NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 1. UNAUDITED INTERIM FINANCIAL STATEMENTS
Interim consolidated financial statements
of Oxford Square Capital Corp. (“OXSQ” and, together with its subsidiaries, the “Company”), formerly TICC
Capital Corp., are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments,
consisting solely of normal accruals, considered necessary for the fair statement of financial statements for the interim period
included herein. The current
period’s consolidated results of operations are not necessarily indicative of results that may be achieved for the year.
The interim consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2017, as filed with the Securities
and Exchange Commission (“SEC”).
NOTE 2. ORGANIZATION
Effective March 19, 2018, TICC Capital
Corp. changed its name to Oxford Square Capital Corp. The Company made this change in order to more closely align the branding
of the Company with its affiliated funds. OXSQ was incorporated under the General Corporation Laws of the State of Maryland on
July 21, 2003 and is a non-diversified, closed-end investment company. The Company has elected to be regulated as a business development
company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, the
Company has elected to be treated for tax purposes as a regulated investment company (“RIC”), under Subchapter M of
the Internal Revenue Code of 1986, as amended (the “Code”). The Company’s investment objective is to maximize
its total return, by investing primarily in corporate debt securities.
The Company’s investment activities
are managed by Oxford Square Management, LLC (“Oxford Square Management”), formerly TICC Management, LLC. Oxford Square
Management is an investment adviser registered under the Investment Advisers Act of 1940, as amended. Oxford Square Management
is owned by Oxford Funds, LLC (“Oxford Funds”), formerly BDC Partners, LLC, its managing member and a related party,
and Charles M. Royce, a member of the Company’s Board of Directors (the “Board”) who holds a minority, non-controlling
interest in Oxford Square Management. Under the investment advisory agreement with Oxford Square Management (the “Investment
Advisory Agreement”), the Company has agreed to pay Oxford Square Management an annual base management fee based on its gross
assets as well as an incentive fee based on its performance. For further details please refer to “Note 7. Related Party Transactions.”
The Company’s consolidated operations
include the activities of its wholly-owned subsidiaries, Oxford Square Funding 2018 LLC (“OXSQ Funding”) and TICC CLO
2012-1 LLC (“2012 Securitization Issuer” or “TICC CLO 2012-1”), for the periods during which they were
held. OXSQ Funding, a special purpose vehicle, was formed for the purpose of entering into a credit facility (the “Credit
Facility”) with Citibank, N.A. TICC CLO 2012-1 was formed for the purpose of enabling the Company to obtain debt financing
and is operated solely for the investment activities of the Company. TICC CLO 2012-1 ceased operations on August 25, 2017. During
the quarter ended December 31, 2017, the Company, as collateral manager of TICC CLO 2012-1, dissolved TICC CLO 2012-1 pursuant
to Delaware law by filing a certificate of cancellation with the Secretary of State in Delaware. Refer to “Note 6. Borrowings”
for additional information on the Company’s borrowings.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, OXSQ Funding and TICC CLO 2012-1, for the periods
during which they are held. All inter-company accounts and transactions have been eliminated in consolidation.
The Company follows the accounting and
reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 946,
Financial Services — Investment Companies.
Certain prior period figures have been reclassified from
those originally published in quarterly and annual reports to conform to the current period presentation for comparative purposes.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont.)
In the normal course of business, the Company
may enter into contracts that contain a variety of representations and provide indemnifications. The Company’s maximum exposure
under these arrangements is unknown as this would involve future claims that may be made against the Company that have not yet
occurred. However, based upon experience, the Company expects the risk of loss to be remote.
USE OF ESTIMATES
The consolidated financial statements have
been prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates, and these differences
could be material.
CONSOLIDATION
As provided under Regulation S-X and ASC
Topic 946-810,
Consolidation,
the Company will generally not consolidate its investment in a company other than a wholly-owned
investment company or a controlled operating company whose business consists of providing services to the Company for the periods
during which it was held. TICC CLO 2012-1 would have been considered an investment company but for the exceptions under Sections
3(c)(1) and 3(c)(7) under the 1940 Act, and was established solely for the purpose of allowing the Company to borrow funds for
the purpose of making investments. The Company owned all of the equity in this entity and controlled the decision making power
that drove its economic performance. Accordingly, the Company consolidated TICC CLO 2012-1 in its financial statements for the
periods which it was held, and follows the accounting and reporting guidance in ASC 946-810. The Company also consolidated OXSQ
Funding in its financial statements, for the periods which it is held in accordance with ASC 946-810.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents consist of demand
deposits and cash held in a money market fund which contain investments with original maturities of three months or less. The Company
places its cash and cash equivalents with financial institutions and, at times, cash held in bank accounts may exceed the Federal
Deposit Insurance Corporation insured limit. Cash equivalents are classified as Level 1 assets and are included on the Company’s
Consolidated Schedule of Investments. Cash equivalents are carried at cost or amortized cost which approximates fair value.
Restricted cash represents the cash held
by the trustee of OXSQ Funding. The amount is held by the trustee for payment of interest expense and operating expenses of the
entity, principal repayments on borrowings, or new investments, based upon the terms of the indenture, and are not available for
general corporate purposes. There was approximately $3.5 million of restricted cash held by the trustee of OXSQ Funding as of September
30, 2018. There was no restricted cash as of December 31, 2017.
INVESTMENT VALUATION
The Company measures its investment portfolio
at fair value in accordance with the provisions of ASC 820,
Fair Value Measurement and Disclosure
. Estimates made in the
preparation of the Company’s consolidated financial statements include the valuation of investments and the related amounts
of unrealized appreciation and depreciation of investments recorded. The Company believes that there is no single definitive method
for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific
facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of
investments the Company makes.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont.)
ASC 820-10 clarified the definition of
fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim
and annual periods subsequent to initial recognition. ASC 820-10 defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10
also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices
for similar securities in active markets and quoted prices for identical securities in markets that are not active; and Level 3,
defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company considers the attributes of current market conditions on an on-going basis and has determined that due to the general
illiquidity of the market for its investment portfolio, whereby little or no market data exists, all of OXSQ’s investments
are based upon “Level 3” inputs as of September 30, 2018.
The Board determines the value of its investment
portfolio each quarter. In connection with that determination, members of Oxford Square Management’s portfolio management
team prepare a quarterly analysis of each portfolio investment using the most recent portfolio company financial statements, forecasts
and other relevant financial and operational information. The Company may engage third-party valuation firms to provide assistance
in valuing certain of its syndicated loans and bilateral investments, including related equity investments, although the Board
ultimately determines the appropriate valuation of each such investment. Changes in fair value, as described above, are recorded
in the consolidated statements of operations as net change in unrealized appreciation/depreciation on investments.
Syndicated Loans
In accordance with ASC 820-10, the Company’s
valuation procedures specifically provide for the review of indicative quotes supplied by the large agent banks that make a market
for each security. However, the marketplace from which the Company obtains indicative bid quotes for purposes of determining the
fair value of its syndicated loan investments has shown attributes of illiquidity as described by ASC 820-10. During such periods
of illiquidity, when the Company believes that the non-binding indicative bids received from agent banks for certain syndicated
loan investments that we own may not be determinative of their fair value or when no market indicative quote is available, the
Company may engage third-party valuation firms to provide assistance in valuing certain syndicated investments that OXSQ owns.
In addition, Oxford Square Management prepares an analysis of each syndicated loan, including a financial summary, debt covenant
compliance review, recent trading activity in the security, if known, and other business developments related to the portfolio
company. All available information, including non-binding indicative bids which may not be determinative of fair value, is presented
to the Valuation Committee to consider in its determination of fair value. In some instances, there may be limited trading activity
in a security even though the market for the security is considered not active. In such cases the Valuation Committee will consider
the number of trades, the size and timing of each trade, and other circumstances around such trades, to the extent such information
is available, in its determination of fair value. The Valuation Committee will evaluate the impact of such additional information,
and factor it into its consideration of the fair value that is indicated by the analysis provided by third-party valuation firms,
if any. All information is presented to the Board for its determination of fair value of these investments.
Collateralized Loan Obligations — Debt and Equity
The Company has acquired a number of
debt and equity positions in collateralized loan obligation (“CLO”) investment vehicles and CLO warehouse
investments. These investments are special purpose financing vehicles. In valuing such investments, the Company considers the
indicative prices provided by a recognized industry pricing service as a primary source, and the implied yield of such
prices, supplemented by actual trades executed in the market at or around period-end, as well as the indicative prices
provided by the broker who arranges transactions in such investment vehicles. The Company also considers those instances in
which the record date for an equity distribution payment falls on or before the last day of the period, and the likelihood
that a prospective purchaser would require a downward adjustment to the indicative price representing substantially all of
the pending distribution. Additional factors include any information resulting from bids-wanted-in-competition. In addition,
the Company considers the operating metrics of the specific investment vehicle, including compliance with collateralization
tests, defaulted and restructured securities, and payment defaults, if any. Oxford Square Management or the
Valuation Committee may request an additional analysis by a third-party firm to assist in the valuation process of CLO
investment vehicles. All information is presented to the Board for its determination of fair value of these investments.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont.)
Bilateral Investments (Including Equity)
Bilateral investments for which market
quotations are readily available are valued by an independent pricing agent or market maker. If such market quotations are not
readily available, under the valuation procedures approved by the Board, upon the recommendation of the Valuation Committee, a
third-party valuation firm will prepare valuations for each of OXSQ’s bilateral investments that, when combined with all
other investments in the same portfolio company, (i) have a value as of the previous quarter of greater than or equal to 2.5% of
its total assets as of the previous quarter, and (ii) have a value as of the current quarter of greater than or equal to 2.5% of
its total assets as of the previous quarter, after taking into account any repayment of principal during the current quarter. In
addition, in those instances where a third-party valuation is prepared for a portfolio investment which meets the parameters noted
in (i) and (ii) above, the frequency of those third-party valuations is based upon the grade assigned to each such security under
its credit grading system as follows: Grade 1, at least annually; Grade 2, at least semi-annually; Grades 3, 4, and 5, at least
quarterly. Bilateral investments which do not meet the parameters in (i) and (ii) above are not required to have a third-party
valuation and, in those instances, a valuation analysis will be prepared by Oxford Square Management. Oxford Square Management
also retains the authority to seek, on the Company’s behalf, additional third-party valuations with respect to the Company’s
bilateral portfolio securities, syndicated loan investments, and CLO investment vehicles. All information is presented to the Board
for its determination of fair value of these investments.
INVESTMENT INCOME
Interest Income
Interest income is recorded on an accrual
basis using the contractual rate applicable to each debt investment and includes the accretion of market discounts and/or original
issue discount (“OID”) and amortization of market premiums. Discounts from and premiums to par value on securities
purchased are accreted/amortized into interest income over the life of the respective security using the effective yield method.
The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums,
if any.
Generally, when interest and/or principal
payments on a loan become past due, or if the Company otherwise does not expect the borrower to be able to service its debt and
other obligations, the Company will place the loan on non-accrual status and will cease recognizing interest income on that loan
for financial reporting purposes until all principal and interest have been brought current through payment or due to restructuring
such that the interest income is deemed to be collectible. The Company generally restores non-accrual loans to accrual status when
past due principal and interest is paid and, in the Company’s judgment, is likely to remain current. As of September 30,
2018 and as of December 31, 2017, the Company had no debt investments that were on non-accrual status.
Interest income also includes a payment-in-kind
(“PIK”) provision on certain investments in the Company’s portfolio. Refer to the section below, “Payment-In-Kind,”
for a description of the PIK provision and its impact on interest income.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont.)
Payment-In-Kind
The Company has debt investments in its
portfolio which contain a contractual PIK provision. Certain PIK investments offer issuers the option at each payment date of making
payments in cash or additional securities. PIK interest computed at the contractual rate is accrued into income and added to the
principal balance on the capitalization date. Upon capitalization, the PIK component is subject to the fair value estimates associated
with their related investments. At the point the Company believes PIK is not fully expected to be realized, the PIK investment
will be placed on non-accrual status. PIK investments on non-accrual status are restored to accrual status once it becomes probable
that PIK will be realized.
Income from Securitization Vehicles and Investments
Income from investments in the equity class
securities of CLO vehicles (typically income notes or subordinated notes) is recorded using the effective interest method in accordance
with the provisions of ASC 325-40, based upon an effective yield to the expected redemption utilizing estimated cash flows, including
those CLO equity investments that have not made their inaugural distribution for the relevant period end. The Company monitors
the expected residual payments, and effective yield is determined and updated periodically, as needed. Accordingly, investment
income recognized on CLO equity securities in the GAAP statement of operations differs from both the tax-basis investment income
and from the cash distributions actually received by the Company during the period.
Other Income
Other income includes prepayment, amendment,
and other fees earned by the Company’s loan investments, distributions from fee letters and success fees associated with
portfolio investments. Distributions from fee letters are an enhancement to the return on a CLO equity investment and are based
upon a percentage of the collateral manager’s fees, and are recorded as other income when earned. The Company may also earn
success fees associated with its investments in certain securitization vehicles or CLO warehouse facilities, which are contingent
upon a repayment of the warehouse by a permanent CLO securitization structure; such fees are earned and recognized when the repayment
is completed.
Preferred Equity Dividends
The Company holds preferred equity investments in its portfolio that contain cumulative preferred dividends
that accumulate quarterly. The Company will record cumulative preferred dividends as investment income when they are declared by
the portfolio company’s board of directors or upon any voluntary or involuntary liquidation, dissolution or winding up of
the portfolio company. As of September 30, 2018, approximately $4.5 million of cumulative preferred dividends had accumulated
but had yet to be recorded as investment income by the Company. These dividends are considered in the estimation of fair
value of these preferred equity investments.
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs consist of
fees and expenses incurred in connection with the closing or amending of credit facilities and debt offerings, and are capitalized
at the time of payment. These costs are amortized using the straight line method over the terms of the respective credit facilities
and debt securities. The amortized expenses are included in interest expense in the Company’s consolidated financial statements.
The unamortized deferred debt issuance costs are included on the Company’s statement of assets and liabilities as a direct
deduction from the related debt liability. Upon early termination or partial principal pay down of debt, or a credit facility,
the unamortized costs related to such debt are accelerated into realized losses on extinguishment of debt on the Company’s
statement of operations.
EQUITY OFFERING COSTS
Equity offering costs consist of fees and
expenses incurred in connection with the registration and public offer and sale of the Company’s common stock, including
legal, accounting and printing fees. These costs are deferred at the time of incurrence and are subsequently charged as a reduction
to capital when the offering takes place or as shares are issued. Deferred costs are periodically reviewed and expensed if the
related registration is no longer active.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont.)
SHARE REPURCHASES
From time to time, the Board may authorize
a share repurchase program under which shares are purchased in open market transactions. Since the Company is incorporated in the
State of Maryland, state law requires share repurchases to be accounted for as a share retirement. The cost of repurchased shares
is charged against capital on the settlement date.
SECURITIES TRANSACTIONS
Securities transactions are recorded on
trade date. Realized gains and losses on investments sold are recorded on the basis of specific identification. Distributions received
on CLO equity investments which were optionally redeemed for which the cost basis has been reduced to zero are recorded as realized
gains. An optional redemption feature of a CLO allows a majority of the holders of the equity securities issued by the CLO issuer,
after the end of a specified non-call period, to cause the redemption of the secured notes issued by the CLO with proceeds of either
the liquidation of the CLO’s assets or through a refinancing with new debt. The optional redemption is effectively a voluntary
prepayment of the secured debt issued by the CLO prior to the stated maturity of such debt.
U.S. FEDERAL INCOME TAXES
The Company intends to operate so as to
qualify to be taxed as a RIC under Subchapter M of the Code and, as such, to not be subject to U.S. federal income tax on the portion
of its taxable income and gains distributed to stockholders. To qualify for RIC tax treatment, the Company is required to distribute
at least 90% of its investment company taxable income annually, meet diversification requirements quarterly and file Form 1120-RIC,
as defined by the Code.
Because U.S. federal income tax regulations
differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized
for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital
accounts in the consolidated financial statements to reflect their tax character. Temporary differences arise when certain items
of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from
the treatment of short-term gains as ordinary income for tax purposes.
The Company recognizes the tax benefits
of uncertain tax positions only when the position is more likely than not to be sustained, assuming examination by tax authorities.
Through September 30, 2018, management has analyzed the Company’s tax positions and concluded that no liability for unrecognized
tax benefits should be recorded related to uncertain tax positions expected to be taken in the Company’s 2018 tax returns.
The Company identifies its major tax jurisdictions as U.S Federal and Connecticut State; however, the Company is not aware of any
tax position for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in
the next 12 months.
For tax purposes, the cost basis of the
portfolio investments at September 30, 2018 and December 31, 2017, was approximately $547,436,144 and $454,683,941, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In
August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13,
Fair Value Measurement (Topic
820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
(“ASU 2018-13”)
to improve the effectiveness of fair value measurement disclosures. This amendment modifies the disclosure requirements of fair
value measurements based on the concepts in FASB Concepts Statement,
Conceptual Framework for Financial Reporting- Chapter 8:
Notes to Financial Statements
. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019, and early adoption is permitted.
Management has adopted the amendments in
ASU 2018-13 as of September 30, 2018. The adoption did not have a material impact on the Company’s consolidated financial
statements and disclosures.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont.)
In
March 2017, the FASB issued ASU 2017-08,
Receivables— Nonrefundable Fees and Other Costs (Subtopic 310-20),
Premium
Amortization on Purchased Callable Debt Securities
(“ASU 2017-08”) which amends the amortization
period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. ASU
2017-08 does not require any accounting change for debt securities held at a discount; the discount continues to be amortized
to maturity. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018. Management has assessed these changes and does not believe they will have a material impact on the Company’s
consolidated financial statements and disclosures.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a Consensus of the Emerging Issues Task Force)
(“ASU 2016-18”),
which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and
amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for annual reporting periods
beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. Management
adopted the new guidance as of January 1, 2018 and upon adoption of the standard, restricted cash was included as part of beginning
and ending cash and cash equivalents on the consolidated statement of cash flows for the nine months ended September 30, 2018 and
2017.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments (a Consensus of the Emerging Issues Task Force)
(“ASU 2016-15”),
which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU
2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal
years, with early adoption permitted. Management adopted the new guidance as of January 1, 2018 and the adoption did not have a
material impact on the Company’s consolidated financial statements.
NOTE 4. FAIR VALUE
The Company’s assets measured at
fair value on a recurring basis as of September 30, 2018 were as follows:
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Assets ($ in millions)
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Senior Secured Notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
290.6
|
|
|
|
290.6
|
|
CLO Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
4.5
|
|
|
|
4.5
|
|
CLO Equity
|
|
|
—
|
|
|
|
—
|
|
|
|
191.2
|
|
|
|
191.2
|
|
Equity and Other Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
19.1
|
|
|
|
19.1
|
|
Total Investments at fair value
|
|
|
—
|
|
|
|
—
|
|
|
$
|
505.4
|
|
|
|
505.4
|
|
Cash equivalents
|
|
|
8.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8.6
|
|
Total assets at fair value
|
|
$
|
8.6
|
|
|
$
|
—
|
|
|
$
|
505.4
|
|
|
|
514.0
|
|
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 4. FAIR VALUE
(cont.)
The Company’s assets measured at
fair value on a recurring basis at December 31, 2017 were as follows:
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Assets ($ in millions)
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Senior Secured Notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
242.2
|
|
|
$
|
242.2
|
|
Subordinated Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
0.8
|
|
|
|
0.8
|
|
CLO Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
4.7
|
|
|
|
4.7
|
|
CLO Equity
|
|
|
—
|
|
|
|
—
|
|
|
|
156.0
|
|
|
|
156.0
|
|
Equity and Other Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
14.7
|
|
|
|
14.7
|
|
Total Investments at fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
418.4
|
|
|
|
418.4
|
|
Cash equivalents
|
|
|
30.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30.0
|
|
Total assets at fair value
|
|
$
|
30.0
|
|
|
$
|
—
|
|
|
$
|
418.4
|
|
|
$
|
448.4
|
|
Significant Unobservable Inputs for Level 3 Investments
The following tables provide quantitative
information about the Company’s Level 3 fair value measurements as of September 30, 2018 and December 31, 2017, respectively.
The Company’s valuation policy, as described above, establishes parameters for the sources and types of valuation analysis,
as well as the methodologies and inputs that the Company uses in determining fair value. If the Valuation Committee or Oxford Square
Management determines that additional techniques, sources or inputs are appropriate or necessary in a given situation, such additional
work will be undertaken. The tables, therefore, are not all-inclusive, but provide information on the significant Level 3 inputs
that are pertinent to the Company’s fair value measurements. The weighted average calculations in the table below are based
on principal balances for all debt related calculations and CLO equity.
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
Assets ($ in millions)
|
|
Fair
Value
as of
September 30, 2018
|
|
|
Valuation
Techniques/
Methodologies
|
|
Unobservable
Input
|
|
Range/Weighted
Average
(1)
|
|
Impact
to
Fair Value
from an
Increase in
Input
(2)
|
Senior
Secured Notes
|
|
$
|
257.9
|
|
|
Market quotes
|
|
NBIB
(3)
|
|
81.5% – 101.3%/98.2%
|
|
NA
|
|
|
|
29.7
|
|
|
Recent transactions
|
|
Actual trade/payoff
(4)
|
|
100.4% – 100.8%/100.5%
|
|
NA
|
|
|
|
3.0
|
|
|
Yield analysis
|
|
Discount Margin
|
|
6.79% – 10.66%/8.73%
|
|
Decrease
|
CLO Debt
|
|
|
4.5
|
|
|
Market quotes
|
|
NBIB
(3)
|
|
88.1% – 99.8%/90.5%
|
|
NA
|
CLO Equity
|
|
|
179.7
|
|
|
Market quotes
|
|
NBIB
(3)
|
|
1.5% – 109.0%/62.4%
|
|
NA
|
|
|
|
6.5
|
|
|
Liquidation net asset value
(5)
|
|
NBIB
(3)
|
|
33.0% – 61.0%/37.9%
|
|
Increase
|
|
|
|
4.1
|
|
|
Yield analysis
|
|
Discount Margin
|
|
16.0%/ncm
(6)
|
|
Decrease
|
|
|
|
0.9
|
|
|
Discounted cash flow
(7)
|
|
Discount rate
(8)
|
|
14.5% – 15.6%/14.6%
|
|
Decrease
|
Equity
and Other Investments
|
|
|
19.1
|
|
|
Enterprise value
(9)
|
|
EBITDA
(10)
/
|
|
$43.9/ncm
(6)
|
|
Increase
|
|
|
|
|
|
|
|
|
Market multiples
(10)
|
|
6.5x – 7.0x/ncm
(6)
|
|
Increase
|
Total
Fair Value for Level 3 Investments
|
|
$
|
505.4
|
|
|
|
|
|
|
|
|
|
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 4. FAIR VALUE
(cont.)
|
(1)
|
Weighted averages are calculated
based on fair value of investments.
|
|
(2)
|
The impact on the fair value
measurement of an increase in each unobservable input is in isolation. The discount rate is the rate used to discount future cash
flows in a discounted cash flow calculation. An increase in the discount rate, in isolation, would result in a decrease in a fair
value measurement. Market/EBITDA multiples refer to the input (often derived from the value of a comparable company) that is multiplied
by the historic and/or expected EBITDA of a company in order to estimate the company’s value. An increase in the Market/EBITDA
multiple, in isolation, net of adjustments, would result in an increase in a fair value measurement.
|
|
(3)
|
The Company generally uses
prices provided by an independent pricing service, or broker or agent bank non-binding indicative bid prices (“NBIB”),
on or near the valuation date as the primary basis for the fair value determinations for syndicated notes, and CLO debt and equity
investments, which may be adjusted for pending equity distributions as of valuation date. These bid prices are non-binding, and
may not be determinative of fair value. Each bid price is evaluated by the Valuation Committee in conjunction with additional
information compiled by Oxford Square Management, including financial performance, recent business developments, and, in the case
of CLO debt and equity investments, performance and covenant compliance information as provided by the independent trustee.
|
|
(4)
|
Prices provided by independent
pricing services are evaluated in conjunction with actual trades and payoffs and, in certain cases, the value represented by actual
trades or payoffs may be more representative of fair value as determined by the Valuation Committee.
|
|
(5)
|
The fair value of those CLO
equity positions which have been optionally redeemed are generally valued using a liquidation net asset value basis which represents
the estimated expected residual value of the CLO as of the end of the period.
|
|
(6)
|
The calculation of weighted
average for a range of values, for a single investment within a given asset category, is not considered to provide a meaningful
representation (“ncm”).
|
|
(7)
|
The Company will calculate
the fair value of certain CLO equity investments based upon the net present value of expected contractual payment streams discounted
using estimated market yields for the equity tranche of the respective CLO vehicle. The Company will also consider those investments
in which the record date for an equity distribution payment falls on or before the last day of the period, and the likelihood
that a prospective purchaser would require an adjustment to the transaction price representing substantially all of the pending
distribution.
|
|
(8)
|
Discount rate represents
the rate at which future cash flows are discounted to calculate a present value, reflecting market assumptions for risk.
|
|
(9)
|
For the corporate debt investments
and equity investments, third-party valuation firms evaluate the financial and operational information of the portfolio companies
that the Company provides to them, as well as independent market and industry information that they consider appropriate in forming
an opinion as to the fair value of the Company’s securities. In those instances where the carrying value and/or internal
credit rating of the investment does not require the use of a third-party valuation firm, a valuation is prepared by Oxford Square
Management, which may include liquidation analysis or which may utilize a subsequent transaction to provide an indication of fair
value.
|
|
(10)
|
EBITDA, or earnings before
interest expense, taxes, depreciation and amortization, is an unobservable input which is generally based on the most recently
available twelve month financial statements provided by the portfolio company. Market multiples, also an unobservable input, represent
an estimation of where market participants might value an enterprise based upon information available for comparable companies
in the market.
|
|
|
Quantitative
Information about Level 3 Fair Value Measurements
|
Assets ($ in millions)
|
|
|
Fair Value as of
December 31,
2017
|
|
|
Valuation Techniques/
Methodologies
|
|
Unobservable
Input
|
|
Range/Weighted
Average
(1)
|
|
Impact to
Fair Value
from an
Increase in
Input
(2)
|
Senior Secured Notes
|
|
$
|
214.9
|
|
|
Market quotes
|
|
NBIB
(3)
|
|
77.6% – 100.6%/98.1%
|
|
NA
|
|
|
|
1.5
|
|
|
Yield Analysis
|
|
Discount Margin
|
|
10.8%/ncm
(4)
|
|
Decrease
|
|
|
|
23.1
|
|
|
Recent transactions
|
|
Actual trade/payoff
(5)
|
|
95.0% – 100.4%/95.7%
|
|
NA
|
|
|
|
2.7
|
|
|
Enterprise value
(6)
/
Discounted cash flow
|
|
Market multiples
(7)
/
Discount rate
(8)
|
|
5.5x – 6.0x/ncm
(4)
6.4% – 8.0%/ncm
(4)
|
|
Increase
Decrease
|
Subordinated Debt
|
|
|
0.8
|
|
|
Enterprise value
(6)
/
Discounted cash flow
|
|
Market multiples
(7)
/
Discount rate
(8)
|
|
5.5x – 6.0x/ncm
(4)
6.4% – 8.0%/ncm
(4)
|
|
Increase
Decrease
|
CLO Debt
|
|
|
4.7
|
|
|
Market quotes
|
|
NBIB
(3)
|
|
86.8% – 100.0%/89.9%
|
|
NA
|
CLO Equity
|
|
|
154.6
|
|
|
Market quotes
|
|
NBIB
(3)
|
|
1.8% – 113.0%/51.3%
|
|
NA
|
|
|
|
1.4
|
|
|
Discounted cash flow
(9)
|
|
Discount rate
(8)
|
|
11.5% – 27.6%/15.4%
|
|
Decrease
|
Equity and Other Investments
|
|
|
14.7
|
|
|
Enterprise value
(6)
|
|
EBITDA
(7)
/
Market multiple
(7)
|
|
$41.6/ncm
(4)
5.5x – 6.0x/ncm
(4)
|
|
Increase
Increase
|
Total Fair Value for
Level 3 Investments
|
|
$
|
418.4
|
|
|
|
|
|
|
|
|
|
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 4. FAIR VALUE
(cont.)
(1)
|
Weighted averages are calculated based on fair value of investments.
|
(2)
|
The impact on the fair value measurement of an increase in each unobservable input is in isolation. The discount rate is the rate used to discount future cash flows in a discounted cash flow calculation. An increase in the discount rate, in isolation, would result in a decrease in a fair value measurement. Market/EBITDA multiples refer to the input (often derived from the value of a comparable company) that is multiplied by the historic and/or expected EBITDA of a company in order to estimate the company’s value. An increase in the Market/EBITDA multiple, in isolation, net of adjustments, would result in an increase in a fair value measurement.
|
(3)
|
The Company generally uses prices provided by an independent pricing service, or broker or agent bank non-binding indicative bid prices (“NBIB”), on or near the valuation date as the primary basis for the fair value determinations for syndicated notes, and CLO debt and equity investments, which may be adjusted for pending equity distributions as of valuation date. These bid prices are non-binding, and may not be determinative of fair value. Each bid price is evaluated by the Valuation Committee in conjunction with additional information compiled by Oxford Square Management, including financial performance, recent business developments, and, in the case of CLO debt and equity investments, performance and covenant compliance information as provided by the independent trustee.
|
(4)
|
The calculation of weighted average for a range of values, for a single investment within a given asset category, is not considered to provide a meaningful representation (“ncm”).
|
(5)
|
Prices provided by independent pricing services are evaluated in conjunction with actual trades and payoffs and, in certain cases, the value represented by actual trades or payoffs may be more representative of fair value as determined by the Valuation Committee.
|
(6)
|
For the corporate debt investments and equity investments, third-party valuation firms evaluate the financial and operational information of the portfolio companies that the Company provides to them, as well as independent market and industry information that they consider appropriate in forming an opinion as to the fair value of the Company’s securities. In those instances where the carrying value and/or internal credit rating of the investment does not require the use of a third-party valuation firm, a valuation is prepared by Oxford Square Management, which may include liquidation analysis or which may utilize a subsequent transaction to provide an indication of fair value.
|
(7)
|
EBITDA, or earnings before interest expense, taxes, depreciation and amortization, is an unobservable input which is generally based on the most recently available twelve month financial statements provided by the portfolio company. Market multiples, also an unobservable input, represent an estimation of where market participants might value an enterprise based upon information available for comparable companies in the market.
|
(8)
|
Discount rate represents the rate at which future cash flows are discounted to calculate a present value, reflecting market assumptions for risk.
|
(9)
|
The Company will calculate the fair value of certain CLO equity investments based upon the net present value of expected contractual payment streams discounted using estimated market yields for the equity tranche of the respective CLO vehicle. The Company will also consider those investments in which the record date for an equity distribution payment falls on the last day of the period, and the likelihood that a prospective purchaser would require an adjustment to the transaction price representing substantially all of the pending distribution.
|
Financial Instruments Disclosed, But Not Carried, At Fair
Value
The following table presents the carrying
value and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of September 30,
2018 and the level of each financial liability within the fair value hierarchy:
($ in millions)
|
|
Carrying Value
(1)
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
6.50% Unsecured Notes
(2)
|
|
$
|
62.6
|
|
|
$
|
64.6
|
|
|
$
|
—
|
|
|
$
|
64.6
|
|
|
$
|
—
|
|
Credit Facility
(3)
|
|
|
87.5
|
|
|
|
87.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
87.7
|
|
Total
|
|
$
|
150.1
|
|
|
$
|
152.3
|
|
|
$
|
—
|
|
|
$
|
64.6
|
|
|
$
|
87.7
|
|
|
(1)
|
Carrying value is net of
deferred debt issuance costs. As of September 30, 2018 the unamortized debt issuance costs were approximately $1.8 million for
the 6.50% unsecured notes due 2024 (the “6.50% Unsecured Notes”) and approximately $0.2 million for the OXSQ Funding
Credit Facility.
|
|
(2)
|
Fair value is based upon
the closing price on the last day of the period. The 6.50% Unsecured Notes are listed on the NASDAQ Global Select Market (trading
symbol OXSQL).
|
|
(3)
|
Fair value represents the
par amount of the Credit Facility.
|
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 4. FAIR VALUE
(cont.)
The following table presents the carrying
value and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of December 31,
2017 and the level of each financial liability within the fair value hierarchy:
($ in millions)
|
|
Carrying Value
(1)
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
6.50% Unsecured Notes
(2)
|
|
$
|
62.3
|
|
|
$
|
66.5
|
|
|
$
|
—
|
|
|
$
|
66.5
|
|
|
$
|
—
|
|
Total
|
|
$
|
62.3
|
|
|
$
|
66.5
|
|
|
$
|
—
|
|
|
$
|
66.5
|
|
|
$
|
—
|
|
|
(1)
|
Carrying value is net of
deferred debt issuance costs, which totaled approximately $2.0 million as of December 31, 2017.
|
|
(2)
|
Fair value is based upon
the closing price on the last day of the period. The 6.50% Unsecured Notes are listed on the NASDAQ Global Select Market (trading
symbol OXSQL).
|
A reconciliation of the fair value of investments
for the three months ended September 30, 2018, utilizing significant unobservable inputs, is as follows:
($ in millions)
|
|
Senior
Secured
Notes
|
|
|
Subordinated
Debt
|
|
|
CLO
Debt
|
|
|
CLO
Equity
|
|
|
Equity/
Other
Investments
|
|
|
Total
(2)
|
|
Balance at June 30, 2018
|
|
$
|
285.3
|
|
|
$
|
0.8
|
|
|
$
|
4.4
|
|
|
$
|
145.8
|
|
|
$
|
16.6
|
|
|
$
|
452.9
|
|
Realized gains/(losses)
included in earnings
|
|
|
0.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.1
|
)
|
|
|
—
|
|
|
|
0.2
|
|
Unrealized (depreciation)/appreciation
included in earnings
|
|
|
(0.3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2.6
|
)
|
|
|
0.5
|
|
|
|
(2.3
|
)
|
Accretion of discount
|
|
|
0.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.1
|
|
Purchases
|
|
|
35.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
54.2
|
|
|
|
2.0
|
|
|
|
91.8
|
|
Repayments and Sales
|
|
|
(30.4
|
)
|
|
|
(0.8
|
)
|
|
|
—
|
|
|
|
(5.0
|
)
|
|
|
—
|
|
|
|
(36.3
|
)
|
Reductions
to CLO Equity Cost Value
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1.2
|
)
|
|
|
—
|
|
|
|
(1.2
|
)
|
Payment in Kind income
|
|
|
0.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.1
|
|
Transfers
in and/or (out) of level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance
at September 30, 2018
(2)
|
|
$
|
290.6
|
|
|
$
|
—
|
|
|
$
|
4.5
|
|
|
$
|
191.2
|
|
|
$
|
19.1
|
|
|
$
|
505.4
|
|
The
amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses
relating to our Level 3 assets still held at the reporting date and reported within the net change in unrealized gains or
losses on investments in our Statement of Operations
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
(2.8
|
)
|
|
$
|
0.5
|
|
|
$
|
(1.6
|
)
|
|
(1)
|
Reduction to cost value on
the Company’s CLO equity investments represents the difference between distributions received, or entitled to be received,
of approximately $8.4 million and the effective yield interest income of approximately $7.2 million.
|
|
(2)
|
Totals may not sum due to
rounding.
|
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 4. FAIR VALUE
(cont.)
A reconciliation of the fair value of investments
for the nine months ended September 30, 2018, utilizing significant unobservable inputs, is as follows:
($
in millions)
|
|
Senior
Secured
Notes
|
|
|
Subordinated
Debt
|
|
|
CLO
Debt
|
|
|
CLO
Equity
|
|
|
Equity/
Other
Investments
|
|
|
Total
(2)
|
|
Balance at December 31, 2017
|
|
$
|
242.2
|
|
|
$
|
0.8
|
|
|
$
|
4.7
|
|
|
$
|
156.0
|
|
|
$
|
14.7
|
|
|
$
|
418.4
|
|
Realized (losses) gains
included in earnings
|
|
|
1.2
|
|
|
|
—
|
|
|
|
0.1
|
|
|
|
(2.0
|
)
|
|
|
0.1
|
|
|
|
(0.6
|
)
|
Unrealized (depreciation)/appreciation
included in earnings
|
|
|
(1.1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.8
|
)
|
|
|
2.4
|
|
|
|
0.5
|
|
Accretion of discount
|
|
|
0.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.5
|
|
Purchases
|
|
|
148.2
|
|
|
|
—
|
|
|
|
0.9
|
|
|
|
54.2
|
|
|
|
2.0
|
|
|
|
205.3
|
|
Repayments and Sales
|
|
|
(100.6
|
)
|
|
|
(0.8
|
)
|
|
|
(1.3
|
)
|
|
|
(5.3
|
)
|
|
|
—
|
|
|
|
(108.1
|
)
|
Reductions to CLO Equity
Cost Value
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10.9
|
)
|
|
|
—
|
|
|
|
(10.9
|
)
|
Payment in Kind income
|
|
|
0.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.2
|
|
Transfers in and/or (out)
of level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at September
30, 2018
(2)
|
|
$
|
290.6
|
|
|
$
|
—
|
|
|
$
|
4.5
|
|
|
$
|
191.2
|
|
|
$
|
19.1
|
|
|
$
|
505.4
|
|
The amount of total gains
or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to our Level
3 assets still held at the reporting date and reported within the net change in unrealized gains or losses on investments
in our Statement of Operations
|
|
$
|
(1.1
|
)
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
(3.2
|
)
|
|
$
|
2.3
|
|
|
$
|
(1.9
|
)
|
|
(1)
|
Reduction to cost value on
the Company’s CLO equity investments represents the difference between distributions received, or entitled to be received,
of approximately $31.0 million and the effective yield interest income of approximately $20.1 million.
|
|
(2)
|
Totals may not sum due to
rounding.
|
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 4. FAIR VALUE
(cont.)
A reconciliation of the fair value of investments
for the year ended December 31, 2017, utilizing significant unobservable inputs, is as follows:
($ in millions)
|
|
Senior
Secured
Notes
|
|
|
Subordinated
Debt
|
|
|
CLO
Debt
|
|
|
CLO
Equity
|
|
|
Equity/
Other
Investments
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
368.3
|
|
|
$
|
0.7
|
|
|
$
|
2.7
|
|
|
$
|
200.8
|
|
|
$
|
12.7
|
|
|
$
|
585.2
|
|
Realized (losses) gains
included in earnings
|
|
|
2.4
|
|
|
|
—
|
|
|
|
0.2
|
|
|
|
(12.1
|
)
|
|
|
2.5
|
|
|
|
(7.0
|
)
|
Unrealized appreciation
included in earnings
|
|
|
11.3
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
10.5
|
|
|
|
0.8
|
|
|
|
23.0
|
|
Accretion of discount
|
|
|
1.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.0
|
|
Purchases
|
|
|
94.3
|
|
|
|
—
|
|
|
|
4.5
|
|
|
|
107.0
|
|
|
|
3.0
|
|
|
|
208.8
|
|
Repayments and Sales
|
|
|
(235.4
|
)
|
|
|
—
|
|
|
|
(3.0
|
)
|
|
|
(113.1
|
)
|
|
|
(4.2
|
)
|
|
|
(355.7
|
)
|
Reductions to CLO equity
cost value
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(37.1
|
)
|
|
|
—
|
|
|
|
(37.1
|
)
|
Payment-in-Kind income
|
|
|
0.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.2
|
|
Transfers
in and/or (out) of level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at December
31, 2017
(2)
|
|
$
|
242.2
|
|
|
$
|
0.8
|
|
|
$
|
4.7
|
|
|
$
|
156.0
|
|
|
$
|
14.7
|
|
|
$
|
418.4
|
|
The
amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses
relating to our Level 3 assets still held at the reporting date and reported within the net change in unrealized gains or
losses on investments in our consolidated statement of operations
(2)
|
|
$
|
4.5
|
|
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
(4.1
|
)
|
|
$
|
3.2
|
|
|
$
|
4.0
|
|
|
(1)
|
Reduction to cost value on
the Company’s CLO equity investments represents the difference between distributions received, or entitled to be received,
of approximately $70.4 million and the effective yield interest income of approximately $33.3 million.
|
|
(2)
|
Totals may not sum due to
rounding.
|
The following table shows the fair value
of the Company’s portfolio of investments by asset class as of September 30, 2018 and December 31, 2017:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
($ in millions)
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
Senior Secured Notes
|
|
$
|
290.6
|
|
|
|
57.5
|
%
|
|
$
|
242.2
|
|
|
|
57.9
|
%
|
Subordinated Debt
|
|
|
—
|
|
|
|
—
|
%
|
|
|
0.8
|
|
|
|
0.2
|
%
|
CLO Debt
|
|
|
4.5
|
|
|
|
0.9
|
%
|
|
|
4.7
|
|
|
|
1.1
|
%
|
CLO Equity
|
|
|
191.2
|
|
|
|
37.8
|
%
|
|
|
156.0
|
|
|
|
37.3
|
%
|
Equity and Other Investments
|
|
|
19.1
|
|
|
|
3.8
|
%
|
|
|
14.8
|
|
|
|
3.5
|
%
|
Total
(1)
|
|
$
|
505.4
|
|
|
|
100.0
|
%
|
|
$
|
418.4
|
|
|
|
100.0
|
%
|
|
(1)
|
Totals may not sum due to
rounding.
|
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 5. CASH, CASH EQUIVALENTS AND RESTRICTED CASH
As of September 30, 2018 and December 31,
2017, respectively, cash, cash equivalents and restricted cash were as follows:
($ in millions)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Cash
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash Equivalents
|
|
|
8.6
|
|
|
|
30.0
|
|
Restricted Cash
|
|
|
3.5
|
|
|
|
—
|
|
Total Cash, Cash Equivalents and Restricted Cash
|
|
$
|
12.1
|
|
|
$
|
30.0
|
|
For further details regarding the composition
of cash, cash equivalents and restricted cash refer to “Note 3 — Summary of Significant Accounting Policies.”
NOTE 6. BORROWINGS
In accordance with the 1940 Act, with certain
limited exceptions, the Company is only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is
at least 200%, immediately after such borrowing. As of September 30, 2018, the Company’s asset coverage for borrowed amounts
was 340.9%.
On March 23, 2018, the Small Business Credit
Availability Act (the “SBCAA”) was signed into law, which included various changes to regulations under the federal
securities laws that impact BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement
to 150% from 200% under certain circumstances. On April 6, 2018, the Board, including a “required majority” (as such
term is defined in Section 57(o) of the 1940 Act) of the Board, approved the modified asset coverage requirements set forth in
Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. As a result, the Company’s asset coverage requirements for senior
securities will be changed from 200% to 150%, effective as of April 6, 2019.
The following are the Company’s outstanding
principal amounts, carrying values and fair values of the Company’s borrowings as of September 30, 2018 and December 31,
2017. Fair values of the Company’s notes payable are based upon the closing price on the last day of the period. The 6.50%
Unsecured Notes are listed on the NASDAQ Global Select Market (trading symbol OXSQL). The Credit Facility fair value represents
the par amount of the debt obligation as of September 30, 2018.
|
|
As of
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
($ in millions)
|
|
Principal
Amount
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Principal
Amount
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
6.50% Unsecured Notes
(1)
|
|
$
|
64.4
|
|
|
$
|
62.6
|
|
|
$
|
64.6
|
|
|
$
|
64.4
|
|
|
$
|
62.3
|
|
|
$
|
66.5
|
|
Credit Facility
(2)
|
|
|
87.7
|
|
|
|
87.5
|
|
|
|
87.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
152.1
|
|
|
$
|
150.1
|
|
|
$
|
152.3
|
|
|
$
|
64.4
|
|
|
$
|
62.3
|
|
|
$
|
66.5
|
|
|
(1)
|
The carrying value represents
the aggregate principal amount outstanding less the unamortized deferred issuance costs. As of September 30, 2018 and December
31, 2017, the total unamortized deferred issuance costs for the 6.50% Unsecured Notes was approximately $1.8 million and $2.0
million, respectively.
|
|
(2)
|
As of September 30, 2018,
the total unamortized deferred issuance costs for the Credit Facility was approximately $0.2 million. The Credit Facility fair
value represents the par amount of the debt obligation.
|
The weighted average stated interest rate
and weighted average maturity on all of the Company’s debt outstanding as of September 30, 2018 were 5.39% and 3.3 years,
respectively, and as of December 31, 2017 were 6.50% and 6.2 years, respectively.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 6. BORROWINGS
(cont.)
The table below summarizes the components
of interest expense for the three and nine months ended September 30, 2018:
|
|
Three Months Ended September 30, 2018
|
|
($ in thousands)
|
|
Stated
Interest
Expense
|
|
|
Note
Discount
|
|
|
Amortization
of Deferred
Debt Issuance
Costs
|
|
|
Total
|
|
6.50% Unsecured Notes
|
|
$
|
1,046.1
|
|
|
$
|
—
|
|
|
$
|
81.8
|
|
|
$
|
1,127.9
|
|
Credit Facility
|
|
|
1,104.0
|
|
|
|
—
|
|
|
|
26.5
|
|
|
|
1,130.5
|
|
Total
|
|
$
|
2,150.1
|
|
|
$
|
—
|
|
|
$
|
108.3
|
|
|
$
|
2,258.4
|
|
|
|
Nine Months Ended September 30, 2018
|
|
($ in thousands)
|
|
Stated
Interest
Expense
|
|
|
Note
Discount
|
|
|
Amortization
of Deferred
Debt Issuance
Costs
|
|
|
Total
|
|
6.50% Unsecured Notes
|
|
$
|
3,138.1
|
|
|
$
|
—
|
|
|
$
|
242.9
|
|
|
$
|
3,381.0
|
|
Credit Facility
|
|
|
1,225.1
|
|
|
|
—
|
|
|
|
29.1
|
|
|
|
1,254.2
|
|
Total
|
|
$
|
4,363.2
|
|
|
$
|
—
|
|
|
$
|
272.0
|
|
|
$
|
4,635.2
|
|
|
|
Three Months Ended September 30, 2017
|
|
($ in thousands)
|
|
Stated
Interest
Expense
|
|
|
Note
Discount
|
|
|
Amortization
of Deferred
Debt Issuance
Costs
|
|
|
Total
|
|
TICC CLO 2012-1 LLC Class A-1 Notes
|
|
$
|
42.1
|
|
|
$
|
1.6
|
|
|
$
|
—
|
|
|
$
|
43.7
|
|
TICC CLO 2012-1 LLC Class B-1 Notes
|
|
|
143.3
|
|
|
|
8.4
|
|
|
|
—
|
|
|
|
151.7
|
|
TICC CLO 2012-1 LLC Class C-1 Notes
|
|
|
208.7
|
|
|
|
14.1
|
|
|
|
—
|
|
|
|
222.8
|
|
TICC CLO 2012-1 LLC Class D-1 Notes
|
|
|
222.6
|
|
|
|
15.9
|
|
|
|
—
|
|
|
|
238.5
|
|
TICC CLO 2012-1 amortization of deferred debt
|
|
|
—
|
|
|
|
—
|
|
|
|
16.1
|
|
|
|
16.1
|
|
Convertible Notes
|
|
|
1,772.7
|
|
|
|
—
|
|
|
|
128.2
|
|
|
|
1,900.9
|
|
6.50% Unsecured Notes
|
|
|
1,046.0
|
|
|
|
—
|
|
|
|
81.8
|
|
|
|
1,127.8
|
|
Total
|
|
$
|
3,435.4
|
|
|
$
|
40.0
|
|
|
$
|
226.1
|
|
|
$
|
3,701.5
|
|
|
|
Nine Months Ended September 30, 2017
|
|
($ in thousands)
|
|
Stated
Interest
Expense
|
|
|
Note
Discount
|
|
|
Amortization
of Deferred
Debt Issuance
Costs
|
|
|
Total
|
|
TICC CLO 2012-1 LLC Class A-1 Notes
|
|
$
|
623.8
|
|
|
$
|
25.4
|
|
|
$
|
—
|
|
|
$
|
649.2
|
|
TICC CLO 2012-1 LLC Class B-1 Notes
|
|
|
600.0
|
|
|
|
35.4
|
|
|
|
—
|
|
|
|
635.4
|
|
TICC CLO 2012-1 LLC Class C-1 Notes
|
|
|
878.4
|
|
|
|
59.4
|
|
|
|
—
|
|
|
|
937.8
|
|
TICC CLO 2012-1 LLC Class D-1 Notes
|
|
|
939.7
|
|
|
|
67.0
|
|
|
|
—
|
|
|
|
1,006.7
|
|
TICC CLO 2012-1 amortization of deferred debt
|
|
|
—
|
|
|
|
—
|
|
|
|
91.7
|
|
|
|
91.7
|
|
Convertible Notes
|
|
|
5,318.0
|
|
|
|
—
|
|
|
|
380.5
|
|
|
|
5,698.5
|
|
6.50% Unsecured Notes
|
|
|
1,964.2
|
|
|
|
—
|
|
|
|
152.0
|
|
|
|
2,116.2
|
|
Total
|
|
$
|
10,324.1
|
|
|
$
|
187.2
|
|
|
$
|
624.2
|
|
|
$
|
11,135.5
|
|
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 6. BORROWINGS
(cont.)
Notes Payable — Credit Facility
On June 21, 2018, OXSQ Funding, a special
purpose vehicle and wholly-owned subsidiary of OXSQ, entered into a Credit Facility with Citibank, N.A. Subject to certain exceptions,
pricing under the Credit Facility is based on the London Interbank Offered Rate for an interest period equal to three months plus
a spread of 2.25% per annum payable quarterly on March 21, June 21, September 21 and December 21. Pursuant to the terms of the
credit agreement governing the Credit Facility, OXSQ Funding has borrowed approximately $95.2 million. The Credit Facility has
a mandatory amortization schedule such that 15.0% of the principal amount outstanding as of June 21, 2018 will be due and payable
on June 21, 2019. On each payment date occurring thereafter, an additional 6.25% of the remaining principal amount outstanding
will be due and payable. On June 21, 2020, all remaining principal and accrued and unpaid interest will be due and payable.
The Credit Facility is collateralized by
a pool of loans initially consisting of loans sold by OXSQ to OXSQ Funding. OXSQ may sell and contribute additional loans to OXSQ
Funding from time to time. OXSQ will act as the collateral manager of the loans owned by OXSQ Funding, and has retained a
residual interest through its ownership of OXSQ Funding.
As of September 30, 2018, there were 24 investments
in portfolio companies with a total fair value of approximately $213.8 million, collateralizing the Credit Facility. The pool of
loans in OXSQ Funding must meet certain requirements, including asset mix and concentration, collateral coverage, term, agency
rating, minimum coupon, minimum spread and sector diversity requirements.
On September 21, 2018, approximately $7.5
million of principal outstanding under the Credit Facility was repaid by the Company. The Company recognized a net extinguishment
loss of approximately $15,000, which consisted of unamortized deferred debt issuance costs. These costs are recorded within realized
losses on extinguishment of debt in the consolidated statements of operations.
The aggregate accrued interest payable on
the Credit Facility as of September 30, 2018 was approximately $0.4 million. Deferred debt issuance costs consisted of fees and
expenses incurred in connection with the Credit Facility. As of September 30, 2018, the unamortized deferred debt issuance costs
relating to the Credit Facility was approximately $0.2 million. This amount is being amortized and included in interest expense
in the consolidated statements of operations over the term of the Credit Facility. The cash paid and effective annualized interest
rate for the three months ended September 30, 2018 was approximately $0.9 million and 4.69%, respectively.
Notes Payable — 6.50% Unsecured Notes Due 2024
On April 12, 2017, the Company completed
an underwritten public offering of approximately $64.4 million in aggregate principal amount of the 6.50% Unsecured Notes. The
6.50% Unsecured Notes mature on March 30, 2024, and may be redeemed in whole or in part at any time or from time to time at the
Company’s option on or after March 30, 2020. The 6.50% Unsecured Notes bear interest at a rate of 6.50% per year, payable
quarterly on March 30, June 30, September 30, and December 30 of each year, which commenced June 30, 2017.
The aggregate accrued interest payable
on the 6.50% Unsecured Notes as of September 30, 2018 was approximately $12,000. As of September 30, 2018, the Company had unamortized
deferred debt issuance costs relating to the 6.50% Unsecured Notes of approximately $1.8 million. The deferred debt issuance costs
are being amortized over the term of the 6.50% Unsecured Notes and are included in interest expense in the consolidated statements
of operations. The cash paid and the effective annualized interest rate for the three months ended September 30, 2018 were approximately
$1.0 million and 6.95%, respectively. The cash paid and the effective annualized interest rate for the three months ended September
30, 2017 were approximately $1.0 million and 6.95%, respectively.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 6. BORROWINGS
(cont.)
Notes Payable — Convertible Notes
On September 26, 2012, the Company issued
$105.0 million aggregate principal amount of convertible notes (the “Convertible Notes”), and an additional $10.0 million
aggregate principal amount of the Convertible Notes was issued on October 22, 2012 pursuant to the exercise of the initial purchasers’
option to purchase additional Convertible Notes. The Convertible Notes bore interest at a rate of 7.50% per year, payable semi-annually
in arrears on May 1 and November 1 of each year, commencing on May 1, 2013. The Convertible Notes were convertible into shares
of OXSQ’s common stock based on an initial conversion rate of 87.2448 shares of its common stock per $1,000 principal amount
of the Convertible Notes, which would have been equivalent to an initial conversion price of approximately $11.46 per share of
common stock. The conversion price for the Convertible Notes would have been reduced for quarterly cash distributions paid to common
shares to the extent that the quarterly distribution exceeded $0.29 cents per share, subject to adjustment. Deferred debt issuance
costs represent fees and other direct incremental costs incurred in connection with the Convertible Notes. On December 2, 2016
and December 16, 2016, the Company repurchased $12.0 million and approximately $8.5 million of the Convertible Notes, respectively.
On November 1, 2017, the Convertible Notes matured and were repaid in full (approximately $94.5 million) in accordance with their
terms.
In connection with the repurchase of approximately
$20.5 million of the Convertible Notes in December 2016, the Company recognized a net extinguishment loss of approximately $815,000,
which consisted of approximately $716,000 from repurchasing the Convertible Notes at a premium to par and approximately $99,000
in previously unamortized deferred debt issuance costs. These costs are recorded within realized losses on extinguishment of debt
in the consolidated statements of operations. The realized loss on extinguishment of debt incurred in prior periods was reclassified
from interest expense in the consolidated statements of operations to conform with the current period presentation for comparative
purposes. The effective annualized interest rate for the three months ended September 30, 2017 was approximately 7.98%. No cash
was paid for interest for the three months ended September 30, 2017.
Notes Payable — TICC CLO 2012-1 LLC
On August 23, 2012, the Company completed
a $160 million debt securitization financing transaction, consisting of $120 million in secured notes and $40.0 million of subordinated
notes (the “2012 Subordinated Notes”). On February 25, 2013 and May 28, 2013, TICC CLO 2012-1 issued additional secured
notes totaling an aggregate of $120 million and 2012 Subordinated Notes totaling an aggregate of $40.0 million, which 2012 Subordinated
Notes were purchased by the Company under the “accordion” feature of the debt securitization which allowed, under certain
circumstances and subject to the satisfaction of certain conditions, for an increase in the amount of secured and subordinated
notes. It is not necessary that the Company own all or any of the notes permitted by this feature, which may affect the accounting
treatment of the debt securitization financing transaction. On August 25, 2016, November 25, 2016, February 27, 2017, and May 25,
2017, the Securitization Issuer repaid approximately $36.0 million, approximately $74.7 million, approximately $24.5 million, and
approximately $31.4 million of the class A-1 notes, respectively. On August 25, 2017, the Securitization Issuer repaid, in full,
the remaining secured notes (classes A-1, B-1, C-1 and D-1) outstanding of approximately $73.4 million. During the quarter ended
December 31, 2017, the Company, as collateral manager of TICC CLO 2012-1, dissolved TICC CLO 2012-1 pursuant to Delaware law by
filing a certificate of cancellation with the Secretary of State in Delaware.
In connection with the August 25, 2016
repayment of approximately $36.0 million of the Class A-1 notes, the Company incurred debt extinguishment costs of approximately
$0.6 million, which consisted of approximately $0.3 million in accelerated note discount expense and approximately $0.3 million
in accelerated deferred debt issuance costs.
In connection with the November 25, 2016
repayment of approximately $74.7 million of the Class A-1 notes, the Company incurred debt extinguishment costs of approximately
$1.3 million, which consisted of approximately $0.6 million in accelerated note discount expense and approximately $0.7 million
in accelerated deferred debt issuance costs.
In connection with the February 27, 2017
repayment of approximately $24.5 million of the Class A-1 notes, the Company incurred debt extinguishment costs of approximately
$0.4 million, which consisted of approximately $0.2 million in accelerated note discount expense and approximately $0.2 million
in accelerated deferred debt issuance costs.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 6. BORROWINGS
(cont.)
In connection with the May 25, 2017 repayment
of approximately $31.4 million of the Class A-1 notes, the Company incurred debt extinguishment costs of approximately $0.5 million,
which consisted of approximately $0.2 million in accelerated note discount expense and approximately $0.3 million in accelerated
deferred debt issuance costs.
In connection with the August 25, 2017
repayment of approximately $73.4 million of the Class A-1, B-1, C-1 and D-1 notes, the Company incurred debt extinguishment costs
of approximately $2.2 million, which consisted of approximately $1.6 million in accelerated note discount expense and approximately
$0.6 million in accelerated deferred debt issuance costs.
The accelerated note discount expense and
accelerated deferred debt issuance costs are recorded within realized losses on extinguishment of debt in the consolidated statements
of operations. The realized loss on extinguishment of debt incurred in prior periods was reclassified from interest expense in
consolidated statements of operations to conform with the current period presentation for comparative purposes. The cash paid and
the effective annualized interest rate for the three months ended September 30, 2017 were $1.0 million and 5.98%, respectively.
NOTE 7. RELATED PARTY TRANSACTIONS
The Company pays Oxford Square Management
a fee for its services under the Investment Advisory Agreement consisting of two components — a base management fee (the
“Base Fee”) based on its gross assets, as described below, and an incentive fee based on its performance. The cost
of both the Base Fee payable to Oxford Square Management and any incentive fees earned by Oxford Square Management are ultimately
borne by the Company’s common stockholders.
Base Management Fee
Through March 31, 2016, the Base Fee was
calculated at an annual rate of 2.00%. Effective April 1, 2016, the Base Fee is calculated at an annual rate of 1.50%. The Base
Fee is payable quarterly in arrears, and is calculated based on the average value of the Company’s gross assets at the end
of the two most recently completed calendar quarters, and appropriately adjusted for any equity or debt capital raises, repurchases
or redemptions during the current calendar quarter (however, no Base Fee will be payable on the cash proceeds received by the Company
in connection with any share or debt issuances until such proceeds have been invested in accordance with the Company’s investment
objective). Accordingly, the Base Fee will be payable regardless of whether the value of the Company’s gross assets has decreased
during the quarter. The Base Fee for any partial quarter will be appropriately prorated.
The following table represents the Base
Fee for the three and nine months ended September 30, 2018 and 2017, respectively:
($ in millions)
|
|
Three Months Ended
September 30, 2018
|
|
|
Three Months Ended
September 30, 2017
|
|
|
Nine Months Ended
September 30, 2018
|
|
|
Nine Months Ended
September 30, 2017
|
|
Base Fee
|
|
$
|
1.8
|
|
|
$
|
2.0
|
|
|
$
|
5.3
|
|
|
$
|
6.5
|
|
The Base Fee payable to Oxford Square Management
as of September 30, 2018 and December 31, 2017 was approximately $1.8 million and $1.7 million, respectively.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 7. RELATED PARTY TRANSACTIONS
(cont.)
Incentive Fee
The incentive fee has two parts: the “Net
Investment Income Incentive Fee” and the “Capital Gains Incentive Fee”. The Net Investment Income Incentive Fee
is calculated and payable quarterly in arrears based on the amount by which (x) the “Pre-Incentive Fee Net Investment
Income” for the immediately preceding calendar quarter exceeds (y) the “Preferred Return Amount” for the current
calendar quarter. For this purpose, Pre-Incentive Fee Net Investment Income means interest income, dividend income and any other
income (including any accrued income that we have not yet received in cash and any other fees such as commitment, origination,
structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar
quarter, minus the Company’s operating expenses accrued during the calendar quarter (including the Base Fee, expenses payable
under a separate agreement with Oxford Funds (the “Administration Agreement”), and any interest expense and dividends
paid on any issued and outstanding preferred stock, but excluding the incentive fee).
Pre-Incentive Fee Net Investment Income
includes, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero
coupon securities), accrued income that the Company has not yet received in cash. Oxford Square Management is not under any obligation
to reimburse the Company for any part of the incentive fee it received that was based on accrued income that it never received
as a result of a default by an entity on the obligation that resulted in the accrual of such income. Pre-Incentive Fee Net Investment
Income does not include any realized gains, realized losses or unrealized appreciation or depreciation. Given that this portion
of the incentive fee is payable without regard to any gain, loss or unrealized depreciation that may occur during the quarter,
this portion of Oxford Square Management’s incentive fee may also be payable notwithstanding a decline in net asset value
that quarter.
Effective April 1, 2016, a Preferred Return
Amount is calculated on a quarterly basis by multiplying 1.75% by the Company’s net asset value at the end of the immediately
preceding calendar quarter. The Net Investment Income Incentive Fee is then calculated as follows: (a) no Net Investment Income
Incentive Fee is payable to Oxford Square Management in any calendar quarter in which the Pre-Incentive Fee Net Investment Income
does not exceed the Preferred Return Amount; (b) 100% of the Pre-Incentive Fee Net Investment Income for such quarter, if
any, that exceeds the Preferred Return Amount but is less than or equal to a “Catch-Up Amount” determined on a quarterly
basis by multiplying 2.1875% by the Company’s net asset value at the end of such calendar quarter; and (c) for any quarter
in which the Pre-Incentive Fee Net Investment Income exceeds the Catch-Up Amount, the Net Investment Income Incentive Fee will
be 20% of the amount of the Pre-Incentive Fee Net Investment Income for such quarter. There is no accumulation of amounts from
quarter to quarter for the Preferred Return Amount, and accordingly there is no claw back of amounts previously paid to Oxford
Square Management if the Pre-Incentive Fee Net Investment Income for subsequent quarters is below the quarterly Preferred Return
Amount, and there is no delay of payment of incentive fees to Oxford Square Management if the Pre-Incentive Fee Net Investment
Income for prior quarters is below the quarterly Preferred Return Amount for the quarter for which the calculation is being made.
In addition, effective April 1, 2016, the
calculation of the Company’s Net Investment Income Incentive Fee is subject to a “Total Return Requirement”,
which provides that a net investment income incentive fee will not be payable to Oxford Square Management except to the extent
20% of the cumulative net increase in net assets resulting from operations (which is the amount, if positive, of the sum of the
Pre-Incentive Fee Net Investment Income, realized gains and losses and unrealized appreciation and depreciation on investments)
during the calendar quarter for which such fees are being calculated and the eleven (11) preceding quarters (or if shorter, the
number of quarters since April 1, 2016) exceeds the cumulative net investment income incentive fees accrued and/or paid for such
eleven (11) preceding quarters (or if shorter, the number of quarters since April 1, 2016). Under the revised fee structure, under
no circumstances will the aggregate fees earned from April 1, 2016 by Oxford Square Management in any quarterly period be higher
than the aggregate fees that would have been earned prior to the adoption of these changes.
From January 1, 2005 through March 31,
2016, the Pre-Incentive Fee Net Investment Income, which was expressed as a rate of return on the value of our net assets at the
end of the immediately preceding calendar quarter, was compared to one-fourth of an annual hurdle rate that was determined as of
the immediately preceding December 31
st
by adding 5.00% to the interest rate then payable on the most recently issued
five-year U.S. Treasury Notes, up to a maximum annual hurdle rate of 10.00%. The annual hurdle used to calculate the Pre-Incentive
Fee Net Investment Income for the quarters ended September 30, 2018 and September 30, 2017 were 7.20% and 6.93%, respectively.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 7. RELATED PARTY TRANSACTIONS
(cont.)
The following table represents the Net
Investment Income Incentive Fees for the three and nine months ended September 30, 2018 and 2017, respectively:
($ in millions)
|
|
Three Months Ended
September 30, 2018
|
|
|
Three Months Ended
September 30, 2017
|
|
|
Nine Months Ended
September 30, 2018
|
|
|
Nine Months Ended
September 30, 2017
|
|
Net Investment Income Incentive Fee
|
|
$
|
1.6
|
|
|
$
|
0.6
|
|
|
$
|
3.4
|
|
|
$
|
2.8
|
|
The Net Investment Income Incentive Fee
payable to Oxford Square Management as September 30, 2018 and December 31, 2017 was approximately $1.6 million and $1.0 million,
respectively.
The Capital Gains Incentive Fee is determined
and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the
termination date), and equals 20% of the Company’s “Incentive Fee Capital Gains,” which consists of its realized
gains on investments for each calendar year, computed net of all realized losses on investments and unrealized capital depreciation
on investments for that calendar year. However, for accounting purposes only, in order to reflect the theoretical Capital Gains
Incentive Fee that would be payable for a given period as if all unrealized gains on investments were realized, the Company will
accrue a Capital Gains Incentive Fee based upon net realized gains/losses on investments and unrealized depreciation on investments
for that calendar year (in accordance with the terms of the Investment Advisory Agreement), plus unrealized appreciation on investments
held at the end of the period. It should be noted that a fee so calculated and accrued for accounting purposes would not necessarily
be payable under the Investment Advisory Agreement, and may never be paid based upon the computation of Capital Gains Incentive
Fees in subsequent periods. Amounts paid under the Investment Advisory Agreement will be consistent with the formula reflected
in the Investment Advisory Agreement.
The amount of Capital Gains Incentive Fee
expense related to the hypothetical liquidation of the portfolio (and assuming no other changes in realized or unrealized gains
and losses on investments) would only become payable to Oxford Square Management in the event of a complete liquidation of the
Company’s portfolio as of period end and the termination of the Investment Advisory Agreement on such date. Also, the Capital
Gains Incentive Fee expense fluctuates with the Company’s overall investment results.
There were no Capital Gains Incentive Fees
incurred during the three months ended September 30, 2018 and 2017. There were no accrued Capital Gains Incentive Fees payable
to Oxford Square Management as of September 30, 2018 and December 31, 2017.
Administration Agreement
The Company has also entered into the Administration
Agreement with Oxford Funds under which Oxford Funds provides administrative services to the Company. The Company pays Oxford Funds
an allocable portion of overhead and other expenses incurred by Oxford Funds in performing its obligations under the Administration
Agreement, including a portion of the rent and the compensation of the Chief Financial Officer, accounting staff and other administrative
support personnel, which creates potential conflicts of interest that the Board must monitor. The Company also reimburses Oxford
Funds for the costs associated with the functions performed by the Company’s Chief Compliance Officer that Oxford Funds pays
on the Company’s behalf pursuant to the terms of an agreement between the Company and Alaric Compliance Services, LLC.
Oxford Square Management is controlled
by Oxford Funds, its managing member. Charles M. Royce, a member of the Board, holds a minority, non-controlling interest in Oxford
Square Management. Oxford Funds manages the business and internal affairs of Oxford Square Management. Jonathan H. Cohen, the Company’s
Chief Executive Officer, as well as a Director, is the managing member of Oxford Funds. Saul B. Rosenthal, the Company’s
President and Chief Operating Officer, is also the President of Oxford Square Management and a member of Oxford Funds.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 7. RELATED PARTY TRANSACTIONS
(cont.)
For the three months ended September 30,
2018 and 2017, the Company incurred approximately $210,000 and $238,000, respectively, in compensation expenses for the services
of employees allocated to the administrative activities of the Company, pursuant to the Administration Agreement with Oxford Funds.
For the nine months ended September 30, 2018 and 2017, the Company incurred approximately $686,000 and $676,000, respectively,
in compensation expenses. Further, the Company incurred approximately $19,000 and $24,000 for facility costs allocated under the
Administration Agreement for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September
30, 2018 and 2017, the Company incurred approximately $45,000 and $57,000, respectively for facility costs. As of September 30,
2018 and December 31, 2017, there were no amounts payable under the Administration Agreement.
Co-Investment Exemptive Relief
On June 14, 2017, the SEC issued an order
permitting the Company and certain of its affiliates to complete negotiated co-investment transactions in portfolio companies,
subject to certain conditions (the “Order”). Subject to satisfaction of certain conditions to the Order, the Company
and certain of its affiliates are now permitted, together with any future BDCs, registered closed-end funds and certain private
funds, each of whose investment adviser is the Company’s investment adviser or an investment adviser controlling, controlled
by, or under common control with the Company’s investment adviser, to co-invest in negotiated investment opportunities where
doing so would otherwise be prohibited under the 1940 Act, providing the Company’s stockholders with access to a broader
array of investment opportunities.
Pursuant to the Order, the Company is permitted
to co-invest in such investment opportunities with its affiliates if a “required majority” (as defined in Section 57(o)
of the 1940 Act) of its independent directors make certain conclusions in connection with a co-investment transaction, including,
but not limited to, that (1) the terms of the potential co-investment transaction, including the consideration to be paid, are
reasonable and fair to the Company and its stockholders and do not involve overreaching in respect of the Company or its stockholders
on the part of any person concerned, and (2) the potential co-investment transaction is consistent with the interests of the Company’s
stockholders and is consistent with the Company’s then-current investment objective and strategies.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 8. EARNINGS PER SHARE
The following table sets forth the computation
of basic and diluted net increase in net assets resulting from investment income per share for the three and nine months ended
September 30, 2018 and 2017, respectively:
|
|
Three Months
Ended
September 30,
2018
|
|
|
Three Months
Ended
September 30,
2017
|
|
|
Nine Months
Ended
September 30,
2018
|
|
|
Nine Months
Ended
September 30,
2017
|
|
Net increase in net assets resulting from net investment income per common share – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
8,612,504
|
|
|
$
|
6,767,753
|
|
|
$
|
25,023,611
|
|
|
$
|
23,097,902
|
|
Weighted average common shares outstanding – basic
|
|
|
49,195,368
|
|
|
|
51,479,409
|
|
|
|
50,153,321
|
|
|
|
51,479,409
|
|
Net increase in net assets resulting from net investment income per common share – basic
|
|
$
|
0.18
|
|
|
$
|
0.13
|
|
|
$
|
0.50
|
|
|
$
|
0.45
|
|
Net increase in net assets resulting from net investment income per common share – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income, before adjustments
|
|
$
|
8,612,504
|
|
|
$
|
6,767,753
|
|
|
$
|
25,023,611
|
|
|
$
|
23,097,902
|
|
Adjustments for interest and deferred issuance costs on the Convertible Notes, and related impact on the Base Fees and Net Investment Income Incentive Fees
(1)(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net investment income, as adjusted
|
|
$
|
8,612,504
|
|
|
$
|
6,767,753
|
|
|
$
|
25,023,611
|
|
|
$
|
23,097,902
|
|
Weighted average common shares outstanding – basic
|
|
|
49,195,368
|
|
|
|
51,479,409
|
|
|
|
50,153,321
|
|
|
|
51,479,409
|
|
Share adjustments for dilutive effect of Convertible Notes
(1)(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average common shares outstanding – diluted
|
|
|
49,195,368
|
|
|
|
51,479,409
|
|
|
|
50,153,321
|
|
|
|
51,479,409
|
|
Net increase in net assets resulting from net investment income per common share – diluted
|
|
$
|
0.18
|
|
|
$
|
0.13
|
|
|
$
|
0.50
|
|
|
$
|
0.45
|
|
The following table sets forth the computation
of basic and diluted net increase in net assets resulting from operations per share for the three and nine months ended September
30, 2018 and 2017, respectively:
|
|
Three Months
Ended
September 30,
2018
|
|
|
Three Months
Ended
September 30,
2017
|
|
|
Nine Months
Ended
September 30,
2018
|
|
|
Nine Months
Ended
September 30,
2017
|
|
Net increase in net assets resulting from operations per common share – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
6,512,309
|
|
|
$
|
6,016,019
|
|
|
$
|
24,904,283
|
|
|
$
|
27,187,874
|
|
Weighted average common shares outstanding – basic
|
|
|
49,195,368
|
|
|
|
51,479,409
|
|
|
|
50,153,321
|
|
|
|
51,479,409
|
|
Net increase in net assets resulting from operations per common share – basic
|
|
$
|
0.13
|
|
|
$
|
0.12
|
|
|
$
|
0.50
|
|
|
$
|
0.53
|
|
Net increase in net assets resulting from operations per common share – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations, before adjustments
|
|
$
|
6,512,309
|
|
|
$
|
6,016,019
|
|
|
$
|
24,904,283
|
|
|
$
|
27,187,874
|
|
Adjustments for interest and deferred issuance costs on the Convertible Notes, and related impact on the Base Fees and Net Investment Income Incentive Fees
(1)(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,215,831
|
|
Net increase in net assets resulting from operations, as adjusted
|
|
$
|
6,512,309
|
|
|
$
|
6,016,019
|
|
|
$
|
24,904,283
|
|
|
$
|
31,403,705
|
|
Weighted average common shares outstanding – basic
|
|
|
49,195,368
|
|
|
|
51,479,409
|
|
|
|
50,153,321
|
|
|
|
51,479,409
|
|
Share adjustments for dilutive effect of Convertible Notes
(1)(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,248,298
|
|
Weighted average common shares outstanding – diluted
|
|
|
49,195,368
|
|
|
|
51,479,409
|
|
|
|
50,153,321
|
|
|
|
59,727,707
|
|
Net increase in net assets resulting from operations per common share – diluted
(3)
|
|
$
|
0.13
|
|
|
$
|
0.12
|
|
|
$
|
0.50
|
|
|
$
|
0.53
|
|
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 8. EARNINGS PER SHARE
(cont.)
(1)
|
Subsequent to the maturity and full repayment of the Convertible Notes on November 1, 2017, there are no dilutive potential common shares or adjustments for purposes of the computation of diluted earnings per share.
|
(2)
|
Due to the anti-dilutive effect on the computation of diluted earnings per share for the three and nine months ended September 30, 2017, the adjustments for interest and deferred issuance costs on the Convertible Notes, and the related impact on the Base Fees and net investment income incentive fees as well as share adjustments for dilutive effect of the Convertible Notes were excluded from the respective periods’ diluted earnings per share computation. The following table represents the respective adjustments which were not made due to the anti-dilutive effect on the computation of diluted net increase in net assets resulting from net investment income per common share for the three and nine months ended September 30, 2017 and diluted net increase in net assets resulting from operations per common share for the three months ended September 30, 2017:
|
|
|
Three Months
Ended
September 30,
2017
|
|
|
Nine Months
Ended
September 30,
2017
|
|
Net increase in net assets resulting from net investment income per common share – diluted:
|
|
|
|
|
|
|
|
|
Adjustments for interest and deferred issuance costs on the Convertible Notes, and related impact on the Base Fees and net investment income incentive fees
|
|
$
|
1,177,683
|
|
|
$
|
4,215,831
|
|
Share adjustments for dilutive effect of the Convertible Notes
|
|
|
8,248,298
|
|
|
|
8,248,298
|
|
Net increase in net assets resulting from operations per common share – diluted:
|
|
|
|
|
|
|
|
|
Adjustments for interest and deferred issuance costs on the Convertible Notes, and related impact on the Base Fees and net investment income incentive fees
|
|
$
|
1,177,683
|
|
|
$
|
—
|
|
Share adjustments for dilutive effect of the Convertible Notes
|
|
|
8,248,298
|
|
|
|
—
|
|
|
(3)
|
Net increase in net assets
resulting from operations per common share – diluted for the nine months ended September 30, 2017 is dilutive on a rounded
basis.
|
NOTE 9. DISTRIBUTIONS
The Company intends to continue to operate
so as to qualify to be taxed as a RIC under the Code and, as such, the Company would not be subject to federal income tax on the
portion of its taxable income and gains distributed to stockholders. To qualify to be taxed as a RIC, the Company is required,
among other requirements, to distribute at least 90% of its annual investment company taxable income, as defined by the Code. The
amount to be paid out as a distribution each quarter is determined by the Board and is based upon the annual taxable income estimated
by the management of the Company. Income calculated in accordance with U.S. federal income tax regulations differs substantially
from GAAP income. To the extent that the Company’s taxable earnings fall below the amount of distributions declared, however,
a portion of the total amount of the Company’s distributions for the fiscal year may be deemed a return of capital for tax
purposes to the Company’s stockholders. For the nine months ended September 30, 2018, the Company has paid cumulative distributions
of approximately $30.0 million from net investment income.
The Company intends to comply with the
applicable provisions of the Code pertaining to RICs to make distributions of taxable income sufficient to relieve it of substantially
all federal income taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions
and pay a 4% excise tax on such income. The Company will accrue excise tax on estimated excess taxable income, if any, as required.
The Company has adopted an “opt out”
distribution reinvestment plan for our common stockholders. As a result, if the Company makes a cash distribution, then stockholders’
cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt
out” of the distribution reinvestment plan so as to receive cash distributions. During the three months ended September 30,
2018 and 2017, the Company did not issue any new shares of common stock to stockholders in connection with the distribution reinvestment
plan. During the three months ended September 30, 2018 and 2017, as part of our dividend reinvestment plan for our common stockholders,
our dividend reinvestment administrator purchased 21,728 shares and 45,183 shares, respectively, of our common stock for approximately
$0.2 million and $0.3 million, respectively, in the open market to satisfy the reinvestment portion of our dividends. On September
28, 2018, the Company paid a distribution of $0.20 per share.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 9. DISTRIBUTIONS
(cont.)
On December 22, 2010, the Regulated Investment
Company Modernization Act of 2010 (the “Act”) was enacted which changed various technical rules governing the tax treatment
of RICs. The changes are generally effective for taxable years beginning after the date of enactment. Under the Act, the Company
will be permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited
period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred
in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards
may be more likely to expire unused. Additionally, post-enactment capital losses that are carried forward will retain their character
as either short-term or long-term losses rather than being considered all short-term as under previous law.
The tax character of distributions for the three months ended
September 30, 2018 represented on an estimated basis, $0.12 per share from ordinary income and $0.08 per share as a return
of capital. For the three months ended September 30, 2018, the amounts and sources of distributions reported are only estimates
(based on an average of our 3 most recent years’ reported tax character) and are not being provided for U.S. tax reporting
purposes. Because the Company believes the historical tax characteristics of distributions is the most useful information which
is readily available, the Company has used the average of the 3 most recent years in providing the estimates herein. However,
the timing and character of distributions for federal income tax purposes (which are determined in accordance with the U.S. federal
tax rules which may differ from GAAP) may be materially different than the historical information the Company used in providing
the estimates herein. The final determination of the source of all distributions in 2018 will be made after year-end and the amounts
represented may be materially different from the amounts disclosed in the final Form 1099-DIV notice. The actual amounts and sources
of the amounts for tax reporting purposes will depend upon the Company’s investment performance and may be subject to change
based on tax regulations.
NOTE 10. NET ASSET VALUE PER SHARE
The Company’s net asset value per
share as of September 30, 2018 and December 31, 2017 was $7.49 and $7.55, respectively. In determining the Company’s net
asset value per share, the Board determined in good faith the fair value of the Company’s portfolio investments for which
reliable market quotations are not readily available.
NOTE 11. SHARE REPURCHASE PROGRAM
On February 5, 2018, the Board authorized
a program for the purpose of repurchasing up to $25.0 million worth of the Company’s common stock. Under that repurchase
program, the Company was authorized, but was not obligated, to repurchase outstanding common stock in the open market from time
to time through December 31, 2018, provided that repurchases comply with the prohibitions under the Company’s Insider Trading
Policies and Procedures and the guidelines specified in Rule 10b-18 of the Securities Exchange Act of 1934, as amended, including
certain price, market volume and timing constraints. Further, any repurchases were to be conducted in accordance with the 1940
Act. During the three months ended September 30, 2018, under that repurchase program, the Company repurchased 261,343 shares of
outstanding common stock for approximately $1.8 million, while complying with the prohibitions under the Company’s Insider
Trading Policies and Procedures and the guidelines specified in Rule 10b-18 of the Securities Exchange Act of 1934, as amended,
including certain price, market volume and timing constraints. The remaining cost of shares that may be repurchased under the program
was $9.9 million as of September 30, 2018. In addition, repurchases were conducted in accordance with the 1940 Act.
The following table summarizes the Company’s
share repurchases under its stock repurchase program for the three and nine months ended September 30, 2018 and September 30, 2017:
|
|
Three Months
Ended
September 30,
2018
|
|
|
Three Months
Ended
September 30,
2017
|
|
|
Nine Months
Ended
September 30,
2018
|
|
|
Nine Months
Ended
September 30,
2017
|
|
Shares repurchased
|
|
|
261,343
|
|
|
|
—
|
|
|
|
2,333,143
|
|
|
|
—
|
|
Dollar amount repurchased
|
|
$
|
1,823,366
|
|
|
|
—
|
|
|
$
|
15,104,677
|
|
|
|
—
|
|
Average price per share (including commission)
|
|
$
|
6.98
|
|
|
|
—
|
|
|
$
|
6.47
|
|
|
|
—
|
|
Weighted average discount to net asset value
|
|
|
6.9
|
%
|
|
|
—
|
|
|
|
13.7
|
%
|
|
|
—
|
|
Remaining cost of shares that may be repurchased
|
|
$
|
9,895,323
|
|
|
|
—
|
|
|
$
|
9,895,323
|
|
|
|
—
|
|
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 12. INVESTMENT INCOME
The following table sets forth the components
of investment income for the three and nine months ended September 30, 2018 and 2017, respectively:
|
|
Three Months
Ended
September 30,
2018
|
|
|
Three Months
Ended
September 30,
2017
|
|
|
Nine Months
Ended
September 30,
2018
|
|
|
Nine Months
Ended
September 30,
2017
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated interest income
|
|
$
|
6,240,305
|
|
|
$
|
5,091,751
|
|
|
$
|
17,561,261
|
|
|
$
|
18,337,423
|
|
Original issue discount and market discount income
|
|
|
123,064
|
|
|
|
244,751
|
|
|
|
488,734
|
|
|
|
827,746
|
|
Payment-in-kind income
|
|
|
91,265
|
|
|
|
59,446
|
|
|
|
230,689
|
|
|
|
173,347
|
|
Discount income derived from unscheduled remittances at par
|
|
|
77,403
|
|
|
|
8,460
|
|
|
|
126,061
|
|
|
|
37,737
|
|
Total interest income
|
|
$
|
6,532,037
|
|
|
$
|
5,404,408
|
|
|
$
|
18,406,745
|
|
|
$
|
19,376,253
|
|
Income from securitization vehicles
|
|
$
|
7,217,804
|
|
|
$
|
8,086,059
|
|
|
$
|
20,121,432
|
|
|
$
|
26,081,676
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee letters
|
|
$
|
102,691
|
|
|
$
|
314,007
|
|
|
$
|
562,022
|
|
|
$
|
1,051,207
|
|
Loan prepayment and bond call fees
|
|
|
762,842
|
|
|
|
300,000
|
|
|
|
1,050,842
|
|
|
|
570,212
|
|
All other fees
|
|
|
603,078
|
|
|
|
393,223
|
|
|
|
942,933
|
|
|
|
895,982
|
|
Total other income
|
|
$
|
1,468,611
|
|
|
$
|
1,007,230
|
|
|
$
|
2,555,797
|
|
|
$
|
2,517,401
|
|
Total investment income
|
|
$
|
15,218,452
|
|
|
$
|
14,497,697
|
|
|
$
|
41,083,974
|
|
|
$
|
47,975,330
|
|
The 1940 Act requires that a BDC offer
significant managerial assistance to its portfolio companies. The Company may receive fee income for managerial assistance it renders
to portfolio companies in connection with its investments. For the three and nine months ended September 30, 2018 and September
30, 2017, respectively, the Company received no fee income for managerial assistance.
NOTE 13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company
enters into a variety of undertakings containing a variety of warranties and indemnifications that may expose the Company to some
risk of loss. The risk of future loss arising from such undertakings, while not quantifiable, is expected to be remote. As of September
30, 2018, the Company had approximately $1.5 million of commitments to purchase additional investments.
The Company is not currently subject to
any material legal proceedings. From time to time, the Company may be a party to certain legal proceedings in the ordinary course
of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio
companies. While the outcome of these legal proceedings, if any, cannot be predicted with certainty, the Company does not expect
that these proceedings will have a material effect upon its consolidated results of operations and financial condition.
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 14. FINANCIAL HIGHLIGHTS
Financial highlights for the three and nine
months ended September 30, 2018 and 2017 are as follows:
|
|
Three Months Ended
September 30, 2018
|
|
|
Three Months Ended
September 30, 2017
|
|
|
Nine Months Ended
September 30, 2018
|
|
|
Nine Months Ended
September 30, 2017
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value as of beginning of period
|
|
$
|
7.56
|
|
|
$
|
7.51
|
|
|
$
|
7.55
|
|
|
$
|
7.50
|
|
Net investment income
(1)
|
|
|
0.18
|
|
|
|
0.13
|
|
|
|
0.50
|
|
|
|
0.45
|
|
Net realized and unrealized (losses)/gains
(2)
|
|
|
(0.05
|
)
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
0.08
|
|
Net change in net asset value from operations
|
|
|
0.13
|
|
|
|
0.12
|
|
|
|
0.49
|
|
|
|
0.53
|
|
Distributions of net investment income
|
|
|
(0.12
|
)
|
|
|
(0.20
|
)
|
|
|
(0.37
|
)
|
|
|
(0.60
|
)
|
Distributions of return of capital
|
|
|
(0.08
|
)
|
|
|
—
|
|
|
|
(0.23
|
)
|
|
|
—
|
|
Total distributions
(3)
|
|
|
(0.20
|
)
|
|
|
(0.20
|
)
|
|
|
(0.60
|
)
|
|
|
(0.60
|
)
|
Effect of shares repurchased, gross
|
|
|
—
|
|
|
|
—
|
|
|
|
0.05
|
|
|
|
—
|
|
Net asset value at end of period
|
|
$
|
7.49
|
|
|
$
|
7.43
|
|
|
$
|
7.49
|
|
|
$
|
7.43
|
|
Per share market value at beginning of period
|
|
$
|
6.90
|
|
|
$
|
6.34
|
|
|
$
|
5.74
|
|
|
$
|
6.61
|
|
Per share market value at end of period
|
|
$
|
7.12
|
|
|
$
|
6.85
|
|
|
$
|
7.12
|
|
|
$
|
6.85
|
|
Total return based on market value
(4)
|
|
|
6.09
|
%
|
|
|
11.20
|
%
|
|
|
35.52
|
%
|
|
|
13.00
|
%
|
Total return based on net asset value
(5)
|
|
|
1.76
|
%
|
|
|
1.60
|
%
|
|
|
7.20
|
%
|
|
|
7.07
|
%
|
Shares outstanding at end of period
|
|
|
49,146,266
|
|
|
|
51,479,409
|
|
|
|
49,146,266
|
|
|
|
51,479,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios/Supplemental Data
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period (000’s)
|
|
|
368,267
|
|
|
|
382,293
|
|
|
|
368,267
|
|
|
|
382,293
|
|
Average net assets (000’s)
|
|
|
370,269
|
|
|
|
384,433
|
|
|
|
379,045
|
|
|
|
386,146
|
|
Ratio of operating expenses to average net assets
(6)
|
|
|
7.14
|
%
|
|
|
8.04
|
%
|
|
|
5.65
|
%
|
|
|
8.59
|
%
|
Ratio of net investment income to average net assets
(6)
|
|
|
9.30
|
%
|
|
|
7.04
|
%
|
|
|
8.80
|
%
|
|
|
7.98
|
%
|
Portfolio turnover rate
(7)
|
|
|
7.78
|
%
|
|
|
6.52
|
%
|
|
|
24.77
|
%
|
|
|
32.3
|
%
|
(1)
|
Represents per share net investment income for the period, based upon average shares outstanding.
|
(2)
|
Net realized and unrealized gains include rounding adjustments to reconcile change in net asset value per share.
|
(3)
|
Management monitors available taxable earnings, including net investment income and
realized capital gains, to determine if a return of capital may occur for the year. To the extent the Company’s
taxable earnings fall below the total amount of the Company’s distributions for that fiscal year, a portion of those
distributions may be deemed a return of capital to the Company’s stockholders. The ultimate tax character of the
Company’s earnings cannot be determined until tax returns are prepared after the end of the fiscal year. Refer to “Note 9. Distributions”.
|
(4)
|
Total return based on market value equals the increase or decrease of ending market value over beginning market value, plus distributions, divided by the beginning market value, assuming distribution reinvestment prices obtained under the Company’s distribution reinvestment plan, excluding any discounts. Total return is not annualized.
|
(5)
|
Total return based on net asset value equals the increase or decrease of ending net asset value over beginning net asset value, plus distributions, divided by the beginning net asset value. Total return is not annualized.
|
(6)
|
Annualized.
|
(7)
|
Portfolio turnover rate is calculated using the lesser of the year-to-date cash investment sales and debt repayments or year-to-date cash investment purchases over the average of the total investments at fair value.
|
(8)
|
The following table provides supplemental performance ratios (annualized) measured for the three and nine months ended September 30, 2018 and September 30, 2017:
|
|
|
Three Months Ended
September 30, 2018
|
|
|
Three Months Ended
September 30, 2017
|
|
|
Nine Months Ended
September 30, 2018
|
|
|
Nine Months Ended
September 30, 2017
|
|
Ratio of expenses to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses before incentive fees
|
|
|
5.44
|
%
|
|
|
7.46
|
%
|
|
|
4.45
|
%
|
|
|
7.61
|
%
|
Net investment income incentive fees
|
|
|
1.70
|
%
|
|
|
0.59
|
%
|
|
|
1.20
|
%
|
|
|
0.98
|
%
|
Ratio of expenses, excluding interest expense
|
|
|
4.70
|
%
|
|
|
4.19
|
%
|
|
|
4.02
|
%
|
|
|
4.74
|
%
|
OXFORD SQUARE CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
NOTE 15. RISKS AND UNCERTAINTIES
The U.S. capital markets have experienced
periods of extreme volatility and disruption. Disruptions in the capital markets tend to increase the spread between the yields
realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. The Company believes
these conditions may reoccur in the future. A prolonged period of market illiquidity may have an adverse effect on the Company’s
business, financial condition and results of operations. Adverse economic conditions could also increase the Company’s funding
costs, limit the Company’s access to the capital markets or result in a decision by lenders not to extend credit to the Company.
These events could limit the Company’s investment originations, limit the Company’s ability to grow and negatively
impact the Company’s operating results.
Many of the companies in which the Company
has made or will make investments may be susceptible to adverse economic conditions, which may affect the ability of such companies
to repay the Company’s loans or engage in a liquidity event such as a sale, recapitalization, or initial public offering.
Therefore, the Company’s nonperforming assets may increase, and the value of the Company’s portfolio may decrease during
this period.
Adverse economic conditions also may decrease
the value of any collateral securing some of the Company’s loans and the value of its equity investments. Adverse economic
conditions could lead to financial losses in the Company’s portfolio and a decrease in its revenues, net income, and the
value of the Company’s assets.
A portfolio company’s failure to satisfy
financial or operating covenants imposed by the Company or other lenders could lead to defaults and, potentially, termination of
the portfolio company’s loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements
and jeopardize the portfolio company’s ability to meet its obligations under the debt securities that the Company holds.
The Company may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting
portfolio company. In addition, if a portfolio company goes bankrupt, even though the Company may have structured its investment
as senior debt or secured debt, depending on the facts and circumstances, including the extent to which the Company actually provided
significant managerial assistance, if any, to that portfolio company, a bankruptcy court might re-characterize the Company’s
debt holding and subordinate all or a portion of the Company’s claim to that of other creditors. These events could harm
the Company’s financial condition and operating results.
As a BDC, the Company is required to carry
its investments at fair value as determined in good faith by or under the direction of its Board. Decreases in fair values of the
Company’s investments are recorded as unrealized depreciation. Depending on market conditions, the Company could incur substantial
losses in future periods, which could have a material adverse impact on its business, financial condition and results of operations.
The Company places its cash in an overnight
money market account and, at times, cash and cash equivalents may exceed the Federal Deposit Insurance Corporation insured limit.
In addition, the Company’s portfolio may be concentrated in a limited number of portfolio companies, which will subject the
Company to a risk of significant loss if any of these companies defaults on its obligations under any of its debt securities that
the Company holds or if those sectors experience a market downturn.
NOTE 16. SUBSEQUENT EVENTS
From October 1, 2018 through October 30,
2018, an additional 646,450 shares of the Company’s common stock settled through its share repurchase program, for an aggregate
cost of approximately $4.3 million at a weighted average price per share of common stock of approximately $6.60.
On October 12, 2018, OXSQ Funding amended
the Credit Facility with Citibank, N.A. Under the amended Credit Facility, an additional borrowing amount of approximately $37.3
million was made under the same terms as the existing credit agreement. The Company posted additional collateral with a principal
amount of approximately $76.4 million. All other existing terms of the Credit Facility remain unchanged.
On October 26, 2018, the Board declared
quarterly distributions to stockholders as follows:
Per Share Distribution Amount Declared
|
|
2018 Record Dates
|
|
2018 Payable Dates
|
$0.20
|
|
December 17, 2018
|
|
December 31, 2018
|
The Company’s management evaluated subsequent events through
the date of issuance of these consolidated financial statements and noted no other events that necessitate adjustments to or disclosure
in the financial statements.