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Section 1: 10-Q (10-Q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)  
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018
   
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

COMMISSION FILE NUMBER: 0-50398

 

 

 

OXFORD SQUARE CAPITAL CORP.

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   20-0188736
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

8 SOUND SHORE DRIVE, SUITE 255
GREENWICH, CONNECTICUT 06830

(Address of principal executive office)

 

(203) 983-5275
(Registrant’s telephone number, including area code)

  

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ Smaller Reporting company ¨
Emerging growth company ¨  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of July 31, 2018 was 49,255,172.

 

 

 

 

  

OXFORD SQUARE CAPITAL CORP.

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
  Consolidated Statements of Assets and Liabilities as of June 30, 2018 (unaudited) and December 31, 2017 1
  Consolidated Schedule of Investments as of June 30, 2018 (unaudited) 2
  Consolidated Schedule of Investments as of December 31, 2017 6
  Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 (unaudited) 13
  Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2018 (unaudited) and for the year ended December 31, 2017 14
  Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited) 15
  Notes to Consolidated Financial Statements (unaudited) 16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 43
Item 3. Quantitative and Qualitative Disclosures About Market Risk 59
Item 4. Controls and Procedures 59
   
PART II. OTHER INFORMATION 60
Item 1. Legal Proceedings 60
Item 1A. Risk Factors 60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 61
Item 3. Defaults Upon Senior Securities 62
Item 4. Mine Safety Disclosures 62
Item 5. Other Information 62
Item 6. Exhibits 63
SIGNATURES 64

 

 i 

 

  

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

   June 30, 2018    
   (unaudited)   December 31, 2017 
ASSETS          
Non-affiliated/non-control investments (cost of $450,822,377 and $418,990,080, respectively)  $432,929,878   $400,223,439 
Affiliated investments (cost of $10,450,787 and $10,528,740, respectively)   20,004,363    18,218,787 
Cash equivalents   124,238,303    30,013,842 
Restricted cash   1,856,479     
Interest and distributions receivable   3,757,276    5,085,494 
Other assets   758,301    579,694 
Total assets  $583,544,600   $454,121,256 
LIABILITIES          
Notes payable – Credit Facility, net of deferred issuance costs  $94,983,678   $ 
Notes payable – 6.50% Unsecured Notes, net of deferred issuance costs   62,501,177    62,340,159 
Securities purchased not settled   49,359,978     
Base management fee and net investment income incentive fee payable to affiliate   2,582,101    2,706,099 
Accrued interest payable   132,735    11,621 
Accrued expenses   577,207    644,735 
Total liabilities   210,136,876    65,702,614 
COMMITMENTS AND CONTINGENCIES (Note 13)          
NET ASSETS          
Common stock, $0.01 par value, 100,000,000 shares authorized; 49,407,609
and 51,479,409 shares issued and outstanding, respectively
   494,076    514,794 
Capital in excess of par value   516,037,155    529,297,749 
Distributions in excess of net investment income   (28,782,735)   (25,072,262)
Net unrealized depreciation on investments   (8,338,923)   (11,076,594)
Accumulated net realized losses on investments   (100,764,733)   (100,007,929)
Accumulated realized losses on extinguishment of debt   (5,237,116)   (5,237,116)
Total net assets   373,407,724    388,418,642 
Total liabilities and net assets  $583,544,600   $454,121,256 
Net asset value per common share  $7.56   $7.55 

 

See Accompanying Notes.

 

 1 

 

 

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited)
June 30, 2018

 

COMPANY/INVESTMENT(1)(20)  PRINCIPAL
AMOUNT
   COST   FAIR
VALUE(2)
   % of Net
Assets
 
Senior Secured Notes                    
Aerospace and Defense                    
Novetta, LLC                    
first lien senior secured notes, 7.10% (LIBOR + 5.00%), (1.00% floor) due October 16, 2022(4)(5)(6)(16)(21)  $5,557,130   $5,507,373   $5,376,523      
Total Aerospace and Defense       $5,507,373   $5,376,523    1.4%
                     
Business Services                    
Access CIG, LLC                    
first lien senior secured notes, 6.19% (LIBOR + 3.75%), (0.00% floor) due February 27, 2025(4)(5)(6)(14)(15)  $2,660,040   $2,673,378   $2,659,375      
second lien senior secured notes, 9.84% (LIBOR + 7.75%), (0.00% floor) due February 27, 2026(4)(5)(14)(16)(21)   13,622,227    13,709,048    13,610,921      
first lien incremental senior secured notes, 6.30% (LIBOR + 3.75%), (0.00% floor) due February 27, 2025(4)(5)(14)(15)   500,000    500,000    499,875      
second lien incremental senior secured notes, 10.39% (LIBOR + 7.50%), (0.00% floor) due February 27, 2026(4)(5)(14)(15)   2,400,000    2,421,000    2,398,008      
                     
Convergint Technologies, LLC                    
second lien senior secured notes, 9.08% (LIBOR + 6.75%), (0.75% floor) due February 2, 2026(4)(5)(15)(21)   1,500,000    1,493,097    1,499,745      
                     
Imagine! Print Solutions, LLC                    
second lien senior secured notes, 11.06% (LIBOR + 8.75%), (1.00% floor) due June 21, 2023(4)(5)(16)(21)   15,000,000    14,830,064    12,750,000      
                     
Intralinks, Inc.                    
first lien senior secured notes, 6.10% (LIBOR + 4.00%), (1.00% floor) due November 10, 2024(4)(5)(6)(14)(16)(21)   9,962,469    9,951,492    9,962,469      
second lien senior secured notes, 10.10% (LIBOR + 8.00%), (1.00% floor) due November 14, 2025(4)(5)(6)(14)(16)(21)   9,476,410    9,452,276    9,523,792      
                     
OMNIA Partners, Inc.                    
first lien senior secured notes, 6.08% (LIBOR + 3.75%), (0.00% floor ) due May 23, 2025(4)(5)(14)(15)(21)   6,000,000    6,000,000    5,985,000      
second lien senior secured notes, 9.83% (LIBOR + 7.50%), (0.00% floor) due May 22, 2026(4)(5)(14)(15)(21)   14,000,000    13,932,873    13,755,000      
                     
Polycom, Inc.                    
second lien senior secured notes, 12.09% (LIBOR + 10.00%), (1.00% floor) due September 27, 2024(4)(5)(16)   13,000,000    12,772,013    13,636,350      
                     
Premiere Global Services, Inc.                    
senior secured notes, 8.86% (LIBOR + 6.50%), (1.00% floor) due December 8, 2021(4)(5)(6)(14)(15)(21)   15,176,345    14,149,820    14,721,055      
second lien senior secured notes, 11.84% (LIBOR + 9.50%), (1.00% floor) due June 6, 2022(4)(5)(14)(16)(21)   10,000,000    9,762,572    9,375,000      
Total Business Services       $111,647,633   $110,376,590    29.6%
                     
Diversified Insurance                    
AmeriLife Group LLC                    
first lien senior secured notes, 6.84% (LIBOR + 4.75%), (1.00% floor) due July 10, 2022(4)(5)(6)(16)(21)  $15,062,966   $14,960,501   $15,006,480      
Total Diversified Insurance       $14,960,501   $15,006,480    4.0%
                     
Education                    
Edmentum, Inc. (f/k/a Plato, Inc.)                    
first lien senior secured notes, 6.86% (LIBOR + 4.50%), (1.00% floor) Cash, 4.00% PIK due June 9, 2021(3)(4)(5)(6)(15)(21)  $5,816,244   $5,765,331   $4,594,833      
Total Education       $5,765,331   $4,594,833    1.2%
                     
Financial Intermediaries                    
First American Payment Systems, L.P.                    
second lien senior secured notes, 12.51% (LIBOR + 10.50%), (1.00% floor) due July 5, 2024(4)(5)(16)(21)  $1,500,000   $1,461,005   $1,485,000      
                     
Lighthouse Network, LLC (f/k/a Harbortouch Payments, LLC)                    
senior secured notes, 6.59% (LIBOR + 4.50%), (1.00% floor) due November 30, 2024(4)(5)(6)(16)(21)   3,482,500    3,466,209    3,482,500      
second lien senior secured notes, 10.59% (LIBOR + 8.50%), (1.00% floor) due November 30, 2025(4)(5)(16)(21)   12,000,000    11,885,876    11,910,000      
Total Financial Intermediaries       $16,813,090   $16,877,500    4.5%
Healthcare                    
Keystone Acquisition Corp.                    
first lien senior secured notes, 7.58% (LIBOR + 5.25%), (1.00% floor) due May 1, 2024(4)(5)(6)(15)(21)  $3,577,500   $3,522,234   $3,573,028      
second lien senior secured notes, 11.58% (LIBOR + 9.25%), (1.00% floor) due May 1, 2025(4)(5)(15)(21)   10,000,000    9,818,343    9,975,000      
                     
MedPlast Holdings, Inc.                    
first lien senior secured notes, 6.09% (LIBOR + 3.75%), (0.00% floor ) due July 2, 2025(4)(5)(15)   10,000,000    10,000,000    9,981,300      
second lien senior secured notes, 10.09% (LIBOR + 7.75%), (0.00% floor) due July 2, 2026(4)(5)(15)   5,000,000    4,950,000    5,012,500      
Total Healthcare       $28,290,577   $28,541,828    7.6%
                     
IT Consulting                    
Unitek Global Services, Inc.                    
first lien senior secured tranche B term loan, 10.81% (LIBOR + 8.50%), (1.00% floor) due January 13, 2019(4)(5)(6)(14)(16)  $2,494,482   $2,488,746   $2,531,899      
Total IT Consulting       $2,488,746   $2,531,899    0.7%
                     
Logistics                    
Capstone Logistics Acquisition, Inc.                    
first lien senior secured notes, 6.59% (LIBOR + 4.50%), (1.00% floor) due October 7, 2021(4)(5)(6)(16)(21)  $10,221,953   $10,208,201   $10,112,067      
Total Logistics       $10,208,201   $10,112,067    2.7%
                     
Printing and Publishing                    
Merrill Communications, LLC                    
first lien senior secured notes, 7.61% (LIBOR + 5.25%), (1.00% floor ) due June 01, 2022(4)(5)(6)(15)(21)  $11,374,901   $11,308,496   $11,488,650      
Total Printing and Publishing       $11,308,496   $11,488,650    3.1%
                     
Software                    
ECI Software Solutions, Inc.                    
first lien senior secured notes, 6.75% (LIBOR + 4.25%), (0.00% floor ) due September 27, 2024(4)(5)(6)(14)(15)  $4,987,469   $5,006,219   $4,993,703      
second lien senior secured notes, 10.33% (LIBOR + 8.00%), (1.00% floor) due September 29, 2025(4)(5)(14)(15)(21)   15,000,000    14,905,007    14,962,500      

 

(continued on next page)

 

See Accompanying Notes.

 

 2 

 

 

 

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) — (continued)

June 30, 2018

 

COMPANY/INVESTMENT(1)(20)  PRINCIPAL
AMOUNT
   COST   FAIR
VALUE(2)
   % of Net
Assets
 
Senior Secured Notes - (continued)                    
                     
Software - (continued)                    
Help/Systems Holdings, Inc.                    
first lien senior secured notes, 6.26% (LIBOR + 3.75%), (0.00% floor) due March 28, 2025(4)(5)(14)(15)  $4,000,000   $4,010,000   $3,990,000      
second lien senior secured notes, 10.05% (LIBOR + 7.75%), (1.00% floor) due March 27, 2026(4)(5)(14)(16)(21)   15,500,000    15,494,553    15,461,250      
                     
Quest Software                    
first lien senior secured notes, 6.99% (LIBOR + 4.25%), (0.00% floor ) due May 16, 2025(4)(5)(14)(15)(21)   6,000,000    5,970,109    5,972,520      
second lien senior secured notes, 11.47% (LIBOR + 8.25%), (0.00% floor) due May 18, 2026(4)(5)(14)(15)(21)   15,000,000    14,850,928    14,953,200      
Total Software       $60,236,816   $60,333,173    16.2%
                     
Telecommunications Services                    
Global Tel Link Corp                    
first lien senior secured notes, 6.40% (LIBOR + 4.00%), (0.00% floor ) due May 22, 2020(4)(5)(6)(14)(15)  $2,991,275   $3,013,775   $2,997,497      
second lien senior secured notes, 10.58% (LIBOR + 8.25%), (1.25% floor) due November 23, 2020(4)(5)(14)(15)(21)   17,000,000    16,920,677    17,021,250      
Total Telecommunication Services       $19,934,452   $20,018,747    5.4%
Total Senior Secured Notes       $287,161,216   $285,258,290    76.4%
                     
Subordinated Debt                    
                     
IT Consulting                    
Unitek Global Services, Inc.                    
Holdco PIK Debt Cash 0.00%, 15.00% PIK, due July 13, 2019(3)(5)(14)  $838,942   $837,660   $851,526      
Total IT Consulting       $837,660   $851,526    0.2%
Total Subordinated Debt       $837,660   $851,526    0.2%
                     
Collateralized Loan Obligation - Debt Investments                    
                     
Structured Finance                    
Galaxy XXVIII CLO, Ltd.                    
CLO secured class F notes, 12.95% (LIBOR + 8.48%), due July 15, 2031(4)(5)(11)(12)(15)  $1,000,000   $925,000   $925,000      
                     
Jamestown CLO V Ltd.                    
CLO secured class F notes, 7.58% (LIBOR + 5.85%), due January 17, 2027(4)(5)(11)(12)(15)   4,000,000    3,345,977    3,513,200      
Total Structured Finance       $4,270,977   $4,438,200    1.2%
Total Collateralized Loan Obligation - Debt Investments       $4,270,977   $4,438,200    1.2%
                     
Collateralized Loan Obligation - Equity Investments                    
                     
Structured Finance                    
AMMC CLO XI, Ltd.                    
CLO subordinated notes, estimated yield 14.33% due April 30, 2031(9)(11)(12)(17)  $6,000,000   $3,742,397   $3,300,000      
                     
AMMC CLO XII, Ltd.                    
CLO subordinated notes, estimated yield 16.14% due November 10, 2030(9)(11)(12)(17)   12,921,429    6,730,450    5,556,214      
                     
Carlyle Global Market Strategies CLO 2013-2, Ltd.                    
CLO subordinated notes, estimated yield 17.81% due January 18, 2029(9)(11)(12)(17)   9,250,000    6,026,677    6,374,452      
                     
Catamaran CLO 2012-1 Ltd.                    
CLO subordinated notes, estimated yield 0.00% due December 20, 2023(9)(10)(11)(12)(17)   23,000,000    2,482,313    -      
                     
Cedar Funding II CLO, Ltd.                    
CLO subordinated notes, estimated yield 11.88% due March 09, 2025(9)(11)(12)(17)   18,000,000    13,648,713    12,240,000      
                     
Cedar Funding VI CLO, Ltd.                    
CLO subordinated notes, estimated yield 13.09% due October 20, 2028(9)(11)(12)(17)   7,700,000    7,087,710    6,930,000      
                     
CIFC Funding 2012-1, Ltd.                    
CLO subordinated notes, estimated yield 0.00% due August 14, 2024(9)(10)(11)(12)(17)   12,750,000    4,867    -      
                     
CIFC Funding 2014-3, Ltd.                    
CLO subordinated notes, estimated yield 9.21% due July 22, 2026(9)(11)(12)(17)   10,000,000    6,638,878    5,500,000      
                     
Galaxy XVIII CLO, Ltd.                    
CLO subordinated notes, estimated yield 25.04% due July 15, 2031(9)(11)(12)(17)   2,000,000    938,476    935,409      
                     
GoldenTree Loan Opportunities VII, Ltd.                    
CLO subordinated notes, estimated yield 7.14% due April 25, 2025(9)(10)(11)(12)(17)   4,670,000    1,131,725    1,027,400      
                     
Hull Street CLO Ltd.                    
CLO subordinated notes, estimated yield 2.55% due October 18, 2026(9)(11)(12)(17)   5,000,000    2,286,087    1,100,000      
                     
Ivy Hill Middle Market Credit Fund VII, Ltd.                    
CLO subordinated notes, estimated yield 17.74% due October 20, 2029(9)(11)(12)(17)   10,800,000    9,075,714    7,692,869      
                     
Jamestown CLO V Ltd.                    
CLO subordinated notes, estimated yield 1.64% due January 17, 2027(9)(11)(12)(17)   8,000,000    4,593,630    2,480,000      
                     
                     
KVK CLO 2013-2, Ltd.                    
CLO subordinated notes, estimated yield 8.20% due January 15, 2026(9)(11)(12)(17)   14,200,000    6,344,826    4,544,000      
                     
Madison Park Funding XIX, Ltd.                    
CLO subordinated notes, estimated yield 14.74% due January 22, 2028(9)(11)(12)(17)   5,422,500    5,331,860    5,964,750      
                     
Regatta V Funding, Ltd.                    
CLO subordinated notes, estimated yield 15.99% due October 25, 2026(9)(11)(12)(17)   3,000,000    1,842,439    1,770,000      
                     
Steele Creek CLO 2014-1, Ltd.                    
CLO subordinated notes, estimated yield 21.68% due August 21, 2031(9)(11)(12)(17)   6,000,000    4,493,041    4,950,000      

 

(continued on next page)

 

See Accompanying Notes.

 

 3 

 

 

 

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) — (continued)

June 30, 2018

 

COMPANY/INVESTMENT(1)(20)  PRINCIPAL
AMOUNT/SHARES
   COST   FAIR
VALUE(2)
   % of Net
Assets
 
Collateralized Loan Obligation - Equity Investments (continued)                    
Structured Finance - (continued)                    
                     
Telos CLO 2013-3, Ltd.                    
CLO subordinated notes, estimated yield 11.84% due July 17, 2026(9)(11)(12)(17)   $14,447,790   $9,686,437   $7,946,285      
                     
Telos CLO 2013-4, Ltd.                    
CLO subordinated notes, estimated yield 21.49% due January 17, 2030(9)(11)(12)(17)    11,350,000    7,611,922    7,717,005      
                     
Telos CLO 2014-5, Ltd.                    
CLO subordinated notes, estimated yield 21.98% due April 17, 2028(9)(11)(12)(14)(17)    28,500,000    19,232,437    19,168,087      
                     
Venture XIV, Ltd.                    
CLO subordinated notes, estimated yield 17.22% due August 28, 2029(9)(11)(12)(17)    5,250,000    3,298,926    2,835,000      
                     
Venture XVII, Ltd.                    
CLO subordinated notes, estimated yield 17.15% due April 15, 2027(9)(11)(12)(17)    6,200,000    4,308,462    4,045,291      
                     
Venture XXIV CLO, Ltd.                    
CLO subordinated notes, estimated yield 16.24% due October 20, 2028(9)(11)(12)(17)   3,750,000    3,391,814    3,412,500      
                     
Vibrant CLO V, Ltd.                    
CLO subordinated notes, estimated yield 16.93% due January 20, 2029(9)(11)(12)(17)    13,475,000    11,904,173    10,914,750      
                     
West CLO 2014-1, Ltd.                    
CLO subordinated notes, estimated yield 20.08% due July 18, 2026(9)(11)(12)(17)    9,250,000    6,539,812    5,735,000      
                     
Windriver 2012-1 CLO, Ltd.                    
CLO subordinated notes, estimated yield 13.41% due January 15, 2024(9)(11)(12)(17)    7,500,000    4,736,245    4,054,501      
                     
Zais CLO 6, Ltd.                    
CLO subordinated notes, estimated yield 22.31% due July 15, 2029(9)(11)(12)(17)    10,500,000    8,143,899    8,610,000      
                     
CLO Equity Side Letter Related Investments(11)(12)(13)        125,000    961,774      
Total Structured Finance       $161,378,930   $145,765,287    39.0%
Total Collateralized Loan Obligation - Equity Investments       $161,378,930   $145,765,287    39.0%
                     
Common Stock                    
IT Consulting                    
                     
Unitek Global Services                    
common equity(7)(14)   1,244,188   $684,960   $4,031,169      
Total IT Consulting       $684,960   $4,031,169    1.1%
Total Common Stock       $684,960   $4,031,169    1.1%
                     
Preferred Equity                    
IT Consulting                    
Unitek Global Services, Inc.                    
Series A Senior Preferred Equity(7)(14)  3,002,455   $2,762,421   $3,572,921      
Series A Preferred Equity(7)(14)   5,706,866    3,677,000    9,016,848      
Total IT Consulting       $6,439,421   $12,589,769    3.4%
Total Preferred Equity       $6,439,421   $12,589,769    3.4%
                     
Warrants                    
IT Consulting                    
Unitek Global Services, Inc.                    
Warrants to purchase common stock(7)(14)   159,795   $-   $-      
Total IT Consulting       $-   $-    0.0%
Total Warrants       $-   $-    0.0%
                     
Other Investments                    
Software                    
Algorithmic Implementations, Inc. (d/b/a "Ai Squared")                    
Earnout payments(7)(18)        500,000    -      
Total Software       $500,000   $-    0.0%
Total Other Investments       $500,000   $-    0.0%
                     
Total Investments in Securities(8)       $461,273,164   $452,934,241    121.3%
                     
Cash Equivalents                    
First American Government Obligations Fund(19)       $124,238,303   $124,238,303      
Total Cash Equivalents       $124,238,303   $124,238,303    33.3%
Total Investments in Securities and Cash Equivalents       $585,511,467   $577,172,544    154.6%

 

See Accompanying Notes.

 

 4 

 

 

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) — (continued)

June 30, 2018

 

 

(1) Other than Unitek Global Services, Inc., of which we are deemed to be an “affiliate,” we do not “control” and are not an “affiliate” of any of our portfolio companies, each as defined in the Investment Company Act of 1940 (the “1940 Act”). In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.

 

(2) Fair value is determined in good faith by the Board of Directors of the Company.

 

(3) Portfolio includes $6,655,186 of principal amount of debt investments which contain a PIK provision at June 30, 2018.

 

(4) Notes bear interest at variable rates.

 

(5) Cost value reflects accretion of original issue discount or market discount.

 

(6) Cost value reflects repayment of principal.

 

(7) Non-income producing at the relevant period end.

 

(8) Aggregate gross unrealized appreciation for federal income tax purposes is $20,151,038; aggregate gross unrealized depreciation for federal income tax purposes is $69,173,054. Net unrealized depreciation is $49,022,016 based upon a tax cost basis of $501,956,257

 

(9) Cost value reflects accretion of effective yield less any cash distributions received or entitled to be received from CLO equity investments.

 

(10) The CLO equity investment was optionally redeemed. Refer to “Note 3. Summary of Significant Accounting Policies.”

 

(11) Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the 1940 Act Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. As of June 30, 2018, the Company held qualifying assets that represented 71.8% of its total assets.

 

(12) Investment not domiciled in the United States.

 

(13) Fair value represents discounted cash flows associated with fees earned from CLO equity investments.

 

(14) Aggregate investments represent greater than 5% of net assets.

 

(15) The principal balance outstanding for this debt investment, in whole or in part, is indexed to 90-day LIBOR.

 

(16) The principal balance outstanding for this debt investment, in whole or in part, is indexed to 30-day LIBOR.

 

(17) The CLO subordinated notes and income notes are considered equity positions in the CLO funds. Equity investments are entitled to recurring distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s securities less contractual payments to debt holders and fund expenses. The estimated yield indicated is based upon a current projection of the amount and timing of these recurring distributions and the estimated amount of repayment of principal upon expected redemption. Such projections are periodically reviewed and adjusted, and the estimated yield may not ultimately be realized.

 

(18) Represents the earnout payments related to the sale of Algorithmic Implementations, Inc. (d/b/a “Ai Squared”).

 

(19) Represents cash equivalents held in money market accounts as of June 30, 2018.

 

(20) The fair value of the investment was determined using signifi cant unobservable inputs. See “Note 4. Fair Value.”

 

(21) All or a portion of this investment represents collateral under the Credit Facility.

 

See Accompanying Notes.

 

 5 

 

 

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

 

COMPANY/INVESTMENT(1)(20)  PRINCIPAL
AMOUNT
   COST   FAIR
VALUE(2)
   % of Net
Assets
 
Senior Secured Notes                    
Aerospace and Defense                    
Novetta, LLC                    
first lien senior secured notes, 6.70%  (LIBOR + 5.00%), (1.00% floor) due October 16, 2022(4)(5)(6)(15)  $5,586,000   $5,534,900   $5,399,819      
Total Aerospace and Defense       $5,534,900   $5,399,819    1.4%
                     
Business Services                    
Imagine! Print Solutions                    
second lien senior secured notes, 10.45% (LIBOR + 8.75%), (1.00% floor) due June 21, 2023(4)(5)(15)  $15,000,000   $14,815,027   $14,400,000      
                     
Intralinks, Inc.                    
first lien senior secured notes, 5.70% (LIBOR + 4.00%), (1.00% floor) due November 14, 2024(4)(5)(15)   5,000,000    4,975,253    4,968,750      
second lien senior secured notes, 9.70% (LIBOR + 8.00%), (1.00% floor) due November 14, 2025(4)(5)(6)(15)   10,560,000    10,492,764    10,494,000      
                     
Polycom, Inc.                    
second lien senior secured notes, 11.52% (LIBOR + 10.00%), (1.00% floor) due September 27, 2024(4)(5)(16)   13,000,000    12,759,617    12,983,750      
                     
Premiere Global Services, Inc.                    
senior secured notes, 7.90% (LIBOR + 6.50%), (1.00% floor) due December 8, 2021(4)(5)(6)(14)(15)   15,605,055    14,450,063    15,312,460      
second lien senior secured notes, 10.85% (LIBOR + 9.50%), (1.00% floor) due June 6, 2022(4)(5)(14)(16)   10,000,000    9,739,241    9,341,700      
Total Business Services       $67,231,965   $67,500,660    17.4%
                     
Consumer Services                    
Jackson Hewitt Tax Service, Inc.                    
first lien senior secured notes, 8.38% (LIBOR + 7.00%), (1.00% floor) due July 30, 2020(4)(5)(6)(15)  $19,601,471   $19,318,775   $19,282,947      
Total Consumer Services       $19,318,775   $19,282,947    4.9%
                     
Diversified Insurance                    
AmeriLife Group LLC                    
first lien senior secured notes, 6.32% (LIBOR + 4.75%), (1.00% floor) due July 10, 2022(4)(5)(6)(16)  $15,408,145   $15,294,886   $15,177,023      
Total Diversified Insurance       $15,294,886   $15,177,023    3.9%
                     
Education                    
Edmentum, Inc. (f/k/a Plato, Inc.)                    
first lien senior secured notes, 7.88% (LIBOR + 4.50%), (1.00% floor) Cash, 2.00% PIK due
June 10, 2019(3)(4)(5)(6)(15)
  $5,765,441   $5,745,684   $4,473,002      
Total Education       $5,745,684   $4,473,002    1.2%

 

(continued on next page)

See Accompanying Notes.

 

 6 

 

 

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)

December 31, 2017

 

COMPANY/INVESTMENT(1)(20)  PRINCIPAL
AMOUNT
   COST  

FAIR

VALUE(2)

   % of Net
Assets
 
Senior Secured Notes – (continued)                    
Financial Intermediaries                    
First American Payment Systems                    
second lien senior secured notes, 11.89% (LIBOR + 10.50%), (1.00% floor) due July 5, 2024(4)(5)(16)  $1,500,000   $1,458,866   $1,492,515      
                     
Lighthouse Network                    
senior secured notes, 6.07% (LIBOR + 4.50%), (1.00% floor) due November 30, 2024(4)(5)(16)   3,500,000    3,482,683    3,506,580      
second lien senior secured notes, 10.07% (LIBOR + 8.50%), (1.00% floor) due November 30, 2025(4)(5)(16)   12,000,000    11,880,523    11,940,000      
Total Financial Intermediaries       $16,822,072   $16,939,095    4.4%
                     
Healthcare                    
Keystone Acquisition Corp.                    
first lien senior secured notes, 6.94% (LIBOR + 5.25%), (1.00% floor) due May 1, 2024(4)(5)(6)(15)  $2,992,500   $2,935,933   $3,003,722      
second lien senior secured notes, 10.94% (LIBOR + 9.25%), (1.00% floor) due May 1, 2025(4)(5)(6)(15)   10,000,000    9,805,957    9,950,000      
Total Healthcare       $12,741,890   $12,953,722    3.3%
                     
IT Consulting                    
Unitek Global Services, Inc.                    
first lien senior secured tranche B term loan, 10.20% (LIBOR + 8.50%), (1.00% floor) due January 13, 2019(4)(5)(15)  $2,638,748   $2,627,442   $2,665,135      
Total IT Consulting       $2,627,442   $2,665,135    0.7%
                     
Logistics                    
Capstone Logistics Acquisition, Inc.                    
first lien senior secured notes, 6.07% (LIBOR + 4.50%), (1.00% floor) due October 7, 2021(4)(5)(6)(16)  $10,573,496   $10,555,951   $10,406,118      
Total Logistics       $10,555,951   $10,406,118    2.7%
                     
Printing and Publishing                    
Merrill Communications, LLC                    
first lien senior secured notes, 6.63% (LIBOR + 5.25%), (1.00% floor) due June 01, 2022(4)(5)(6)(15)  $11,374,901   $11,300,971   $11,431,776      
Total Printing and Publishing       $11,300,971   $11,431,776    2.9%
                     
Software                    
ECI Software Solutions                    
second lien senior secured notes, 9.69% (LIBOR + 8.00%), (1.00% floor) due September 29, 2025(4)(5)(15)  $15,000,000   $14,898,256   $14,925,000      
Help/Systems Holdings, Inc.                    
second lien senior secured notes, 11.19% (LIBOR + 9.50%), (1.00% floor) due October 8, 2022(4)(5)(15)   10,000,000    9,719,036    9,841,700      
Total Software       $24,617,292   $24,766,700    6.4%

 

(continued on next page)

See Accompanying Notes.

 

 7 

 

  

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)

December 31, 2017

 

COMPANY/INVESTMENT(1)(20)  PRINCIPAL
AMOUNT
   COST   FAIR
VALUE(2)
   % of Net
Assets
 
Senior Secured Notes – (continued)                    
Telecommunications Services                    
Aricent Technologies, Inc.                    
second lien senior secured notes, 9.97% (LIBOR + 8.50%), (1.00% floor) due April 14, 2022(4)(5)(16)  $14,000,000   $14,007,813   $14,077,000      
                     
Birch Communications, Inc.                    
first lien senior secured notes, 8.60% (LIBOR + 7.25%), (1.00% floor) due July 17, 2020(4)(5)(6)(14)(15)   21,171,285    20,571,906    20,112,721      
                     
Global Tel Link Corp                    
second lien senior secured notes, 9.94% (LIBOR + 8.25%), (1.25% floor) due November 23, 2020(4)(5)(15)   17,000,000    16,906,033    16,978,750      
Total Telecommunication Services       $51,485,752   $51,168,471    13.2%
Total Senior Secured Notes       $243,277,580   $242,164,468    62.4%
                     
Subordinated Debt                    
IT Consulting                    
Unitek Global Services, Inc.                    
Holdco PIK Debt Cash 0.00%, 15.00% PIK, due July 13, 2019(3)(5)  $778,766   $776,917   $786,554      
Total IT Consulting       $776,917   $786,554    0.2%
Total Subordinated Debt       $776,917   $786,554    0.2%
                     
Collateralized Loan Obligation – Debt Investments                    
Structured Finance                    
Catamaran CLO 2012-1 Ltd.                    
CLO secured class F notes, 7.88% (LIBOR + 6.25%), due December 20, 2023(4)(5)(11)(12)(15)  $1,250,000   $1,185,390   $1,250,000      
                     
Jamestown CLO V Ltd.                    
CLO secured class F notes, 7.20% (LIBOR + 5.85%), due January 17, 2027(4)(5)(11)(12)(15)   4,000,000    3,308,060    3,470,000      
Total Structured Finance       $4,493,450   $4,720,000    1.2%
Total Collateralized Loan Obligation – Debt Investments       $4,493,450   $4,720,000    1.2%
                     
Collateralized Loan Obligation – Equity Investments                    
Structured Finance                    
AMMC CLO XI, Ltd.                    
CLO subordinated notes, estimated yield 5.02% due October 30, 2023(9)(11)(12)(17)  $6,000,000   $3,677,571   $3,180,000      
                     
AMMC CLO XII, Ltd.                    
CLO subordinated notes, estimated yield 15.85% due November 10, 2030(9)(11)(12)(17)   12,921,429    6,771,090    6,848,357      
                     
Ares XXV CLO Ltd.                    
CLO subordinated notes, estimated yield 0.00% due January 17, 2024(9)(10)(11)(12)(17)   15,500,000    317,125          

 

(continued on next page)

See Accompanying Notes.

 

 8 

 

 

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)

December 31, 2017

 

COMPANY/INVESTMENT(1)(20)  PRINCIPAL
AMOUNT
   COST  

FAIR

VALUE(2)

   % of Net
Assets
 
Collateralized Loan Obligation – Equity Investments – (continued)                   
Structured Finance – (continued)                    
Ares XXVI CLO Ltd.                    
CLO subordinated notes, estimated yield 0.60% due April 15, 2025(9)(11)(12)(17)  $17,630,000   $3,939,835   $1,969,952      
                     
Carlyle Global Market Strategies CLO 2013-2, Ltd.                    
CLO subordinated notes, estimated yield 21.86% due January 18, 2029(9)(11)(12)(17)   9,250,000    5,714,900    6,485,378      
                     
Catamaran CLO 2012-1 Ltd.                    
CLO subordinated notes, estimated yield -3.04% due December 20, 2023(9)(11)(12)(17)   23,000,000    9,100,628    4,140,000      
                     
Cedar Funding II CLO, Ltd.                    
CLO subordinated notes, estimated yield 14.01% due March 09, 2025(9)(11)(12)(17)   18,000,000    13,720,760    13,320,000      
                     
Cedar Funding VI CLO, Ltd.                    
CLO subordinated notes, estimated yield 13.91% due October 20, 2028(9)(11)(12)(17)   7,700,000    6,979,156    6,776,000      
                     
CIFC Funding 2012-1, Ltd.                    
CLO subordinated notes, estimated yield 0.00% due August 14, 2024(9)(10)(11)(12)(17)   12,750,000    213,307    223,125      
                     
CIFC Funding 2014-3, Ltd.                    
CLO subordinated notes, estimated yield 11.67% due July 22, 2026(9)(11)(12)(17)   10,000,000    6,865,057    6,200,000      
                     
Galaxy XVII CLO, Ltd.                    
CLO subordinated notes, estimated yield 35.05% due July 15, 2026(9)(11)(12)(17)   2,000,000    887,235    815,304      
                     
GoldenTree Loan Opportunities VII, Ltd.                    
CLO subordinated notes, estimated yield 12.95% due April 25, 2025(9)(11)(12)(17)   4,670,000    2,567,366    2,521,800      
                     
Hull Street CLO Ltd.                    
CLO subordinated notes, estimated yield -4.73% due October 18, 2026(9)(11)(12)(17)   5,000,000    2,710,747    1,500,000      
                     
Ivy Hill Middle Market Credit Fund VII, Ltd.                    
CLO subordinated notes, estimated yield 17.49% due October 20, 2029(9)(11)(12)(17)   10,800,000    8,973,086    8,053,212      
                     
Jamestown CLO V Ltd.                    
CLO subordinated notes, estimated yield 9.42% due January 17, 2027(9)(11)(12)(17)   8,000,000    4,841,345    2,880,000      
                     
KVK CLO 2013-2, Ltd.                    
CLO subordinated notes, estimated yield 19.78% due January 15, 2026(9)(11)(12)(17)   14,200,000    6,731,819    5,254,000      

 

(continued on next page)

See Accompanying Notes.

 

 9 

 

 

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)

December 31, 2017

 

COMPANY/INVESTMENT(1)(20)  PRINCIPAL
AMOUNT
   COST  

FAIR

VALUE(2)

   % of Net
Assets
 
Collateralized Loan Obligation – Equity Investments – (continued)                   
Structured Finance – (continued)                    
Madison Park Funding XIX, Ltd.                    
CLO subordinated notes, estimated yield 13.35% due January 22, 2028(9)(11)(12)(17)  $5,422,500   $5,300,799   $6,127,425      
                     
Mountain Hawk III CLO, Ltd.                    
CLO M notes due April 18, 2025(11)(12)(13)   2,389,676        73,526      
                     
Regatta V Funding, Ltd.                    
CLO subordinated notes, estimated yield 20.45% due October 25, 2026(9)(11)(12)(17)   3,000,000    1,834,823    1,920,000      
                     
Steele Creek CLO 2014-1, Ltd.                    
CLO subordinated notes, estimated yield 21.88% due August 21, 2026(9)(11)(12)(17)   6,000,000    4,309,580    4,320,000      
                     
Telos CLO 2013-3, Ltd.                    
CLO subordinated notes, estimated yield 17.45% due July 17, 2026(9)(11)(12)(17)   14,447,790    9,548,557    8,090,762      
                     
Telos CLO 2013-4, Ltd.                    
CLO subordinated notes, estimated yield 30.14% due July 17, 2024(9)(11)(12)(17)   11,350,000    7,468,980    6,810,000      
                     
Telos CLO 2014-5, Ltd.                    
CLO subordinated notes, estimated yield 19.95% due April 17, 2025(9)(11)(12)(17)   28,500,000    18,258,468    16,267,667      
                     
Venture XIV, Ltd.                    
CLO subordinated notes, estimated yield 17.23% due August 28, 2029(9)(11)(12)(17)   5,250,000    3,324,796    2,835,000      
                     
Venture XVII, Ltd.                    
CLO subordinated notes, estimated yield 19.92% due July 15, 2026(9)(11)(12)(17)   6,200,000    4,196,382    3,919,298      
                     
Venture XXIV CLO, Ltd.                    
CLO subordinated notes, estimated yield 15.98% due October 20, 2028(9)(11)(12)(17)   3,750,000    3,331,706    3,375,000      
                     
Vibrant CLO V, Ltd.                    
CLO subordinated notes, estimated yield 17.01% due January 20, 2029(9)(11)(12)(17)   13,475,000    11,931,713    11,319,000      
                     
West CLO 2014-1, Ltd.                    
CLO subordinated notes, estimated yield 27.80% due July 18, 2026(9)(11)(12)(17)   9,250,000    6,472,541    6,290,000      
                     
Windriver 2012-1 CLO, Ltd.                    
CLO subordinated notes, estimated yield 13.19% due January 15, 2024(9)(11)(12)(17)   7,500,000    4,823,259    4,105,937      

 

(continued on next page)

 

See Accompanying Notes.

 

 10 

 

 

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)

December 31, 2017

 

COMPANY/INVESTMENT(1)(20)  PRINCIPAL
AMOUNT/
SHARES
   COST  

FAIR

VALUE(2)

   % of Net
Assets
 
Collateralized Loan Obligation – Equity Investments – (continued)                    
Structured Finance – (continued)                    
Zais CLO 6, Ltd.                    
CLO subordinated notes, estimated yield 21.30% due July 15, 2029(9)(11)(12)(17)  $10,500,000   $8,408,861   $9,030,000      
                     
CLO Equity Side Letter Related Investments(11)(12)(13)        125,000    1,353,363      
Total Structured Finance       $173,346,492   $156,004,106    40.2%
Total Collateralized Loan Obligation – Equity Investments       $173,346,492   $156,004,106    40.2%
                     
Common Stock                    
IT Consulting                    
Unitek Global Services                    
common equity(7)   1,244,188   $684,960   $3,048,261      
Total IT Consulting       $684,960   $3,048,261    0.8%
Total Common Stock       $684,960   $3,048,261    0.8%
                     
Preferred Equity                    
IT Consulting                    
Unitek Global Services, Inc.                    
Series A Senior Preferred Equity(7)   3,002,455   $2,762,421   $3,272,675      
Series A Preferred Equity(7)   5,706,866    3,677,000    8,446,162      
Total IT Consulting       $6,439,421   $11,718,837    3.0%
Total Preferred Equity       $6,439,421   $11,718,837    3.0%
                     
Warrants                    
IT Consulting                    
Unitek Global Services, Inc.                    
Warrants to purchase common stock(7)   159,795   $   $      
Total IT Consulting       $   $    0.0%
Total Warrants       $   $    0.0%
                     
Other Investments                    
Software                    
Algorithmic Implementations, Inc. (d/b/a “Ai Squared”)                    
Earnout payments(7)(18)        500,000          
Total Software       $500,000   $    0.0%
Total Other Investments       $500,000   $    0.0%
                     
Total Investments in Securities(8)       $429,518,820   $418,442,226    107.8%
                     
Cash Equivalents                    
First American Government Obligations Fund(19)       $30,013,842   $30,013,842      
Total Cash Equivalents       $30,013,842   $30,013,842    7.7%
Total Investments in Securities and Cash Equivalents       $459,532,662   $448,456,068    115.5%

 

See Accompanying Notes.

 

 11 

 

  

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)

December 31, 2017

 

 

(1)Other than Unitek Global Services, Inc., of which we are deemed to be an “affiliate,” we do not “control” and are not an “affiliate” of any of our portfolio companies, each as defined in the Investment Company Act of 1940 (the “1940 Act”). In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.

(2)Fair value is determined in good faith by the Board of Directors of the Company.
(3)Portfolio includes $6,544,207 of principal amount of debt investments which contain a PIK provision at December 31, 2017.
(4)Notes bear interest at variable rates.
(5)Cost value reflects accretion of original issue discount or market discount.
(6)Cost value reflects repayment of principal.
(7)Non-income producing at the relevant period end.
(8)Aggregate gross unrealized appreciation for federal income tax purposes is $19,352,263; aggregate gross unrealized depreciation for federal income tax purposes is $55,593,978. Net unrealized depreciation is $36,247,715 based upon a tax cost basis of $454,683,941.
(9)Cost value reflects accretion of effective yield less any cash distributions received or entitled to be received from CLO equity investments.
(10)The CLO equity investment was optionally redeemed. Refer to “Note 3. Summary of Significant Accounting Policies.”
(11)Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the 1940 Act Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. As of 2017, the Company held qualifying assets that represented 64.6% of its total assets.
(12)Investment not domiciled in the United States.
(13)Fair value represents discounted cash flows associated with fees earned from CLO equity investments.
(14)Aggregate investments represent greater than 5% of net assets.
(15)The principal balance outstanding for this debt investment, in whole or in part, is indexed to 90-day LIBOR.
(16)The principal balance outstanding for this debt investment, in whole or in part, is indexed to 30-day LIBOR.
(17)The CLO subordinated notes and income notes are considered equity positions in the CLO funds. Equity investments are entitled to recurring distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s securities less contractual payments to debt holders and fund expenses. The estimated yield indicated is based upon a current projection of the amount and timing of these recurring distributions and the estimated amount of repayment of principal upon expected redemption. Such projections are periodically reviewed and adjusted, and the estimated yield may not ultimately be realized.
(18)Represents the earnout payments related to the sale of Algorithmic Implementations, Inc. (d/b/a “Ai Squared”).
(19)Represents cash equivalents held in money market accounts as of December 31, 2017.
(20)The fair value of the investment was determined using significant unobservable inputs. See “Note 4. Fair Value.”

 

See Accompanying Notes.

 

 12 

 

 

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

 

   Three Months
Ended
June 30, 2018
   Three Months
Ended
June 30, 2017
   Six Months
Ended
June 30, 2018
   Six Months
Ended
June 30, 2017
 
INVESTMENT INCOME                    
From non-affiliated investments:                    
Interest income – debt investments  $5,851,355   $6,717,197   $11,673,092   $13,789,404 
Income from securitization vehicles and investments   6,100,764    9,426,014    12,903,628    17,995,617 
Other income   465,203    768,682    1,087,186    1,510,171 
Total investment income from non-affiliated investments   12,417,322    16,911,893    25,663,906    33,295,192 
From affiliated investments:                    
Interest income – debt investments   101,400    100,260    201,616    182,441 
Total investment income from affiliated investments   101,400    100,260    201,616    182,441 
Total investment income   12,518,722    17,012,153    25,865,522    33,477,633 
                     
EXPENSES                    
Base management fee   1,742,391    2,182,173    3,422,205    4,452,175 
Interest expense   1,250,694    4,128,335    2,376,774    7,433,918 
Professional fees   348,159    589,841    505,077    1,342,234 
Compensation expense   216,133    203,339    476,222    438,373 
General and administrative   433,624    651,417    834,195    1,217,163 
Total expenses before incentive fee   3,991,001    7,755,105    7,614,473    14,883,863 
Net investment income incentive fee   839,710    1,210,141    1,839,942    2,263,621 
Capital gains incentive fee                
Total incentive fees   839,710    1,210,141    1,839,942    2,263,621 
Total expenses   4,830,711    8,965,246    9,454,415    17,147,484 
Net investment income   7,688,011    8,046,907    16,411,107    16,330,149 
                     
Net change in unrealized appreciation/depreciation on investments                    
Non-Affiliated investments   (2,477,460)   1,499,946    874,142    10,759,231 
Affiliated investments   2,737,099    (466,884)   1,863,529    (78,111)
Total net change in unrealized appreciation/depreciation on investments   259,639    1,033,062    2,737,671    10,681,120 
                     
Net realized (losses)/gains                    
Non-Affiliated investments   (1,045,739)   542,959    (756,804)   (4,925,712)
Extinguishment of debt       (505,032)       (913,702)
Total net realized (losses)/gains   (1,045,739)   37,927    (756,804)   (5,839,414)
Net increase in net assets resulting from operations  $6,901,911   $9,117,896   $18,391,974   $21,171,855 
                     
Net increase in net assets resulting from net investment income per common share:                    
(Basic and Diluted)  $0.15   $0.16   $0.32   $0.32 
                     
Net increase in net assets resulting from operations per common share:                    
(Basic and Diluted)  $0.14   $0.18   $0.36   $0.41 
                     
Weighted average shares of common stock outstanding:                    
Basic   50,086,563    51,479,409    50,640,236    51,479,409 
Diluted   50,086,563    59,727,707    50,640,236    59,727,707 
Distributions per share  $0.20   $0.20   $0.40   $0.40 

 

See Accompanying Notes.

 

 13 

 

 

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

 

   Six Months     
   Ended
June 30, 2018
(unaudited)
   Year Ended
December 31, 2017
 
Increase in net assets from operations:          
Net investment income  $16,411,107   $30,726,730 
Net change in unrealized appreciation/depreciation on investments   2,737,671    23,040,171 
Net realized losses   (756,804)   (10,157,230)
Net increase in net assets resulting from operations   18,391,974    43,609,671 
Distributions to stockholders          
Distributions from net investment income   (20,121,580)   (33,752,176)
Tax return of capital distributions       (7,431,351)
Total distributions to stockholders   (20,121,580)   (41,183,527)
Capital share transactions:          
Repurchase of common stock   (13,281,312)    
Net decrease in net assets from capital share transactions   (13,281,312)    
Total (decrease)/increase in net assets   (15,010,918)   2,426,144 
Net assets at beginning of period   388,418,642    385,992,498 
Net assets at end of period (including over distributed net investment income of $28,782,735 and $25,072,262, respectively)  $373,407,724   $388,418,642 
Capital share activity:          
Shares repurchased   (2,071,800)    
Net decrease in capital share activity   (2,071,800)    

 

See Accompanying Notes.

 

 14 

 

 

OXFORD SQUARE CAPITAL CORP.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

 

   Six Months
Ended
June 30, 2018
   Six Months
Ended
June 30, 2017
 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net increase in net assets resulting from operations  $18,391,974   $21,171,855 
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:          
Accretion of discounts on investments   (365,670)   (582,992)
Accretion of discount on notes payable and deferred debt issuance costs   163,628    545,247 
Increase in investments due to PIK   (139,424)   (111,212)
Payment of original discount on TICC CLO 2012-1 LLC       (693,253)
Purchases of investments   (64,163,990)   (133,934,917)
Repayments of principal   68,559,380    108,714,373 
Proceeds from the sale of investments   3,235,410    131,410,627 
Net realized losses   756,804    5,839,414 
Reductions to CLO equity cost value   9,718,834    28,180,587 
Net change in unrealized appreciation/depreciation on investments   (2,737,671)   (10,681,120)
Decrease in interest and distributions receivable   1,328,218    2,862,187 
Increase in other assets   (174,316)   (357,680)
Increase (decrease) in accrued interest payable   121,114    (122,849)
Decrease in base management fee and net investment income incentive fee payable   (123,998)   (281,067)
Decrease in accrued expenses   (67,528)   (99,218)
Net cash provided by operating activities   34,502,765    151,859,982 
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Distributions paid   (20,121,580)   (20,591,765)
Repurchase of common stock   (13,281,312)    
Proceeds from issuance of credit facility   95,193,113     
Deferred debt issuance costs    (212,046)   (2,260,868)
Repayment of original proceeds of notes payable – TICC CLO 2012-1 LLC       (55,204,316)
Proceeds from issuance of 6.50% unsecured notes       64,370,255 
Net cash provided by financing activities   61,578,175    (13,686,724)
Net increase in cash, cash equivalents and restricted cash   96,080,940    138,173,258 
Cash equivalents and restricted cash, beginning of period   30,013,842    11,713,334 
Cash equivalents and restricted cash, end of period  $126,094,782   $149,886,592 
           
SUPPLEMENTAL DISCLOSURES          
Cash paid for interest  $1,046,016   $7,011,420 
           
NON-CASH ACTIVITIES          
Securities sold not settled  $   $10,209,285 
Securities purchased not settled  $49,359,978   $2,956,250 

 

See Accompanying Notes.

 

 15 

 

 

OXFORD SQUARE CAPITAL CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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. 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.

 

 16 

 

 

OXFORD SQUARE CAPITAL CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 trustees of OXSQ Funding. The amounts are held by the trustees for payment of interest expense and operating expenses of the entities, principal repayments on borrowings, or new investments, based upon the terms of the respective indenture, and are not available for general corporate purposes. There was approximately $1.9 million of restricted cash held by the trustee of OXSQ Funding as of June 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.

 

 17 

 

 

OXFORD SQUARE CAPITAL CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 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 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.

 

 

 18 

 

 

OXFORD SQUARE CAPITAL CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 30, 2018 and as of December 31, 2017, the Company had no 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.

 

 19 

 

 

OXFORD SQUARE CAPITAL CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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.

 

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. This amortization expense is included in interest expense in the Company’s consolidated financial statements. Upon early termination of debt, or a credit facility, the remaining balance of unamortized fees related to such debt is accelerated into realized losses on extinguishment of debt on the Company’s statement of operations. Deferred debt issuance costs are presented on the balance sheet as a direct deduction from the related debt liability.

 

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.

 

 20 

 

 

OXFORD SQUARE CAPITAL CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 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 June 30, 2018 and December 31, 2017, was approximately $501,956,257 and $454,683,941, respectively.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In March 2017, the FASB issued Accounting Standards Update (“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 would have a material impact on the Company’s consolidated financial statements and disclosures.

 

 21 

 

 

OXFORD SQUARE CAPITAL CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(unaudited)

 

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

 

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 six months ended June 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 June 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  $   $   $285.3    285.3 
Subordinated Debt           0.8    0.8 
CLO Debt           4.4    4.4 
CLO Equity           145.8    145.8 
Equity and Other Investments           16.6    16.6 
Total Investments at fair value          $452.9    452.9 
Cash equivalents   124.2            124.2 
Total assets at fair value  $124.2   $   $452.9    577.1 

 

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 

 

 22 

 

 

OXFORD SQUARE CAPITAL CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(unaudited)

 

NOTE 4. FAIR VALUE (cont.)

 

Significant Unobservable Inputs for Level 3 Investments

 

The following tables provide quantitative information about the Company’s Level 3 fair value measurements as of June 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
June 30, 2018
   Valuation Techniques/
Methodologies
  Unobservable
Input
  Range/Weighted Average(1)  Impact to
Fair Value
from an
Increase in
Input(2)
Senior Secured Notes   $238.0   Market quotes  NBIB(3)  79.0% – 101.0%/98.0%  NA
    1.5   Yield Analysis  Discount Margin  6.9%/ ncm(4)  Decrease
    43.3   Recent transactions  Actual trade/payoff(5)  97.0% – 104.9%/100.4%  NA
    2.5   Enterprise value(6)/
Discounted cash flow
  Market multiples(7)/
Discount rate(8)
  6.5x – 7.0x/ncm(4)  
7.1% – 8.4%/ncm(4)
  Increase
Decrease
Subordinated Debt    0.8   Enterprise value(6)/
Discounted cash flow
  Market multiples(7)/
Discount rate(8)
  6.5x – 7.0x/ncm(4)  
7.1% – 10.6%/ncm(4)
  Increase
Decrease
CLO Debt    4.4   Market quotes  NBIB(3)  87.8% – 92.5%/88.8%  NA
CLO Equity    138.7   Market quotes  NBIB(3)  22.0% – 110.0%/53.5%  NA
    1.0   Discounted cash flow(9)  Discount rate(8)  12.1% – 15.4%/15.2%  Decrease
    6.1   Recent transactions  Actual trade/payoff(5)  22.0% – 82.5%/55.0%  N/A
Equity and Other Investments    16.6   Enterprise value(6)  EBITDA(7)/
Market multiples(7)
  $39.5/ncm(4)  
6.5x – 7.0x/ncm(4)
  Increase
Increase
Total Fair Value for
Level 3 Investments
  $452.9             

 

 

(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.

 

 23 

 

 

OXFORD SQUARE CAPITAL CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(unaudited)

 

NOTE 4. FAIR VALUE (cont.)

 

(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 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.

 

   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             

 

 

(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.

 

 24 

 

 

OXFORD SQUARE CAPITAL CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(unaudited)

 

NOTE 4. FAIR VALUE (cont.)

 

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 June 30, 2018 and the level of each financial liability within the fair value hierarchy:

 

($ in thousands)  Carrying
Value(1)
   Fair Value   Level 1   Level 2   Level 3 
6.50% Unsecured Notes(2)  $62,501   $66,276   $   $66,276   $ 
Credit Facility(3)   94,984    95,193            95,193 
Total  $157,485    161,469        66,276   $95,193 

 

 

(1)Carrying value is net of deferred debt issuance costs. As of June 30, 2018 the unamortized debt issuance costs were approximately $1.9 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 due 2024 (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.

 

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 thousands)  Carrying
Value(1)
   Fair Value   Level 1   Level 2   Level 3 
6.50% Unsecured Notes(2)  $62,340   $66,546   $   $66,546   $ 
Total  $62,340   $66,546   $   $66,546   $ 

 

 

(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).

 

 25 

 

 

OXFORD SQUARE CAPITAL CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(unaudited)

 

NOTE 4. FAIR VALUE (cont.)

 

A reconciliation of the fair value of investments for the three months ended June 30, 2018, utilizing significant unobservable inputs, is as follows:

 

($ in millions)  Senior
Secured
Notes
   Subordinated
Debt
   CLO
Debt
   CLO
Equity
   Equity/
Other
Investments
   Total 
Balance at March 31, 2018(1)  $241.9   $0.8   $3.5   $154.2   $13.9   $414.2 
Realized gains (losses) included in earnings   0.8            (1.8)       (1.0)
Unrealized appreciation (depreciation) included in earnings   (1.8)           (0.6)   2.7    0.3 
Accretion of discount   0.2                    0.2 
Purchases   87.9        0.9            88.8 
Repayments and Sales   (43.7)           (0.2)       (43.9)
Reductions to CLO equity cost value(2)               (5.8)       (5.8)
Payment-in-Kind income   0.1                    0.1 
Transfers in and/or (out) of level 3                        
Balance at June 30, 2018(1)  $285.3   $0.8   $4.4   $145.8   $16.6   $452.9 
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
  $(1.3)  $   $   $(2.5)  $2.7   $(1.1)

 

 

(1)Totals may not sum due to rounding.
(2)Reduction to cost value on the Company’s CLO equity investments represents the difference between distributions received, or entitled to be received, of approximately $11.9 million and the effective yield interest income of approximately $6.1 million.

 

 26 

 

 

OXFORD SQUARE CAPITAL CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(unaudited)

 

NOTE 4. FAIR VALUE (cont.)

 

A reconciliation of the fair value of investments for the six months ended June 30, 2018, 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, 2017  $242.2   $0.8   $4.7   $156.0   $14.7   $418.4 
Realized (losses) gains included in earnings   1.0        0.1    (1.9)   0.1    (0.7)
Unrealized appreciation included in earnings   (0.8)           1.8    1.8    2.8 
Accretion of discount   0.4                    0.4 
Purchases   112.6        0.9            113.5 
Repayments and Sales   (70.2)       (1.3)   (0.4)       (71.9)
Reductions to CLO equity cost value(1)               (9.7)       (9.7)
Payment-in-Kind income   0.2                    0.2 
Transfers in and/or (out) of level 3