facility and BNP Facility have floating rates (Prime Rate and LIBOR, respectively)[237] Interest Rate Sensitivity Analysis (in thousands) | Basis Point Change | Interest Income Change (in thousands) | Interest Expense Change (in thousands) | Net Change (in thousands) | | :----------------- | :------------------------------------ | :------------------------------------- | :------------------------ | | +25 | $801 | $(240) | $561 | | +125 | $4,171 | $(1,385) | $2,786 | | -25 | $(170) | $317 | $147 | | -125 | $(424) | $611 | $187 | Item 4. Controls and Procedures Management, including the CEO and CFO, confirmed the effectiveness of disclosure controls and procedures as of March 31, 2022 - Disclosure controls and procedures were evaluated as effective at the reasonable assurance level as of March 31, 2022[241] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended March 31, 2022[242] PART II—OTHER INFORMATION Item 1. Legal Proceedings No material legal proceedings are pending against the company or its affiliates, and incidental proceedings are not expected to be adverse - No material pending legal proceedings are threatened against OFS Capital Corporation, OFS Advisor, or OFS Services as of March 31, 2022[245] - Management expects that any incidental legal proceedings will not have a material adverse effect on the company's financial position[245] Item 1A. Risk Factors Investing in common stock is highly speculative, with new risks from global economic and political conditions potentially impacting operations - Investing in the common stock is speculative and involves a high degree of risk[246] - A new material risk factor emphasizes that global economic, political, and market conditions (e.g., Russia-Ukraine conflict, COVID-19 pandemic) may adversely affect the business, financial condition, and results of operations[248] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued 3,016 common shares via DRIP in Q1 2022; the stock repurchase program was extended but no shares were repurchased - 3,016 shares of common stock, valued at approximately $39,201, were issued to stockholders through the DRIP in Q1 2022, not subject to registration requirements[249] - The Stock Repurchase Program was extended until May 22, 2024, with $9.992 million remaining for repurchases; no shares were repurchased in Q1 2022[251][252] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period Item 5. Other Information This item is not applicable to the company for the reporting period Item 6. Exhibits This section lists exhibits filed with the report, including corporate governance documents and CEO/CFO certifications - Exhibits include corporate governance documents (Certificate of Incorporation, Bylaws) and certifications from the CEO and CFO[257] Signatures