# OFS Capital Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [OFS Capital Corp](/companies/ofs.md) (CIK 1487918)
- Form: 10-Q
- Filed: 2023-11-03
- Accepted by EDGAR: Nov 2, 2023, 17:34 ET
- Period: 2023-09-30
- Accession: 0001487918-23-000101
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1487918/000148791823000101/ofs-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1487918/000148791823000101/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $4.9m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $14.8m | us-gaap:InterestExpense |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $1.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $3.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.40 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.15 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.40 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 13,398,078 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 13,398,078 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $47.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $13.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $15.9m | us-gaap:Cash |
| Total assets | at 2023-09-30 | $477.0m | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $306.3m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $303.0m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-09-30 | $170.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 64,873 characters.

The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. For additional overview information on the Company, see “Item 1. Business” in our Annual Report on Form 10-K for the year ended December 31, 2022.

### Overview

Key performance metrics per common share are presented below:

|  | September 30, 2023 | June 30, 2023 |
| --- | ---: | ---: |
| Net asset value | $12.74 | $12.94 |

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net investment income | $0.40 | $0.38 | $1.15 | $1.01 |
| Net increase (decrease) in net assets resulting from operations | 0.14 | (0.15) | 0.27 | (0.75) |
| Distributions paid | 0.34 | 0.33 | 1.00 | 0.86 |

Our NAV per common share decreased from $12.94 at June 30, 2023 to $12.74 at September 30, 2023, primarily due to unrealized depreciation on investments of $0.26 per common share. For the quarter ended September 30, 2023, net investment income of $0.40 per common share exceeded our quarterly distribution of $0.34 per common share during such period.

For the quarter ended September 30, 2023, total investment income increased to $14.7 million from $14.5 million in the prior quarter, primarily due to an increase of $0.2 million in interest income. Interest income increased due to certain non-recurring interest on a realized Structured Finance Security, partially offset by a reduction in interest on our debt investments related to certain loans placed on non-accrual status during the current quarter. For the quarter ended September 30, 2023, our portfolio’s weighted-average performing income yield increased to 14.6% from 13.8% in the prior quarter, primarily due to interest income recognized on the pay off of a loan accumulation facility.

For the quarter ended September 30, 2023, our weighted-average debt interest costs increased to 6.1% compared to 6.0% for the quarter ended June 30, 2023, primarily due to an increase in the cost of debt on our BNP Facility resulting from SOFR rate increases. As of September 30, 2023, approximately 89% of our outstanding debt matures in 2026 and beyond, 70% of our outstanding debt carries fixed interest rates and 59% of our outstanding debt is unsecured. We continue to believe that our balance sheet remains well positioned in the current interest rate environment.

For the quarter ended September 30, 2023, we recognized a net loss on investments of $3.4 million, primarily due to net unrealized depreciation of $3.5 million. The net unrealized depreciation of $3.5 million was primarily due to net unrealized depreciation of $6.8 million on our debt and equity investments, partially offset by net unrealized appreciation of $3.3 million on our Structured Finance Securities.

During the quarter ended September 30, 2023, loans with an aggregate fair value of $6.4 million were placed on non-accrual status. As of September 30, 2023, our loan portfolio had non-accrual loans with an aggregate fair value of $16.7 million, or 3.7% of our total investments at fair value. For the quarter ended September 30, 2023, our loans on non-accrual status experienced net unrealized depreciation of $2.6 million.

As of September 30, 2023, our asset coverage ratio of 163% exceeded the minimum asset coverage requirement of 150% under the 1940 Act, and we remained in compliance with all applicable covenants under our outstanding debt facilities. As of September 30, 2023, we had access to $25.0 million under our PWB Credit Facility, as well as $58.9 million under our BNP Facility, each of which are subject to a borrowing base and other covenants. As of September 30, 2023, we had unfunded commitments of $14.1 million to 9 portfolio companies.

On October 31, 2023, the Board declared a distribution of $0.34 per share for the fourth quarter of 2023, payable on December 29, 2023, to stockholders of record as of December 22, 2023.

### Critical Accounting Policies and Significant Estimates

Our critical accounting policies and estimates are those relating to revenue recognition and fair value estimates. Management has discussed the development and selection of each critical accounting policy and estimate with the Audit Committee of the Board. For descriptions of our revenue recognition and fair value policies, see “Item 8. Financial Statements - Notes to Consolidated Financial Statements - Note 2” and “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Significant Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022.

The following table illustrates the impact of our fair value measures if we selected the low or high end of the range of values for all investments as of September 30, 2023 (dollar amounts in thousands):

| Investment Type Debt investments: | Low-end | Range of Fair Value High-end |  |
| --- | ---: | ---: | ---: |
| Senior secured | $279,144 | $273,970 | $284,328 |
| Subordinated | 100 | 100 | 100 |
| Structured Finance Securities: |  |  |  |
| Subordinated notes | 52,980 | 50,448 | 55,507 |
| Mezzanine debt | 30,309 | 29,784 | 30,832 |
| Equity investments: |  |  |  |
| Preferred equity | 11,806 | 11,185 | 12,413 |
| Common equity, warrants and other | 82,908 | 75,623 | 90,198 |
|  | $457,247 | $441,110 | $473,378 |

### Related Party Transactions

We have entered into a number of business relationships with affiliated or related parties, including the following:

- The Investment Advisory Agreement with OFS Advisor to manage our operating and investment activities. Under the Investment Advisory Agreement we have agreed to pay OFS Advisor an annual base management fee based on the average value of our total assets (other than cash but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) as well as an incentive fee based on our investment performance. See “Item 1–Financial Statements–**Note 3”.**
- The Administration Agreement with OFS Services, an affiliate of OFS Advisor, to provide us with the office facilities and administrative services necessary to conduct our operations. See “Item 1–Financial Statements–**Note 3”.**
- A license agreement with OFSAM, the parent company of OFS Advisor, under which OFSAM has agreed to grant us a non-exclusive, royalty-free license to use the name “OFS.” Under this agreement, we have a right to use the “OFS” name for so long as OFS Advisor or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we have no legal right to the “OFS” name. This license agreement will remain in effect for so long as the Investment Advisory Agreement with OFS Advisor is in effect.

OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to us and OFS Advisor is free to furnish similar services to other entities, including other funds affiliated with OFS Advisor, so long as its services to us are not impaired. OFS Advisor also serves as the investment adviser to other funds, including HPCI and OCCI. Additionally, OFS Advisor provides sub-advisory services to: (i) CMFT Securities Investments, LLC, a wholly owned subsidiary of CIM Real Estate Finance Trust, Inc., a corporation that qualifies as a real estate investment trust; and (ii) CIM Real Assets & Credit Fund, an externally managed registered investment company that operates as an interval fund that invests primarily in a combination of real estate, credit and related investments.

For the years ended December 31, 2023 and 2022, OFS Advisor agreed to reduce its base management fee attributable to all of the OFSCC-FS Assets to 0.25% per quarter (1.00% annualized) of the average value of the OFSCC-FS Assets (excluding cash) at the end of the two most recently completed calendar quarters. OFS Advisor’s base management fee reduction is renewable on an annual basis and OFS Advisor is not entitled to recoup the amount of the base management fee reduced with respect to the OFSCC-FS Assets. OFS Advisor most recently renewed the agreement to reduce its base management fee for the 2023 calendar year on January 11, 2023.

The 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting the BDC to do so. On August 4, 2020, we received our existing Order, which superseded a previous order that we received on October 12, 2016, and provides us with greater flexibility to enter into co-investment transactions with certain Affiliated Funds in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions. We are generally permitted to co-invest with Affiliated Funds if, under the terms of our existing Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including that: (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned; and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.

In addition, we may file an application for an amendment to our existing Order to permit us to participate in follow-on investments in our existing portfolio companies with private funds that do not hold any investments in such existing portfolio companies. However, if filed, there is no guarantee that such application will be granted.

Conflicts may arise when we make an investment in conjunction with an investment being made by an Affiliated Account, or in a transaction where an Affiliated Account has already made an investment. Investment opportunities are, from time to time, appropriate for more than one account in the same, different or overlapping securities of a portfolio company’s capital structure. Conflicts arise in determining the terms of investments, particularly where these accounts may invest in different types of securities in a single portfolio company. Potential conflicts arise when addressing, among other things, questions as to whether payment obligations and covenants should be enforced, modified or waived, or whether debt should be restructured, modified or refinanced. For a discussion of the risks associated with conflicts of interest, see “Item 1. Business — Regulation — Conflicts of Interest”, “Item 1A. Risk Factors — Risks Related to OFS Advisor and its Affiliates —We have potential conflicts of interest related to the purchases and sales that OFS Advisor makes on our behalf and/or on behalf of Affiliated Accounts” and “Item 1. Business — Regulation — Conflicts of Interest — Conflicts Related to Portfolio Investments” in our Annual Report on Form 10-K for the year ended December 31, 2022.

### Portfolio Composition and Investment Activity

### Portfolio Composition

As of September 30, 2023, the fair value of our debt investment portfolio totaled $279.2 million in 43 portfolio companies, of which approximately 99% were senior secured loans. As of September 30, 2023, we had equity investments in 15 portfolio companies with a fair value of approximately $94.7 million. As of September 30, 2023, we also had 23 investments in Structured Finance Securities with a fair value of $83.3 million and unfunded commitments of $14.1 million to 9 portfolio companies. Set forth in the tables and charts below is selected information with respect to our portfolio as of September 30, 2023 and December 31, 2022.

The following table presents our investment portfolio by each wholly owned legal entity within the consolidated group as of September 30, 2023 and December 31, 2022 (dollar amounts in thousands):

|  | September 30, 2023 Amortized Cost | Fair Value | December 31, 2022 Amortized Cost | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| OFS Capital Corporation (Parent) | $187,162 | $157,133 | $195,823 | $162,308 |
| SBIC I LP | 77,250 | 143,330 | 97,214 | 167,211 |
| OFSCC-FS | 165,561 | 154,432 | 178,460 | 168,050 |
| OFSCC-MB | 2,890 | 2,352 | 3,383 | 3,007 |
| Total investments | $432,863 | $457,247 | $474,880 | $500,576 |

57

The following table presents our ten largest investments by portfolio company based on fair value as of September 30, 2023 (dollar amounts in thousands):

| Portfolio Company | Type | Amortized Cost | Fair Value | % of Total Portfolio, at Fair Value |
| --- | --- | ---: | ---: | ---: |
| Pfanstiehl Holdings, Inc. | Equity | $217 | $77,105 | 16.9% |
| All Star Auto Lights, Inc. | Debt | 27,629 | 27,856 | 6.1 |
| The Escape Game, LLC | Debt | 23,713 | 24,010 | 5.3 |
| Inergex Holdings, LLC | Debt | 17,056 | 17,212 | 3.8 |
| Kreg LLC | Debt | 16,944 | 15,731 | 3.4 |
| Tolemar Acquisition, Inc. | Debt | 15,927 | 14,938 | 3.3 |
| SSJA Bariatric Management LLC | Debt | 13,422 | 13,419 | 2.9 |
| Honor HN Buyer Inc. | Debt | 12,387 | 12,566 | 2.7 |
| One GI LLC | Debt | 12,673 | 12,058 | 2.6 |
| Boca Home Care Holdings, Inc. | Debt and Equity | 12,562 | 11,869 | 2.6 |
| Total |  | $152,530 | $226,764 | 49.6% |

As of September 30, 2023, approximately 4.5% and 12.0% of our total portfolio at fair value and net assets, respectively, were comprised of Structured Finance Securities managed by a single adviser.

### Portfolio Yields

The following table presents weighted-average yield metrics for our portfolio as of September 30, 2023 and June 30, 2023:

| Weighted-average performing income yield(1): | For the Three Months Ended September 30, 2023 | June 30, 2023 |
| --- | ---: | ---: |
| Debt investments | 13.1% | 13.0% |
| Structured Finance Securities | 19.3% | 16.4% |
| Interest-bearing investments | 14.6% | 13.8% |
| Weighted-average realized yield(2): |  |  |
| Interest-bearing investments | 13.3% | 12.5% |

(1) Performing income yield is calculated as (a) the actual amount earned on performing interest-bearing investments, including interest, prepayment fees and amortization of Net Loan Fees, divided by (b) the weighted-average of total performing interest-bearing investments at amortized cost.

(2) Realized yield is calculated as (a) the actual amount earned on interest-bearing investments, including interest, prepayment fees and amortization of Net Loan Fees, divided by (b) the weighted-average of total interest-bearing investments at amortized cost, in each case, including debt investments on non-accrual status and non-income producing Structured Finance Securities.

For the three months ended September 30, 2023, the weighted average performing income yield on interest-bearing investments increased primarily due to certain non-recurring interest income recognized on the pay off of a loan accumulation facility.

Weighted-average yields of our investments are not the same as a return on investment for our stockholders, but rather the gross investment income from our investment portfolio before the payment of all of our fees and expenses. There can be no assurance that the weighted average yields will remain at their current levels.

### Portfolio Company Investments

The following table summarizes the composition of our Portfolio Company Investments as of September 30, 2023 and December 31, 2022 (dollar amounts in thousands):

|  | September 30, 2023 Amortized Cost | Fair Value | December 31, 2022 Amortized Cost | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Senior secured debt investments | $304,865 | $279,144 | $335,558 | $311,636 |
| Subordinated debt investments | 4,680 | 100 | 13,890 | 1,226 |
| Preferred equity | 11,116 | 11,806 | 9,966 | 8,196 |
| Common equity, warrants and other | 11,537 | 82,908 | 12,989 | 91,000 |
| Total Portfolio Company Investments | $332,198 | $373,958 | $372,403 | $412,058 |
| Number of portfolio companies | 54 | 54 | 63 | 63 |

As of September 30, 2023, approximately 99% and 61% of our loan portfolio and total portfolio, respectively, consisted of senior secured loans, based on fair value. We believe the seniority of our debt investments in the borrowers’ capital structures may provide greater downside protection against adverse economic changes, including those caused by the impacts of the ongoing war between Russia and Ukraine, the current conflict in Israel, rising interest and elevated inflation rates, instability in the U.S. and international banking systems, the risk of recession or a shutdown of U.S. government services and related market volatility.

As of September 30, 2023, the three largest industries of our Portfolio Company Investments by fair value, were (1) Manufacturing (28.1%), (2) Health Care and Social Assistance (19.3%) and (3) Wholesale Trade (14.0%), totaling an aggregate of approximately 61.4% of our Portfolio Company Investment portfolio. For a full summary of our investment portfolio by industry, see “Item 1–Financial Statements–**Note 4.”**

As of September 30, 2023, our common equity investment in Pfanstiehl Holdings, Inc., a global manufacturer of high-purity pharmaceutical ingredients, accounted for 16.9% and 45.2% of our total portfolio at fair value and our total net assets, respectively. The value of this investment is substantially comprised of unrealized appreciation of $76.9 million. A deterioration in the operating performance of the company or other factors underlying the valuation of this investment could have a material impact on our NAV.

### Structured Finance Securities

The following table summarizes the composition of our Structured Finance Securities as of September 30, 2023 and December 31, 2022 (dollar amounts in thousands):

|  | September 30, 2023 Amortized Cost | Fair Value | December 31, 2022 Amortized Cost | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Subordinated notes | $69,581 | $52,980 | $65,870 | $53,807 |
| Mezzanine debt | 31,084 | 30,309 | 28,107 | 26,412 |
| Loan accumulation facilities | — | — | 8,500 | 8,299 |
| Total Structured Finance Securities | $100,665 | $83,289 | $102,477 | $88,518 |
| Number of Structured Finance Securities | 23 | 23 | 23 | 23 |

As of September 30, 2023, we had no non-performing Structured Finance Securities. Non-performing Structured Finance Securities are securities that have not been optionally redeemed and have an effective yield of 0.0%. Structured Finance Securities that have not been optionally redeemed and are in the process of liquidating have an effective yield of 0.0% as remaining residual distributions are anticipated to be recognized as a return of capital. As of September 30, 2023, we have one Structured Finance Security with a cost and fair value of $1.3 million and $0.1 million, respectively, that has been optionally redeemed.

### Investment Activity

The following is a summary of our investment activity for the three and nine months ended September 30, 2023 (dollar amounts in millions):

|  | Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 |
| --- | ---: | ---: |
| Investments in debt and equity securities | $0.7 | $27.1 |
| Investments in Structured Finance Securities | 7.6 | 7.6 |
| Total investment purchases and originations | $8.3 | $34.7 |
| Proceeds from principal payments | $41.9 | $48.2 |
| Proceeds from investments sold or redeemed | — | 18.8 |
| Proceeds from distributions received from portfolio investments | 3.8 | 10.6 |
| Total proceeds from principal payments, sales or redemptions, and distributions received from portfolio investments | $45.7 | $77.6 |

60

### Risk Monitoring

We categorize investments in the debt securities of portfolio companies into seven risk categories based on relevant information about the ability of borrowers to service their debt. For additional information regarding our risk categories, see “Item 1. Business–Portfolio Review/Risk Monitoring” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed on March 3, 2023. The following table shows the classification of our debt securities of portfolio companies, excluding Structured Finance Securities, by credit risk rating as of September 30, 2023 and December 31, 2022 (dollar amounts in thousands):

| Risk Category | Debt Investments September 30, 2023 Amortized Cost | Fair Value | % of Debt Investments, at Fair Value | December 31, 2022 Amortized Cost | Fair Value | % of Debt Investments, at Fair Value |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| 1 (Low Risk) | $— | $— | —% | $— | $— | —% |
| 2 (Below Average Risk) | — | — | — | — | — | — |
| 3 (Average) | 259,578 | 252,627 | 90.5 | 298,414 | 288,170 | 92.2 |
| 4 (Special Mention) | 21,627 | 16,890 | 6.0 | 30,060 | 17,218 | 5.5 |
| 5 (Substandard) | 21,724 | 9,581 | 3.4 | 16,294 | 7,352 | 2.3 |
| 6 (Doubtful) | 6,616 | 146 | 0.1 | 4,680 | 122 | — |
| 7 (Loss) | — | — | — | — | — | — |
|  | $309,545 | $279,244 | 100.0% | $349,449 | $312,862 | 100.0% |

### Non-Accrual Loans

Management reviews, for placement on non-accrual status, all loans that become past due on principal and interest, and/or when there is reasonable doubt that principal, cash interest, or PIK interest will be collected. When a loan is placed on non-accrual status, accrued and unpaid interest is reversed. Additionally, Net Loan Fees are no longer accreted to interest income as of the date the loan is placed on non-accrual status. Interest payments subsequently received on non-accrual investments may be recognized as income or applied to principal depending upon management’s judgment. Interest accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal and interest payments and, in the judgment of management, the investments are estimated to be fully collectible as to all principal and interest. For the three months ended September 30, 2023, loans with an aggregate amortized cost and fair value of $11.8 million and $6.4 million, respectively, were placed on non-accrual status. The aggregate amortized cost and fair value of loans on non-accrual status was $39.2 million and $16.7 million, respectively, as of September 30, 2023, and $36.5 million and $11.2 million, respectively, as of December 31, 2022.

### Results of Operations

Our key financial measures are described in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations–Results of Operations–Key Financial Measures” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed on March 3, 2023. The following is a discussion of the key financial measures that management employs in reviewing the performance of our operations.

We do not believe that our historical operating performance is necessarily indicative of our future results of operations. We are primarily focused on debt investments in middle-market and larger companies in the United States and, to a lesser extent, equity investments, including warrants and other minority equity securities, and Structured Finance Securities. This approach differs from our historical investment concentration in that we now also focus on the debt of larger U.S. companies and Structured Finance Securities. Moreover, as a BDC and a RIC, we are also subject to certain constraints on our operations, including, but not limited to, limitations imposed by the 1940 Act and the Code. In addition, SBIC I LP is subject to regulation and oversight by the SBA. For the reasons described above, the results of operations described below may not necessarily be indicative of the results we expect to report in future periods.

Net increase (decrease) in net assets resulting from operations can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, annual comparisons of net increase (decrease) in net assets resulting from operations may not be meaningful.

The following analysis compares our quarterly results of operations to the preceding quarter, as well as our year-to-date results of operations to the corresponding period in the prior year. We believe a comparison of our current quarterly results to the preceding quarter is more meaningful and transparent than a comparison to the corresponding prior-year quarter as our results of operations are not influenced by seasonal factors the latter comparison is designed to elicit and highlight.

### Comparison of the three months ended September 30, 2023 and June 30, 2023 and comparison of the nine months ended September 30, 2023 and 2022

Consolidated operating results for the three months ended September 30, 2023 and June 30, 2023, and the nine months ended September 30, 2023 and 2022 are as follows (in thousands):

| Investment income Interest income: | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Cash interest income | $10,962 | $10,511 | $31,171 | $23,316 |
| PIK interest income | 170 | 214 | 610 | 431 |
| Net Loan Fee amortization | 420 | 409 | 1,238 | 1,318 |
| Accretion of interest income on CLO subordinated notes | 2,653 | 2,879 | 8,534 | 7,647 |
| Other interest income | 86 | 88 | 232 | 26 |
| Total interest income | 14,291 | 14,101 | 41,785 | 32,738 |
| Dividend income: |  |  |  |  |
| Cash dividends | 11 | 89 | 649 | 812 |
| Preferred equity PIK dividends | 323 | 245 | 804 | 230 |
| Total dividend income | 334 | 334 | 1,453 | 1,042 |
| Fee income: |  |  |  |  |
| Syndication fees | — | 60 | 96 | 393 |
| Prepayment and other fees | 26 | 31 | 126 | 573 |
| Total fee income | 26 | 91 | 222 | 966 |
| **Total investment income** | 14,651 | 14,526 | 43,460 | 34,746 |
| **Total expenses** | 9,261 | 9,403 | 27,997 | 21,121 |
| **Net investment income** | 5,390 | 5,123 | 15,463 | 13,625 |
| **Net loss on investments** | (3,395) | (7,087) | (11,607) | (23,502) |
| Loss on extinguishment of debt | (194) | — | (213) | (144) |
| **Net increase (decrease) in net assets resulting from operations** | $1,801 | $(1,964) | $3,643 | $(10,021) |

### Investment Income

For the three months ended September 30, 2023, total investment income increased to $14.7 million from $14.5 million in the prior quarter, primarily due to an increase in total interest income of $0.2 million.

Interest income increased $0.2 million during the three months ended September 30, 2023 compared to the prior quarter, primarily due to an increase of $0.5 million in cash interest income, partially offset by a decrease of $0.2 million in accretion of interest income on Structured Finance Securities. The increase in cash interest income was primarily due to non-recurring interest income recognized on the pay off of a loan accumulation facility.

Fee income is primarily comprised of unused fees, prepayment fees and syndication fees that generally result from periodic transactions rather than from holding portfolio investments, and are considered non-recurring. We receive syndication fees on investments where OFS Advisor sources, structures, and arranges the lending group. For the three months ended September 30, 2023, total fee income decreased $0.1 million compared to the prior quarter due to no syndication fees recognized during the current quarter.

### Expenses

Operating expenses for the three months ended September 30, 2023 and June 30, 2023 and nine months ended September 30, 2023 and 2022, are presented below (in thousands):

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Interest expense | $4,913 | $5,011 | $14,798 | $12,224 |
| Management fee | 1,796 | 1,883 | 5,573 | 6,062 |
| Income Incentive Fee | 1,348 | 1,280 | 3,866 | 1,093 |
| Capital Gains Fee | — | — | — | (1,916) |
| Professional fees | 397 | 429 | 1,262 | 1,155 |
| Administration fee | 380 | 440 | 1,302 | 1,309 |
| Other expenses | 427 | 360 | 1,196 | 1,194 |
| Total expenses | $9,261 | $9,403 | $27,997 | $21,121 |

#### Comparison of the three months ended September 30, 2023 and June 30, 2023

Interest expense for the three months ended September 30, 2023 decreased $0.1 million compared to the prior quarter, primarily due to a decrease in our average outstanding debt balance. During the three months ended September 30, 2023, we redeemed $14.0 million of SBA debentures and reduced the total amount outstanding under the BNP Facility.

#### Comparison of the nine months ended September 30, 2023 and 2022

Interest expense for the nine months ended September 30, 2023 increased $2.6 million compared to the corresponding period in the prior year, primarily due to the increase in the weighted average effective interest rate on our total outstanding debt to 5.9% compared to 4.5% during the nine months ended September 30, 2022.

Management fee expense for the nine months ended September 30, 2023 decreased $0.5 million compared to the corresponding period in the prior year, primarily due to a decrease in the average quarterly portfolio fair value to $488.0 million from $532.1 million.

Incentive fees for the nine months ended September 30, 2023 increased $4.7 million compared to the corresponding period in the prior year, partially due to an increase of $2.8 million in the Income Incentive Fee during the current year primarily driven by an increase in interest income related to rising interest rates. In addition, during the nine months ended September 30, 2022, there was a full reversal of a previously accrued Capital Gains Fee as a result of the reduction in net unrealized appreciation on the investment portfolio.

### Net realized and unrealized gain (loss) on investments

Net gain (loss), inclusive of realized and unrealized gains (losses), by investment type for the three months ended September 30, 2023 and June 30, 2023 and nine months ended September 30, 2023 and 2022, were as follows (in thousands):

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Senior secured debt | $(1,554) | $1,042 | $(1,954) | $(15,729) |
| Subordinated debt | (16) | (13) | (1,126) | (5,487) |
| Preferred equity | 674 | 170 | 2,474 | 3,462 |
| Common equity, warrants and other | (5,870) | (4,154) | (7,526) | 6,466 |
| Structured Finance Securities | 3,253 | (4,291) | (3,421) | (12,600) |
| Income tax benefit (expense) on net realized investment gains | 118 | — | (54) | 365 |
| Deferred tax benefit | — | 159 | — | 21 |
| Total net loss on investments | $(3,395) | $(7,087) | $(11,607) | $(23,502) |

63

#### Net gain (loss) on investments for the three months ended September 30, 2023 and June 30, 2023

#### Three months ended September 30, 2023

For the three months ended September 30, 2023, we recognized a net loss on investments of $3.4 million, primarily due to net unrealized depreciation of $6.8 million on our debt and equity investments, partially offset by net unrealized appreciation of $3.3 million on our Structured Finance Securities.

During the three months ended September 30, 2023, our common equity investment in Pfanstiehl Holdings, Inc. experienced unrealized depreciation of $5.7 million.

#### Three months ended June 30, 2023

For the three months ended June 30, 2023, we recognized a net loss on investments of $7.1 million, primarily due to unrealized depreciation of $4.3 million and $2.7 million on our Structured Finance Securities and equity securities, respectively. For the three months ended June 30, 2023, our loan portfolio experienced net gains of $1.0 million.

During the three months ended June 30, 2023, our common equity investment in Pfanstiehl Holdings, Inc. experienced unrealized depreciation of $2.7 million.

During the three months ended June 30, 2023, we wrote-off the remainder of our non-accrual loan and equity investment in Eblens Holdings, Inc., resulting in a realized loss of $10.5 million, of which $9.0 million was recognized in prior fiscal years, with $0.4 million recognized during the three months ended June 30, 2023.

#### Net gain (loss) on investments for the nine months ended September 30, 2023 and September 30, 2022

#### Nine months ended September 30, 2023

During the nine months ended September 30, 2023, our portfolio experienced net losses of $11.6 million, primarily due to net unrealized depreciation of $6.7 million and $3.4 million on our common equity, warrant and other investments and Structured Finance Securities, respectively.

During the nine months ended September 30, 2023, our common equity investment in Pfanstiehl Holdings, Inc. experienced unrealized depreciation of $8.4 million.

#### Nine months ended September 30, 2022

During the nine months ended September 30, 2022, our portfolio experienced unrealized depreciation of $20.0 million and $12.6 million on our debt investments and Structured Finance Securities, respectively, primarily due to widening of liquid credit market spreads. These net losses were partially offset by unrealized appreciation of $16.5 million on our common equity investment in Pfanstiehl Holdings, Inc.

### Loss on Extinguishment of Debt

#### Nine months ended September 30, 2023 and 2022

During the nine months ended September 30, 2023 and 2022, we redeemed SBA debentures of $19.0 million and $19.0 million, respectively, and, as a result, we recognized losses on extinguishment of debt of $0.2 million and $0.1 million, respectively, related to the acceleration of unamortized deferred borrowing costs on the redeemed debentures.

### Non-GAAP Financial Measure – Adjusted Net Investment Income

On a supplemental basis, we disclose Adjusted NII (including on a per share basis), which is a financial measure calculated and presented on a basis other than in accordance with GAAP. Adjusted NII represents net investment income, excluding the capital gains incentive fee, in periods in which such expense occurs. GAAP requires recognition of a capital gains incentive fee in our financial statements when aggregate net realized and unrealized capital gains, if any, on a cumulative basis is positive from the date of the election to be a BDC through the reporting date. Such fees are subject to further conditions specified in the Investment Advisory Agreement, principally related to the realization of such net gains, before OFS Advisor is entitled to payment, and such recognized fees are subject to the risk of reversal should unrealized gains diminish to become losses. Management believes that Adjusted NII is a useful indicator of operations exclusive of any net capital gains incentive fee, as net investment income does not include the net gains, realized or unrealized, associated with the capital gains incentive fee.

Management believes Adjusted NII facilitates the analysis of our results of operations and provides greater transparency into the determination of incentive fees. Adjusted NII is not meant as a substitute for net investment income determined in accordance with GAAP and should be considered in the context of the entirety of our reported results of operations, financial position and cash flows determined in accordance with GAAP.

The following table provides a reconciliation from net investment income (the most comparable GAAP measure) to Adjusted NII for the three months ended September 30, 2023 and June 30, 2023 and nine months ended September 30, 2023 and 2022, respectively (dollar amounts in thousands, except per share data):

|  | Three Months Ended September 30, 2023 (000's) | Per Share | June 30, 2023 (000's) | Per Share | Nine Months Ended September 30, 2023 (000's) | Per Share | 2022 (000's) | Per Share |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net investment income | $5,390 | $0.40 | $5,123 | $0.38 | $15,463 | $1.15 | $13,625 | $1.01 |
| Capital Gains Fee | — | — | — | — | — | — | (1,916) | (0.14) |
| Adjusted NII | $5,390 | $0.40 | $5,123 | $0.38 | $15,463 | $1.15 | $11,709 | $0.87 |

Although these non-GAAP financial measures are intended to enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.

### Liquidity and Capital Resources

As of September 30, 2023, we held cash of $15.9 million, which includes $8.4 million held by SBIC I LP, our wholly owned SBIC, and $4.0 million held by OFSCC-FS. Our use of cash held by SBIC I LP may be restricted by SBA regulations, including limitations on the amount of cash SBIC I LP can distribute to the Parent. Any such distributions to the Parent from SBIC I LP are generally restricted under SBA regulations to a statutory measure of undistributed accumulated earnings (“READ”) or regulatory capital of SBIC I LP. During the nine months ended September 30, 2023, the Parent received return of capital and READ distributions from SBIC I LP of $2.5 million and $4.5 million, respectively. Distributions from OFSCC-FS to the Parent are restricted by the terms and conditions of the BNP Facility. During the nine months ended September 30, 2023, the Parent received $8.8 million in cash distributions from OFSCC-FS. As of September 30, 2023, cash available to be distributed from SBIC I LP and OFSCC-FS were $4.1 million and $-0- million, respectively.

As of September 30, 2023, we had an unused commitment of $25.0 million under our PWB Credit Facility, as well as an unused commitment of $58.9 million under our BNP Facility, both of which are subject to a borrowing base requirements and other covenants. Based on our regulatory asset coverage ratio as of September 30, 2023, we could access approximately $70.2 million of our unused lines of credit, subject to the provisions of the borrowing bases as of any borrowing date, and remain in compliance with asset coverage ratio requirements.

The Parent may make unsecured loans to SBIC I LP, of which the aggregate cannot exceed $35 million at any given time, and no interest may be charged on the unpaid principal balance. There were no intercompany loans between the Parent and SBIC I LP as of September 30, 2023.

### Sources and Uses of Cash

We generate operating cash flows from net investment income and the net liquidation of portfolio investments, and use cash in our operations in the net purchase of portfolio investments and payment of expenses. Significant variations may exist between net investment income and cash from net investment income, primarily due to the recognition of non-cash investment income, including certain Net Loan Fee amortization, PIK interest and PIK dividends, which generally will not be fully realized in cash until we exit the investment, as well as accreted interest income on Structured Finance Securities, which may not coincide with cash distributions from these investments. As discussed in “Item 1.–Financial Statements–Note 3,” we pay OFS Advisor a quarterly incentive fee with respect to our pre-incentive fee net investment income, which may include investment income that we have not received in cash. In addition, we must distribute substantially all of our taxable income, which approximates, but will not always equal, the cash we generate from net investment income to maintain our RIC tax treatment. We also obtain cash to fund investments or general corporate activities from the issuance of securities and our revolving lines of credit. These principal sources and uses of cash and liquidity are presented below (in thousands):

|  | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Cash from net investment income(1) | $12,638 | $8,240 |
| Net (purchases and originations) / repayments and sales of portfolio investments(1) | 34,365 | (29,465) |
| Net cash provided by (used in) operating activities | 47,003 | (21,225) |
| Distributions paid to stockholders(2) | (13,398) | (11,418) |
| Net borrowings (repayments) under revolving lines of credit | (13,600) | 22,900 |
| Repayments of SBA debentures | (19,000) | (19,000) |
| Other financing activities | — | (1,253) |
| Net cash used in financing activities | (45,998) | (8,771) |
| Net increase (decrease) in cash | $1,005 | $(29,996) |

(1) Net purchases and originations/repayments and sales of portfolio investments includes the purchase and origination of portfolio investments, proceeds from principal payments on portfolio investments, proceeds from sale or redemption of portfolio investments, changes in receivable for investments sold, payable from investments purchased as reported in our statements of cash flows, as well as the excess of proceeds from distributions received from Structured Finance Securities over accretion of interest income on Structured Finance Securities. Cash from net investment income includes all other cash flows from operating activities reported in our statements of cash flows.

(2) The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our ICTI for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year.

#### Cash from net investment income

Cash from net investment income increased $4.4 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to an increase of $5.3 million in our cash net interest margin.

#### Net (purchases and originations) / repayments and sales of portfolio investments

During the nine months ended September 30, 2023, net purchases and originations of portfolio investments of $34.4 million were primarily due to $69.1 million of cash we received from amortized cost repayments, sales on our portfolio investments and the net proceeds from distributions received from Structured Finance Securities and accretion of interest income on Structured Finance Securities, partially offset by $34.7 million of cash we used to purchase portfolio investments. During the nine months ended September 30, 2022, net purchases and originations of portfolio investments of $29.5 million were primarily due to $153.7 million of cash we used to purchase portfolio investments, partially offset by $124.2 million of cash we received from amortized cost repayments, sales on our portfolio investments and the net proceeds from distributions received from Structured Finance Securities and accretion of interest income on Structured Finance Securities. See “—Portfolio Composition and Investment Activity–Investment Activity.”

### Borrowings

#### SBA Debentures

SBIC I LP’s SBIC license allowed it to obtain leverage by issuing SBA-guaranteed debentures, subject to issuance of a capital commitment by the SBA and customary procedures. These debentures are non-recourse to us, and bear interest payable semi-annually, and each debenture has a maturity date that is ten years following issuance. The interest rate was fixed at the first pooling date after issuance, which was March and September of each year, at a market-driven spread over U.S. Treasury Notes with ten-year maturities. As of September 30, 2023 and December 31, 2022, SBIC I LP had outstanding debentures of $31.9 million and $50.9 million, respectively.

On a stand-alone basis, as of September 30, 2023 and December 31, 2022, SBIC I LP held $152.3 million and $176.5 million in total assets, respectively, which accounted for approximately 32% and 34% of the Company’s total consolidated assets, respectively.

As part of our plans to focus on providing first lien senior secured loans to larger borrowers, which we believe will improve our overall risk profile, SBIC I LP is repaying over time its outstanding SBA debentures prior to their scheduled maturity dates. Under a plan approved by the SBA, we will only make follow-on investments in current portfolio companies held by SBIC I LP. During the nine months ended September 30, 2023, SBIC I LP redeemed $19.0 million of SBA debentures that were contractually due March 1, 2025.

SBIC I LP is periodically examined and audited by the SBA’s staff to determine its compliance with SBA regulations. If SBIC I LP fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit SBIC I LP’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit SBIC I LP from making distributions.

We have received exemptive relief from the SEC effective November 26, 2013, which permits us to exclude SBA guaranteed debentures from the definition of senior securities in the statutory 150% asset coverage ratio under the 1940 Act.

#### PWB Credit Facility

We are party to a BLA with Pacific Western Bank, as lender, to provide us with a senior secured revolving credit facility, or the PWB Credit Facility, which is available for general corporate purposes including investment funding. The maximum availability of the PWB Credit Facility is equal to 50% of the aggregate outstanding principal amount of eligible loans included in the borrowing base, which excludes subordinated loan investments (as defined in the BLA) and as otherwise specified in the BLA. The PWB Credit Facility is guaranteed by OFSCC-MB, Inc. and secured by all of our current and future assets, excluding assets held by SBIC I LP, OFSCC-FS and the Company’s partnership interests in SBIC I LP and OFS SBIC I, GP.

On April 22, 2022, we amended the PWB Credit Facility to: (i) increase the maximum amount available under the PWB Credit Facility from $25.0 million to $35.0 million; and (ii) extend the maturity date of the PWB Credit Facility from February 28, 2023 to February 28, 2024.

On December 15, 2022, we amended the PWB Credit Facility to: (i) reduce the maximum amount available under the PWB Credit Facility from $35.0 million to $25.0 million; and (ii) eliminate the No Net Losses covenant, which restricted net losses (defined as income after adjustments to the investment portfolio for gains and losses, realized and unrealized, also shown as net increase (decrease) in net assets resulting from operations) in more than two quarters during the prior four quarters then ended.

As of September 30, 2023, we had $-0- outstanding and an unused commitment of $25.0 million under the PWB Credit Facility, subject to a borrowing base and other covenants. As of September 30, 2023, the effective interest rate on the PWB Credit Facility was 8.80%.

The BLA contains customary terms and conditions, including, without limitation, affirmative and negative covenants, such as information reporting requirements, a minimum tangible net asset value, a minimum quarterly net investment income after incentive fees, a debt/worth ratio and a net loss restriction. The BLA also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change in investment advisor, and the occurrence of a material adverse change in our financial condition. As of September 30, 2023, we were in compliance in all material respects with the applicable covenants under the PWB Credit Facility.

On July 25, 2023, Banc of California and Pacific Western Bank announced the signing of a definitive merger agreement. It is uncertain whether we will be able to extend the PWB Credit Facility or negotiate a new facility with the new entity, or an alternative lender, which could impact our future ability to access liquidity and could have a material adverse effect on our business, liquidity, financial condition, results of operations and ability to pay distributions to our stockholders.

#### Unsecured Notes

The Unsecured Notes are direct unsecured obligations and rank equal in right of payment with all of our current and future unsecured indebtedness. Because the Unsecured Notes are not secured by any of our assets, they are effectively subordinated to all existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest), to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under the PWB Credit Facility. As of September 30, 2023 and December 31, 2022, we had $180.0 million in Unsecured Notes.

In order to, among other things, reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we may, from time to time, purchase the Unsecured Notes for cash in open market purchases and/or privately negotiated transactions. We will evaluate any such transactions in light of then-existing market conditions, taking into account our current liquidity, prospects for future access to capital, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.

#### BNP Facility

On June 20, 2019, OFSCC-FS entered into the BNP Facility, which provides for borrowings in an aggregate principal amount up to $150.0 million, of which $91.1 million was drawn as of September 30, 2023. Borrowings under the BNP Facility bear interest based on SOFR for the relevant interest period, plus an applicable spread (subject to an effective floor of 2.65%). The BNP Facility will mature on the earlier of June 20, 2027 or upon certain other events defined in the credit agreement which may result in accelerated maturity. Borrowings under the BNP Facility are secured by substantially all of the assets held by OFSCC-FS. As of September 30, 2023, we were in compliance in all material respects with the applicable covenants under the BNP Facility.

On June 24, 2022, we amended the BNP Facility to, among other things: (i) extend the reinvestment period under the BNP Facility for three years from June 20, 2022 to June 20, 2025; (ii) extend the maturity date under the BNP Facility from June 20, 2024 to June 20, 2027; (iii) convert the benchmark interest rate from LIBOR to SOFR; (iv) increase the top two Moody’s Industry concentrations from 15% to 17.5% and 20%; (v) increase the applicable margin by 0.40% on all classes of loans; and (vi) increase the applicable margin floor from 1.925% to 2.65%.

As of September 30, 2023, the effective interest rate on the BNP Facility was 8.67% and the unused commitment under the facility was $58.9 million. On a stand-alone basis, as of September 30, 2023 and December 31, 2022, OFSCC-FS held approximately $160.2 million and $173.7 million in total assets, respectively, which accounted for approximately 34% and 33% of our total consolidated assets, respectively.

### Other Liquidity Matters

We expect to fund the growth of our investment portfolio utilizing our current borrowings, follow-on equity offerings, and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act. We cannot assure stockholders that our plans to raise capital will be successful. In addition, we intend to distribute to our stockholders substantially all of our taxable income in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments or make additional investments in our portfolio companies. The illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.

As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our assets, as defined by the 1940 Act, are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized in the United States. Conversely, we may invest up to 30% of our portfolio in opportunistic investments not otherwise eligible under BDC regulations. Specifically, as part of this 30% basket, we may consider investments in investment funds that are operating pursuant to certain exceptions to the 1940 Act and in advisers to similar investment funds, as well as in debt or equity of middle-market portfolio companies located outside of the United States and debt and equity of public companies that do not meet the definition of eligible portfolio companies because their market capitalization of publicly traded equity securities exceeds the levels provided for in the 1940 Act. We have, and may continue to, make opportunistic investments in Structured Finance Securities and other non-qualifying assets, consistent with our investment strategy. As of September 30, 2023, approximately 80% of our investments were qualifying assets.

BDCs are generally required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities to total senior securities. We received an exemptive order from the SEC to permit us to exclude the debt of SBIC I LP guaranteed by the SBA from the definition of Senior Securities in the statutory asset coverage ratio under the 1940 Act, which limits the amount that we may borrow. To fund growth in our investment portfolio in the future, we anticipate the need to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all.

On May 3, 2018, our Board, including a required majority (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, our minimum required asset coverage ratio decreased from 200% to 150%, effective May 3, 2019.

On May 22, 2018, the Board authorized the Stock Repurchase Program under which we could acquire up to $10.0 million of our outstanding common stock through the two-year period ending May 22, 2020. On May 4, 2020 and May 3, 2022, the Board extended the Stock Repurchase Program for additional two-year periods. Under the extended Stock Repurchase Program, we are authorized to repurchase shares in open-market transactions, including through block purchases, depending on prevailing market conditions and other factors. We expect the Stock Repurchase Program to be in place through May 22, 2024, or until the approved dollar amount has been used to repurchase shares. The Stock Repurchase Program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases. The Stock Repurchase Program may be extended, modified or discontinued at any time for any reason. We have provided our stockholders with notice of our intention to repurchase shares of our common stock in accordance with 1940 Act requirements. We retire all shares of common stock that we purchased in connection with the Stock Repurchase Program. During the nine months ended September 30, 2023, we did not make any repurchases of common stock on the open market under the Stock Repurchase Program. As of September 30, 2023, the approximate dollar value of shares remaining that may be purchased under the program was $9.6 million.

As of September 30, 2023, the aggregate amount outstanding of the senior securities issued by us was $303.0 million, for which our asset coverage was 163%. The Small Business Administration debentures are not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC effective November 26, 2013. The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by total senior securities representing indebtedness.

As a BDC, we are generally not permitted to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value per share of our common stock if the Board determines that such sale is in the best interests of us and our stockholders, and if our stockholders approve such sale. On July 19, 2023, our stockholders approved a proposal to authorize us, with approval of our Board, to sell or otherwise issue shares of our common stock (during a twelve-month period) at a price below our then-current net asset value per share in one or more offerings, subject to certain limitations (including that the cumulative number of shares sold pursuant to such authority does not exceed 25% of our then outstanding common stock immediately prior to each such sale). We have not sold any shares below net asset value pursuant to the proposal approved by our stockholders.

We continue to monitor the instability in the current banking environment arising from recent bank failures. If the banks and financial institutions with whom we have credit facilities enter into receivership, undergo consolidation or become insolvent in the future, our liquidity may be reduced significantly. At various times, our cash balances at third-party financial institutions exceed the federally insured limit. Our cash balances are retained in custodian accounts with U.S. Bank N.A and Citibank N.A., and we do not believe they are exposed to any significant credit risk. We continue to monitor our portfolio and believe the deposit risk and counterparty risk to be minimal.

### Contractual Obligations and Off-Balance Sheet Arrangements

#### Contractual Obligations

As of September 30, 2023, we had $15.9 million of cash and cash equivalents, as well as $25.0 million and $58.9 million of unfunded commitments under our PWB Credit Facility and BNP Facility, respectively, to meet our short-term contractual obligations. As of September 30, 2023, we had $14.1 million in outstanding commitments to fund portfolio investments under various undrawn revolvers and other credit facilities. Long-term contractual obligations, such as our BNP Facility that matures in 2027 and has $91.1 million outstanding as of September 30, 2023, can be repaid by selling OFSCC-FS portfolio investments that have a fair value of $154.4 million as of September 30, 2023. The OFSCC-FS portfolio includes broadly syndicated loans that can be sold over a relatively short period to generate cash. We cannot, however, be certain that this source of funds will be available and upon terms acceptable to us in sufficient amounts in the future.

As of September 30, 2023, we have $31.9 million of outstanding SBA debentures that mature in 2025, which we may repay prior to their maturity dates by using proceeds from investment repayments. As of September 30, 2023, the SBIC I LP investment portfolio had a fair value of $143.3 million.

As of September 30, 2023, we continue to believe our $303.0 million of debt financing, of which 89% contractually matures in 2026 and beyond and 70% carries fixed interest rates, affords us operational flexibility.

#### Off-Balance Sheet Arrangements

We have entered into contracts with third parties under which we have material future commitments—the Investment Advisory Agreement, pursuant to which OFS Advisor has agreed to serve as our investment adviser, and the Administration Agreement, pursuant to which OFS Services has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations.

We may become a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized on the balance sheet. There is no guarantee that these amounts will be funded to the borrowing party now or in the future. We continue to believe that we have sufficient levels of liquidity to support our existing portfolio companies and will meet these unfunded commitments by using our cash on hand or utilizing our available borrowings under the PWB Credit Facility and BNP Facility. In addition, we generally hold broadly syndicated loans in larger portfolio companies that can be sold over a relatively short period to generate cash. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than its current fair value and incur significant realized losses on our invested capital.

### Distributions

We are taxed as a RIC under the Code. In order to maintain our tax treatment as a RIC, we are required to distribute annually to our stockholders at least 90% of our ICTI, as defined by the Code. Additionally, to avoid a 4% excise tax on undistributed earnings we are required to distribute each calendar year the sum of: (i) 98% of our ordinary income for such calendar year; (ii) 98.2% of our net capital gains for the one-year period ending October 31 of that calendar year; and (iii) any income recognized, but not distributed, in preceding years and on which we paid no federal income tax. Maintenance of our RIC status requires adherence to certain source of income and asset diversification requirements. Generally, a RIC is entitled to deduct dividends it pays to its stockholders from its income to determine “taxable income”. Taxable income includes our taxable interest, dividend and fee income, and taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow received as consideration from the sale of investments, are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest and dividends or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation, and amortization expense.

Our Board maintains a variable dividend policy with the objective of distributing quarterly distributions in an amount not less than 90-100% of our taxable quarterly income or potential annual income for a particular year. In addition, during the year, we may pay a special dividend, such that we may distribute approximately all of our annual taxable income in the year it was earned, while maintaining the option to spill over our excess taxable income to a following year. We may choose to retain a portion of our taxable income in any year and pay the 4% U.S. federal excise tax on the retained amounts. Each year, a statement on Form 1099-DIV identifying the source of the distribution is mailed to the Company’s stockholders.

### Recent Developments

On October 31, 2023, our Board declared a distribution of $0.34 per share for the fourth quarter of 2023, payable on December 29, 2023 to stockholders of record as of December 22, 2023.

## Market risk

As filed, 5,016 characters.

We are subject to financial market risks, including changes in interest rates and the valuations of our investment portfolio. The economic effects of the ongoing war between Russia and Ukraine, the current conflict in Israel, rising interest and elevated inflation rates, ongoing supply chain and labor market disruptions, instability in the U.S. and international banking systems and the risk of recession or a shutdown of U.S. government services has introduced significant volatility in the financial markets, and the effects of this volatility has impacted and could continue to impact our market risks. For additional information concerning risks and their potential impact on our business and our operating results, see “Part I — Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 3, 2023 and “Part II — Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, filed on May 5, 2023 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, filed on August 4, 2023.

### Investment Valuation Risk

Because there is not a readily available market value for most of the investments in our portfolio, we value a significant portion of our portfolio investments at fair value as determined in good faith by OFS Advisor, as valuation designee, based, in part, on independent third-party valuation firms that have been engaged at the direction of OFS Advisor to assist in the valuation of each portfolio investment without a readily available market quotation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, some investments may be subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than its current fair value. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Estimates” as well as Notes 2 and 5 to our consolidated financial statements for the nine months ended September 30, 2023 for more information relating to our investment valuation.

### Interest Rate Risk

Changes in interest rates, including any further interest rate increases approved by the U.S. Federal Reserve, and elevated inflation rates may affect both our cost of funding and the valuation of our investment portfolio. As of September 30, 2023, 94% of our loan portfolio, at fair value, bore interest at floating interest rates and contain interest rate re-set provisions that adjust applicable interest rates to current rates on a periodic basis.

Our outstanding SBA debentures and Unsecured Notes bear interest at fixed rates. As of September 30, 2023, our PWB Credit Facility and BNP Facility have floating interest rate provisions based on the Prime Rate and SOFR, respectively.

Interest rate sensitivity refers to the change in our earnings that may result from changes in the level of interest rates as of September 30, 2023. As of September 30, 2023, 1-month and 3-month SOFR were 5.32% and 5.40%, respectively, and certain loan contracts in our investment portfolio have not reset to the current market rate. Assuming that the interim and unaudited consolidated balance sheet as of September 30, 2023 were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following tables show the annualized impact of hypothetical changes in interest rate indices (in thousands).

| Basis point increase | Interest income | Interest expense | Net change |
| ---: | ---: | ---: | ---: |
| 25 | $344 | $(228) | $116 |
| 50 | 1,100 | (456) | 644 |
| 75 | 1,857 | (683) | 1,174 |
| 100 | 2,613 | (911) | 1,702 |
| 125 | 3,369 | (1,139) | 2,230 |

| Basis point decrease | Interest income | Interest expense | Net change |
| ---: | ---: | ---: | ---: |
| 25 | $(1,168) | $228 | $(940) |
| 50 | (1,924) | 456 | (1468) |
| 75 | (2,681) | 683 | (1,998) |
| 100 | (3,437) | 911 | (2,526) |
| 125 | (4,193) | 1,139 | (3,054) |

71

### Credit Risk

We generally endeavor to minimize our risk of exposure by limiting to reputable financial institutions the counterparties with which we enter into financial transactions. As of September 30, 2023 and December 31, 2022, we held our cash balances with third-party financial institutions and such balances are in excess of Federal Deposit Insurance Corporation insured limit. We seek to mitigate this exposure by monitoring the credit standing of these financial institutions.

## Controls and procedures

As filed, 2,034 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. The term “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the foregoing evaluation of our disclosure controls and procedures as of September 30, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

### Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2023, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 1,643 characters.

Investing in our common stock may be speculative and involves a high degree of risk. In addition to the other information contained in this Quarterly Report on Form 10-Q, including our financial statements, and the related notes, schedules and exhibits, you should carefully consider the risk factors described in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Annual Report on Form 10-K”), filed on March 3, 2023, and in “Part II, Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the “First Quarter 10-Q”), filed on May 5, 2023 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, filed on August 4, 2023 (the “Second Quarter 10-Q”), which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K, the First Quarter 10-Q and Second Quarter 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K, the First Quarter 10-Q and the Second Quarter 10-Q. The risks previously disclosed in the Annual Report on Form 10-K, the First Quarter 10-Q and Second Quarter 10-Q should be read together with the other information disclosed elsewhere in this Quarterly Report on Form 10-Q and our other reports filed with the SEC.

Filed Nov 3, 2023.
Source: SEC EDGAR, the filing index for accession 0001487918-23-000101. Last ingested by Listed: Oct 29, 2026, 16:32 ET. No prices; not investment advice.