Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of Report (Date of earliest event reported): March 8, 2019
 
OFS Capital Corporation
(Exact name of Registrant as specified in its charter)
 
Delaware
814-00813
46-1339639
(State or other jurisdiction
of incorporation)
(Commission
File Number)
(I.R.S. Employer
Identification No.)
 
10 S. Wacker Drive, Suite 2500
Chicago, Illinois
60606
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (847) 734-2000
 
Not applicable
(Former name or former address, if changed since last report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
 
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.
Emerging growth company    ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨





 
Item 2.02
Results of Operations and Financial Condition
 
On March 8, 2019, OFS Capital Corporation (the “Company”) issued a press release announcing its financial results for the quarter and year ended December 31, 2018. On March 5, 2019, the Company’s Board of Directors declared a 2019 first quarter distribution of $0.34 per common share, payable on March 29, 2019 to stockholders of record as of March 22, 2019. The full text of the press release issued in connection with the announcement is furnished as Exhibit 99.1 to this Current Report on Form 8-K.
 
The information disclosed under this Item 2.02, including Exhibit 99.1 hereto, is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing made under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.

 
Item 9.01.
Financial Statements and Exhibits
 
(a)
Not applicable.
(b)
Not applicable.
(c)
Not applicable.
(d)
Exhibits.
Exhibit
No.
 
Description
 
 
 






SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
OFS Capital Corporation
 
 
 
Dated: March 8, 2019
By:  
/s/ Bilal Rashid
 
 
Chief Executive Officer



Exhibit
Exhibit 99.1
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12766571&doc=3


OFS CAPITAL CORPORATION ANNOUNCES FOURTH QUARTER AND FULL YEAR 2018 FINANCIAL RESULTS


Fourth Quarter Net Investment Income of $0.40 per common share Increased 38% year-over-year
Paid $1.36 per common share in Regular Distributions in 2018
Paid $0.37 per common share in additional Special Distributions in 2018

Chicago, IL-March 8, 2019-OFS Capital Corporation (Nasdaq: OFS) (“OFS Capital,” “we,” “us,” or “our”) today announced its financial results for the fiscal quarter and the full year ended December 31, 2018.

FINANCIAL HIGHLIGHTS

Fourth quarter net investment income of $5.3 million, or $0.40 per common share - an increase of 38% year-over-year and above the $0.34 quarterly distribution.
Full year 2018 net investment income of $18.4 million, or $1.38 per common share - an increase of 8% year-over-year and above the $1.36 regular distribution.
Paid $1.73 per share in distributions in 2018, inclusive of a $0.37 special distribution.
Closed investments in the fourth quarter of approximately $79.6 million.
Net asset value ("NAV") per share decreased to $13.10 at December 31, 2018 from $13.75 at September 30, 2018 due to unrealized depreciation of the portfolio. No new non-accruals.
At December 31, 2018, 88% of our loan portfolio consisted of senior secured loans, based on fair value.
On March 5, 2019, OFS Capital's Board of Directors declared a distribution of $0.34 per share for the first quarter of 2019, payable on March 29, 2019 to stockholders of record as of March 22, 2019.
"Our net investment income again exceeded our distribution," said Bilal Rashid, OFS Capital's Chairman and Chief Executive Officer. "We have declared 25 consecutive quarterly distributions of $0.34 per common share since our IPO in late 2012, which we believe places us in a select group of BDCs that have been able to maintain their distribution over this time. In total, we have declared $8.70 per common share in regular and special distributions and our net investment income over the last four years exceeded our regular distributions."
“We believe that the breadth and expertise of our advisor puts us in a strong position to benefit from the increase in the leverage allowance for BDCs and enhance our net investment income. Our commitment to capital preservation, and strong long-term performance is enhanced by the alignment of interests of our stockholders and our advisor, which owns approximately 22% of the outstanding OFS Capital common stock."

 














HIGHLIGHTS
($ in millions, except for per share data)
Portfolio Overview
 
At December 31, 2018
Total assets
 
$
441.4

Investment portfolio, at fair value
 
$
396.8

Net assets
 
$
175.0

Net asset value per share
 
$
13.10

Weighted average yield on performing debt investments (1)
 
11.50
%
Weighted average yield on total debt investments (2)
 
11.12
%
Weighted average yield on total investments (3)
 
10.49
%
(1)
The weighted average yield on our performing debt investments is computed as (a) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of loan origination fees, original issue discount, market discount or premium, and loan amendment fees divided by (b) amortized cost of our debt investments, excluding assets on non-accrual basis as of the balance sheet date.
(2)
The weighted average yield on total debt investments is computed as (a) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of loan origination fees, original issue discount, market discount or premium, and loan amendment fees divided by (b) amortized cost of our debt investments, including assets on non-accrual basis as of the balance sheet date.
(3)
The weighted average yield on total investments is computed as (a) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of loan origination fees, original issue discount, market discount or premium, and loan amendment fees, plus the effective cash yield on our performing preferred equity investments divided by (b) amortized cost of our total investment portfolio, including assets on non-accrual basis as of the balance sheet date. The weighted average yield of investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our fees and expenses.
 
 
Quarter Ended December 31,
 
Year Ended December 31,
Operating Results
 
2018
 
2017
 
2018
 
2017
Total investment income
 
$
12.6

 
$
8.3

 
$
42.8

 
$
33.4

Net investment income
 
$
5.3

 
$
3.8

 
$
18.4

 
$
15.9

Net investment income per common share, basic and
    diluted
 
$
0.40

 
$
0.29

 
$
1.38

 
$
1.28

Net increase (decrease) in net assets resulting from
    operations
 
$
(4.1
)
 
$
4.2

 
$
9.6

 
$
7.9

 
 
Quarter Ended December 31,
 
Year Ended December 31,
Portfolio Activity
 
2018
 
2017
 
2018
 
2017
Number of new portfolio companies
 
8

 
4

 
28

 
17

Investments in new portfolio companies
 
$
45.7

 
$
19.3

 
$
201.1

 
$
118.9

Investments in existing portfolio companies
 
$
33.9

 
$
9.0

 
$
71.1

 
$
24.0

Number of portfolio companies at end of period
 
50

 
37

 
50

 
37


PORTFOLIO AND INVESTMENT ACTIVITIES 
During the fourth quarter of 2018, we closed nine senior secured debt investments in eight new portfolio companies totaling $45.7 million. In addition, we made $30.6 million of senior secured debt investments in existing portfolio companies, including $2.6 million in delayed draw and revolver fundings and equity investments of $0.7 million.



The total fair value of our investment portfolio was $396.8 million at December 31, 2018, which was equal to approximately 96% of amortized cost. As of December 31, 2018, the fair value of OFS Capital's debt investment portfolio totaled $363.6 million in 44 portfolio companies, of which 88% and 12% were senior secured loans and subordinated loans, respectively. As of December 31, 2018, we also held approximately $33.2 million in common and preferred equity investments, at fair value, in 13 portfolio companies in which we also held debt investments and six portfolio companies in which we solely held an equity investment. We had unfunded commitments of $8.2 million to four portfolio companies at December 31, 2018. As of December 31, 2018, floating rate loans comprised 87% of OFS Capital’s debt investment portfolio, with the remaining 13% in fixed rate loans, as a percentage of fair value.
RESULTS OF OPERATIONS
Income
Interest Income
Interest income increased approximately $10.2 million, due to a $8.9 million increase in recurring interest income caused by a $76.8 million increase in the average outstanding loan balance during 2018 along with an increase of $0.7 million in recurring interest income resulting from a 23 basis point increase in the weighted average yield in our portfolio during the year ended December 31, 2018. Acceleration of Net Loan Fees (defined as loan origination fees, original issue discount, market discount or premium and loan amendment fees) of $1.1 million and $0.6 million were included in interest income for the years ended December 31, 2018 and 2017, respectively, from the repayment of loans prior to their scheduled due dates.
Fee Income
We recorded prepayment fees of $0.9 million resulting from $50.0 million of unscheduled principal payments during the year ended December 31, 2018, compared to $1.0 million from $60.2 million of unscheduled principal payments during 2017. We recognized capital structuring fees of $0.0 million and $0.5 million for the years ended December 31, 2018 and 2017, respectively, upon the closing of $0 and $55.7 million of debt and equity investments, respectively. We ceased recognition of such fees with the adoption of ASC 606. We recognized syndication fees of $0.7 million and $0.2 million for the years ended December 31, 2018 and 2017, respectively, resulting from approximately $64 million and $21 million in loan originations during each period in which OFS Advisor sourced, structured, and arranged the lending group, and for which we were additionally compensated.
Expenses
Interest expense
Interest expense increased by $3.4 million primarily due to $3.1 million relating to the April 2018 and October 2018 unsecured note issuances of $98.5 million (the "Bond Issuances").

Management Fees
Management fee expense increased by $1.3 million due to an increase in our average total assets, primarily due to an increase in net investment activity, including the deployment of funds from the Bond Issuances.
Incentive Fees
Incentive fee expense increased by $1.4 million primarily due to a $2.5 million increase in net investment income relating to the deployment of the proceeds from the Bond Issuances.
Net Gain (Loss) on Investments
We recognized net losses of $9.0 million on senior secured debt during the year ended December 31, 2018, primarily as a result of a realized loss of $3.5 million on our senior secured debt investment in Jobson Healthcare recognized upon the sale in the second quarter of 2018, as well as by the negative net impact of mark-to-market adjustments in the fourth quarter relating to our broadly syndicated loan investments resulting in an unrealized loss of $5.5 million.
We recognized net losses of $3.3 million on subordinated debt during the year ended December 31, 2018, primarily as a result of a realized loss of $3.5 million on the restructuring of the Southern Technical Institute, LLC subordinated debt investment, of which $2.3 million was recognized as unrealized losses in prior years, and net unrealized depreciation of $2.1 from the negative impact of specific performance factors, of which $2.1 million related to Master Cutlery LLC.



We recognized net losses of $2.0 million on preferred equity investments for the year ended December 31, 2018, as a result of unrealized losses of $1.4 million relating to TRS Services, LLC, and other negative net impact of portfolio company-specific performance factors on other investments resulting in an additional unrealized loss of $0.6 million.
We recognized net gains of $5.5 million on common equity and warrant investments for the year ended December 31, 2018, as a result of net realized gains of $3.7 million, primarily driven by a $4.1 million realized gain on the sale of All Metals Holdings, LLC., and the positive impact of portfolio company-specific performance factors resulting in unrealized appreciation of $1.8 million for the year ended December 31, 2018.

LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2018, we had $38.2 million in cash and cash equivalents, which includes cash and cash equivalents of $36.0 million held by our wholly owned small business investment company. At December 31, 2018, we had $260.4 million in debt, which includes $149.9 million in outstanding SBA-guaranteed debentures, $98.5 million in unsecured notes and $12.0 million outstanding under our $50.0 million revolving credit facility with Pacific Western Bank. As of December 31, 2018, we had $38.0 million available for additional borrowings on our Pacific Western Bank credit facility and had drawn all of our available SBA-guaranteed debentures.
CONFERENCE CALL
OFS Capital will host a conference call to discuss these results on Friday, March 8, 2019, at 10:00 AM Eastern Time. Interested parties may participate in the call via the following:
INTERNET: Log on to www.ofscapital.com at least 15 minutes prior to the start time of the call to register, download, and install any necessary audio software. A replay will be available for 90 days on OFS Capital’s website at www.ofscapital.com.
TELEPHONE: Dial (877) 510-7674 (Domestic) or (412) 902-4139 (International) approximately 15 minutes prior to the call. A telephone replay of the conference call will be available through March 18, 2019 at 9:00 AM Eastern Time and may be accessed by calling (877) 344-7529 (Domestic) or (412) 317-0088 (International) and utilizing conference ID #10129192.
For more detailed discussion of the financial and other information included in this press release, please refer to OFS Capital’s Form 10-K for the year ended December 31, 2018, which is to be filed with the Securities and Exchange Commission.




OFS Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Assets and Liabilities
(Dollar amounts in thousands, except per share data)
 
December 31,
 
2018
 
2017
Assets
 
 
 
Investments, at fair value
 
 
 
Non-control/non-affiliate investments (amortized cost of $312,223 and $209,360, respectively)
$
297,749

 
$
197,374

Affiliate investments (amortized cost of $90,751 and $70,402, respectively)
89,103

 
69,557

Control investment (amortized cost of $10,337 and $10,213, respectively)
9,945

 
10,568

Total investments at fair value (amortized cost of $413,311 and $289,975, respectively)
396,797

 
277,499

Cash and cash equivalents
38,172

 
72,952

Interest receivable
2,787

 
2,734

Prepaid expenses and other assets
3,665

 
4,593

Total assets
$
441,421

 
$
357,778

 
 
 
 
Liabilities
 
 
 
Revolving line of credit
$
12,000

 
$
17,600

SBA debentures (net of deferred debt issuance costs of $2,280 and 2,657, respectively)
147,600

 
147,223

Unsecured notes (net of discounts and deferred debt issuance costs of $3,299 and $0, respectively)
95,226

 

Interest payable
2,791

 
1,596

Payable to investment adviser and affiliates
3,700

 
2,463

Payable for investments purchased
4,151

 

Accrued professional fees
637

 
433

Other liabilities
293

 
127

Total liabilities
266,398

 
169,442

 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
Total net assets
175,023

 
188,336

 
 
 
 
Total liabilities and net assets
$
441,421

 
$
357,778

 
 
 
 
Number of shares outstanding
13,357,337

 
13,340,217

Net asset value per share
$
13.10

 
$
14.12















OFS Capital Corporation and Subsidiaries

Consolidated Statements of Operations
(Dollar amounts in thousands, except per share data)

Quarter Ended December 31,
 
Year Ended December 31,

2018
 
2017
 
2018
 
2017
Investment income
 
 
 
 





Interest income:
 
 
 
 





Non-control/non-affiliate investments
$
8,039


$
5,534

 
$
27,547


$
20,078

Affiliate investments
2,747


1,417

 
10,055


6,506

Control investment
261


238

 
1,005


1,540

Total interest income
11,047


7,189

 
38,607


28,124

Payment-in-kind interest and dividend income:





 





Non-control/non-affiliate investments
144


424

 
668


1,400

Affiliate investments
267


256

 
1,321


1,375

Control investment
28


28

 
110


132

Total payment-in-kind interest and dividend income:
439


708

 
2,099


2,907

Dividend income:





 
 



Non-control/non-affiliate investments



 


50

Affiliate investments


22

 
130


140

Control investment


30

 
185


292

Total dividend income


52

 
315


482

Fee income:





 
 



Non-control/non-affiliate investments
323


82

 
987


1,086

Affiliate investments
748


244

 
760


675

Control investment
14


17

 
66


152

Total fee income
1,085


343

 
1,813


1,913


 
 
 
 
 



Total investment income
12,571


8,292

 
42,834


33,426


 
 
 
 





Expenses
 
 
 
 





Interest and financing expense
3,036


1,584

 
9,232


5,813

Management fees
1,749


1,273

 
6,335


4,999

Incentive fee
1,368


713

 
4,409


2,962

Professional fees
386


275

 
1,245


1,115

Administration fee
349


332

 
1,601


1,314

Other Expenses
362


296

 
1,649


1,346

Incentive fee waiver



 
(22
)


Total expenses, net of incentive fee waiver
7,228


4,473

 
24,449


17,549







 





Net investment income
5,321


3,819

 
18,385


15,877


 
 
 
 





Net realized and unrealized gain (loss) on investments
 
 
 
 





Net realized gain (loss) on non-control/non-affiliate investments
37


1,793

 
(4,966
)

(3,248
)
Net realized gain on affiliate investments
4,205


5,590

 
187


10,081

Net unrealized depreciation on non-control/non-affiliate investments
(5,409
)

(2,365
)
 
(2,484
)

(9,715
)
Net unrealized depreciation on affiliate investments
(7,199
)

(2,845
)
 
(803
)

(5,088
)
Net unrealized appreciation (depreciation) on control investments
(1,050
)

(1,842
)
 
(747
)

3







 





     Net gain (loss) on investments
(9,416
)

331

 
(8,813
)

(7,967
)






 





     Net increase (decrease) in net assets resulting from operations
$
(4,095
)

$
4,150

 
$
9,572


$
7,910


 
 
 
 





Net investment income per common share - basic and diluted
$
0.40


$
0.29

 
$
1.38


$
1.28

Net increase (decrease) in net assets resulting from operations per common share - basic and diluted
$
(0.31
)

$
0.31

 
$
0.72


$
0.64

Distributions declared per common share
$
0.34


$
0.34

 
$
1.73


$
1.36

Basic and diluted weighted average shares outstanding
13,352,873


13,334,909

 
13,348,203


12,403,706





ABOUT OFS CAPITAL
OFS Capital Corporation is an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company. OFS Capital's investment objective is to provide stockholders with both current income and capital appreciation primarily through debt investments and, to a lesser extent, equity investments. OFS Capital invests primarily in privately held middle-market companies in the United States, including lower-middle-market companies, targeting investments of $3 million to $20 million in companies with annual EBITDA between $3 million and $50 million. OFS Capital offers flexible solutions through a variety of asset classes including senior secured loans, which includes first-lien, second-lien and unitranche loans, as well as subordinated loans and, to a lesser extent, warrants and other equity securities. OFS Capital's investment activities are managed by OFS Capital Management, LLC, an investment adviser registered under the Investment Advisers Act of 1940 and headquartered in Chicago, Illinois, with additional offices in New York and Los Angeles.
 
FORWARD-LOOKING STATEMENTS
Statements in this press release regarding management's future expectations, beliefs, intentions, goals, strategies, plans or prospects, including statements relating to: OFS Capital’s results of operations, including net investment income, net asset value and net investment gains and losses and the factors that may affect such results; management's belief regarding the Company's status relative to other BDCs and, in particular those who have paid consistent distributions since 2012; management's belief that the expertise of its investment advisor positions the Company to leverage recent regulatory change to increase net investment income; the alignment of interest of the Company's stockholder and the investment advisor and whether such interest impacts the Company's commitment to capital preservation and long-term performance; and other factors may constitute forward-looking statements for purposes of the safe harbor protection under applicable securities laws. Forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “could,” “could increase the likelihood,” “estimate,” “expect,” “intend,” “is planned,” “may,” “should,” “will,” “will enable,” “would be expected,” “look forward,” “may provide,” “would” or similar terms, variations of such terms or the negative of those terms. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including those risks, uncertainties and factors referred to in OFS Capital’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission under the section “Risk Factors,” as well as other documents that may be filed by OFS Capital from time to time with the Securities and Exchange Commission. As a result of such risks, uncertainties and factors, actual results may differ materially from any future results, performance or achievements discussed in or implied by the forward-looking statements contained herein. OFS Capital is providing the information in this press release as of this date and assumes no obligations to update the information included in this press release or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 
INVESTOR RELATIONS CONTACT:
Steve Altebrando
646-652-8473
saltebrando@ofsmanagement.com