Oxford Square Capital (OXSQ) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements H1 2021 unaudited financials show asset growth, increased NAV per share, and a positive net increase in net assets from operations Consolidated Statements of Assets and Liabilities Total assets increased to $472.5 million by June 30, 2021, driven by investment fair value, boosting net assets and NAV per share Consolidated Statements of Assets and Liabilities Comparison | Metric | June 30, 2021 (unaudited) | December 31, 2020 (USD) | | :--- | :--- | :--- | | Total Assets | $472,470,501 | $357,657,781 | | Non-affiliated/non-control investments | $404,821,888 | $294,674,000 | | Cash equivalents | $63,592,092 | $59,137,284 | | Total Liabilities | $229,007,565 | $132,231,255 | | Notes payable (net) | $184,975,805 | $106,862,828 | | Total Net Assets | $243,462,936 | $225,426,526 | | Net Asset Value per common share | $4.91 | $4.55 | Consolidated Schedule of Investments The investment portfolio's fair value grew to $404.8 million by June 30, 2021, primarily in Senior Secured Notes and CLO Equity, all classified as Level 3 Portfolio Composition by Asset Class (June 30, 2021) | Asset Class | Fair Value (USD) | % of Net Assets | | :--- | :--- | :--- | | Senior Secured Notes | $242,024,124 | 99.4% | | CLO – Equity Investments | $162,797,764 | 66.9% | | Common Stock | $0 | 0.0% | | Preferred Stock | $0 | 0.0% | | Total Investments | $404,821,888 | 166.3% | - The company's qualifying assets under Section 55(a) of the 1940 Act represented 62.2% of its total assets as of June 30, 2021, which is below the required 70% threshold for acquiring new non-qualifying assets[26] - As of June 30, 2021, debt or preferred equity investments with an aggregate fair value of approximately $7.8 million were on non-accrual status[31] Consolidated Statements of Operations For H1 2021, total investment income decreased, but a significant $33.6 million net unrealized appreciation led to a $28.3 million net increase in net assets from operations Statement of Operations Summary (Six Months Ended June 30) | Metric | 2021 (USD) | 2020 (USD) | | :--- | :--- | :--- | | Total Investment Income | $17,201,696 | $19,079,309 | | Total Expenses | $9,603,063 | $8,376,836 | | Net Investment Income | $7,598,633 | $10,702,473 | | Net change in unrealized appreciation/(depreciation) | $33,583,290 | $(66,462,225) | | Net realized gains/(losses) | $(12,890,651) | $(3,042,692) | | Net Increase/(Decrease) in Net Assets from Operations | $28,291,272 | $(58,802,444) | | EPS from Operations (Basic & Diluted) | $0.57 | $(1.19) | Consolidated Statements of Changes in Net Assets Net assets increased by $18.0 million in H1 2021, driven by a $28.3 million net increase from operations, partially offset by stockholder distributions Reconciliation of Net Assets (Six Months Ended June 30, 2021) | Description | Amount (USD) | | :--- | :--- | | Net Assets at beginning of period | $225,426,526 | | Net increase from operations | $28,291,272 | | Total distributions to stockholders | $(10,415,632) | | Net increase from capital share transactions | $160,770 | | Net Assets at end of period | $243,462,936 | Consolidated Statements of Cash Flows H1 2021 saw a $63.1 million net cash outflow from operations, primarily due to investment purchases, offset by financing activities, increasing cash equivalents to $63.6 million Cash Flow Summary (Six Months Ended June 30) | Activity | 2021 (USD) | 2020 (USD) | | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | $(63,084,470) | $45,560,965 | | Net cash provided by/(used in) financing activities | $67,539,278 | $(41,960,090) | | Net increase in cash equivalents | $4,454,808 | $3,600,875 | | Cash equivalents, end of period | $63,592,092 | $20,061,813 | Notes to Consolidated Financial Statements The notes detail accounting policies, BDC/RIC status, Level 3 investment valuation, $185.0 million in unsecured notes, and the investment adviser's fee structure - The company is a non-diversified, closed-end investment company regulated as a BDC and has elected to be treated as a RIC for tax purposes, investing in corporate debt and CLO structured finance investments[58] - All of the company's investments are classified as Level 3 in the fair value hierarchy, relying on unobservable inputs and significant judgment from the Board of Directors[67] Borrowings as of June 30, 2021 | Security | Principal Amount (Millions USD) | Carrying Value (Millions USD) | Fair Value (Millions USD) | | :--- | :--- | :--- | :--- | | 6.50% Unsecured Notes due 2024 | $64.4M | $63.5M | $65.0M | | 6.25% Unsecured Notes due 2026 | $44.8M | $43.7M | $45.5M | | 5.50% Unsecured Notes due 2028 | $80.5M | $77.8M | $81.1M | | Total | $189.7M | $185.0M | $191.6M | - The company's asset coverage ratio for borrowed amounts was 226% as of June 30, 2021, exceeding the regulatory minimum of 150%[116] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses investment strategy, portfolio growth to $404.8 million, and the $28.3 million net increase in net assets from operations for H1 2021 - The company's primary focus is to seek an attractive risk-adjusted total return by investing primarily in corporate debt securities and CLO structured finance investments[182] Portfolio Reconciliation (Six Months Ended June 30, 2021) | Description | Amount ($ in millions) | | :--- | :--- | | Beginning investment portfolio | $294.7 | | Portfolio investments acquired | $132.4 | | Debt repayments & Sales of securities | $(21.9) | | Reductions to CLO equity cost value | $(21.4) | | Net change in unrealized appreciation | $33.6 | | Net realized losses on investments | $(12.9) | | Ending investment portfolio | $404.8 | - The weighted average annualized yield on the company's debt investments was approximately 7.6% as of June 30, 2021[184] - As of June 30, 2021, the debt portfolio had a weighted average credit grade of 2.1, with 96.8% of the portfolio at fair value graded as 2 ('Full repayment expected')[222] Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk from variable-rate debt investments, with a 100 basis point LIBOR increase potentially boosting investment income by 7.7% Interest Rate Sensitivity Analysis | Hypothetical Change in LIBOR | Estimated Percentage change in Investment Income (%) | | :--- | :--- | | Up 300 basis points | 23.1% | | Up 200 basis points | 15.4% | | Up 100 basis points | 7.7% | | Down 25 basis points | (0.6)% | - The company is monitoring the planned cessation of LIBOR settings, with most U.S. dollar LIBOR settings scheduled to end after June 30, 2023[276] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[279] - No material changes to the internal control over financial reporting occurred during the quarter ended June 30, 2021[281] PART II. OTHER INFORMATION Legal Proceedings The company is not currently subject to any material legal proceedings, with no expected material effect on financial condition - As of the filing date, the company is not a party to any material legal proceedings[283] Risk Factors No material changes to prior risk factors, but new emphasis on ESG scrutiny and heightened cybersecurity risks - The company identifies increasing public scrutiny related to environmental, social, and governance (ESG) activities as a business risk[285] - Cybersecurity risks and cyber incidents are highlighted as potential threats, with remote working conditions heightening this vulnerability[286] Unregistered Sales of Equity Securities and Use of Proceeds In Q2 2021, 26,458 common shares, valued at $124,000, were issued via the distribution reinvestment plan, with no repurchases - In Q2 2021, 26,458 shares of common stock were issued under the company's distribution reinvestment plan for a total value of approximately $124,000[287] - No common stock was repurchased by the company during the quarter ended June 30, 2021[288] Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the period - The company reported no defaults upon its senior securities during the period[289] Mine Safety Disclosures This section is not applicable to the company's operations - This section is not applicable to the company[290] Other Information The company reported no other information required to be disclosed under this item - The company reported no other information required to be disclosed under this item[291] Exhibits This section lists filed exhibits, including CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002 - The report includes required certifications from the CEO and CFO under Rules 13a-14 and Section 906 of the Sarbanes-Oxley Act[292]