UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM
_______________________________
| (Mark One) | ||||||
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
| FOR THE QUARTERLY PERIOD ENDED | ||||||
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER:
_______________________________
(Exact name of registrant as specified in its charter)
_______________________________
|
| | |||||
| (State or other jurisdiction of | (I.R.S. Employer |
(Address of principal executive office)
(Registrant’s telephone number, including area code)
_______________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| | | | ||
| | | | ||
| | | |
_______________________________
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the 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 ☐ | |||
| | 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
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 May 1, 2024, was
OXFORD SQUARE CAPITAL CORP.
TABLE OF CONTENTS
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1 |
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Item 1. |
1 |
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Statements of Assets and Liabilities as of March 31, 2024 (unaudited) and December 31, 2023 |
1 |
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2 |
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10 |
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Statements of Operations for the three months ended March 31, 2024 and 2023 (unaudited) |
17 |
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Statements of Changes in Net Assets for the three months ended March 31, 2024 and 2023 (unaudited) |
18 |
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Statements of Cash Flows for the three months ended March 31, 2024 and 2023 (unaudited) |
19 |
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20 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
45 |
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Item 3. |
61 |
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Item 4. |
61 |
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63 |
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Item 1. |
63 |
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Item 1A. |
63 |
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Item 2. |
63 |
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Item 3. |
63 |
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Item 4. |
63 |
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Item 5. |
63 |
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Item 6. |
64 |
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65 |
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i
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OXFORD SQUARE CAPITAL CORP.
STATEMENTS OF ASSETS AND LIABILITIES
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March 31, |
December 31, |
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(unaudited) |
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ASSETS |
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| Non-affiliated/non-control investments (cost: $ |
$ |
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$ |
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| Affiliated investments (cost: $ |
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Cash and cash equivalents |
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Interest and distributions receivable |
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Other assets |
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Total assets |
$ |
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$ |
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LIABILITIES |
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| Notes payable – 6.25% Unsecured Notes, net of deferred issuance costs of $ |
$ |
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$ |
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| Notes payable – 5.50% Unsecured Notes, net of deferred issuance costs of $ |
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Securities purchased not settled |
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Base Fee and Net Investment Income Incentive Fee payable to affiliate |
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Accrued interest payable |
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Accrued expenses |
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Distributions payable |
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Total liabilities |
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COMMITMENTS AND CONTINGENCIES (Note 13) |
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NET ASSETS |
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| Common stock, $ |
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Capital in excess of par value |
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Total distributable earnings/(accumulated losses) |
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( |
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( |
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Total net assets |
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Total liabilities and net assets |
$ |
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$ |
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Net asset value per common share |
$ |
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$ |
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The accompanying notes are an integral part of these financial statements.
1
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS (unaudited)
March 31, 2024
|
COMPANY/INVESTMENT(1)(20) |
ACQUISITION |
PRINCIPAL |
COST |
FAIR |
% OF |
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Senior Secured Notes |
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Business Services |
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Access CIG, LLC |
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| first lien senior secured notes, |
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$ |
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$ |
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$ |
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Convergint Technologies, LLC |
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| first lien senior secured notes, |
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| second lien senior secured notes, |
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Premiere Global Services, Inc. |
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| first lien senior secured notes, |
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| replacement revolver, |
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| second lien senior secured notes, |
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Verifone Systems, Inc. |
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| first lien senior secured notes, |
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Total Business Services |
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$ |
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$ |
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% |
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Diversified Insurance |
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Affinion Insurance Solutions, Inc. (f/k/a AIS Intermediate, LLC) |
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| first lien senior secured notes, |
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$ |
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$ |
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$ |
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Total Diversified Insurance |
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$ |
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$ |
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% |
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Food and Beverage |
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Shearer’s Foods, LLC |
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| first lien senior secured notes, |
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$ |
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$ |
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$ |
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Total Food and Beverage |
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$ |
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$ |
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% |
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(continued on next page)
The accompanying notes are an integral part of these financial statements.
2
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS (unaudited) — (continued)
March 31, 2024
|
COMPANY/INVESTMENT(1)(20) |
ACQUISITION |
PRINCIPAL |
COST |
FAIR |
% OF |
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Senior Secured Notes – (continued) |
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Healthcare |
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Careismatic Brands, Inc. (f/k/a New Trojan Parent, Inc.) |
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| second lien senior secured notes, |
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$ |
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$ |
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$ |
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HealthChannels, Inc. (f/k/a ScribeAmerica, LLC) |
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| first lien senior secured notes, |
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Viant Medical Holdings, Inc. |
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| first lien senior secured notes, |
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| second lien senior secured notes, |
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Total Healthcare |
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$ |
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$ |
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% |
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Software |
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Alvaria, Inc. (f/k/a Aspect Software, Inc.) |
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| first lien second out senior secured notes, |
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$ |
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$ |
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$ |
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| first lien third out tranche A senior secured notes, |
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| first lien third out tranche B senior secured notes, |
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| first lien fourth out senior secured notes, |
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Dodge Data & Analytics, LLC |
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| first lien senior secured notes, |
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| second lien senior secured notes, |
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Help/Systems Holdings, Inc. |
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| first lien senior secured notes, |
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| second lien senior secured notes, |
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(continued on next page)
The accompanying notes are an integral part of these financial statements.
3
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS (unaudited) — (continued)
March 31, 2024
|
COMPANY/INVESTMENT(1)(20) |
ACQUISITION |
PRINCIPAL |
COST |
FAIR |
% OF |
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Senior Secured Notes – (continued) |
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Software – (continued) |
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Kofax, Inc. |
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| first lien senior secured notes, |
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$ |
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$ |
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$ |
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Magenta Buyer, LLC (f/k/a McAfee Enterprise) |
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| first lien senior secured notes, |
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| second lien senior secured notes, |
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Quest Software, Inc. |
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| first lien senior secured notes, |
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| second lien senior secured notes, |
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RSA Security, LLC |
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| second lien senior secured notes, |
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Veritas USA, Inc. |
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| first lien senior secured notes, |
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Total Software |
|
$ |
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$ |
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% |
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Telecommunication Services |
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ConvergeOne Holdings, Inc. |
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| first lien senior secured notes, |
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$ |
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$ |
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$ |
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| second lien senior secured notes, |
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| Global Tel Link Corp. |
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Total Telecommunication Services |
|
$ |
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$ |
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% |
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Utilities |
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CLEAResult Consulting, Inc. |
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| second lien senior secured notes, |
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$ |
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$ |
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$ |
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Total Utilities |
|
$ |
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$ |
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% |
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Total Senior Secured Notes |
|
$ |
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$ |
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% |
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(continued on next page)
The accompanying notes are an integral part of these financial statements.
4
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS (unaudited) — (continued)
March 31, 2024
|
COMPANY/INVESTMENT(1)(20) |
ACQUISITION |
PRINCIPAL |
COST |
FAIR |
% OF |
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Collateralized Loan Obligation – Equity Investments |
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Structured Finance |
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Ares XLIV CLO Ltd. |
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| CLO subordinated notes, estimated yield |
|
$ |
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$ |
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$ |
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Atlas Senior Loan Fund XI, Ltd. |
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| CLO subordinated notes, estimated yield |
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| Bain Capital Credit CLO 2017-2, Ltd. |
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BlueMountain CLO 2014-2 Ltd. |
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| CLO subordinated notes, estimated yield |
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Carlyle Global Market Strategies CLO 2013-2, Ltd. |
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| CLO subordinated notes, estimated yield |
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Carlyle Global Market Strategies CLO 2021-6, Ltd. |
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| CLO subordinated notes, estimated yield |
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Cedar Funding II CLO, Ltd. |
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| CLO subordinated notes, estimated yield |
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Cedar Funding VI CLO, Ltd. |
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| CLO subordinated notes, estimated yield |
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CIFC Funding 2014-3, Ltd. |
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| CLO subordinated notes, estimated yield |
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Dryden 43 Senior Loan Fund |
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| CLO subordinated notes, estimated yield |
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Gulf Stream Meridian 4 Ltd. |
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| CLO subordinated notes, estimated yield |
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Madison Park Funding XVIII, Ltd. |
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| CLO subordinated notes, estimated yield |
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(continued on next page)
The accompanying notes are an integral part of these financial statements.
5
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS (unaudited) — (continued)
March 31, 2024
|
COMPANY/INVESTMENT(1)(20) |
ACQUISITION |
PRINCIPAL |
COST |
FAIR |
% OF |
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|
Collateralized Loan Obligation – Equity Investments – (continued) |
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Structured Finance – (continued) |
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Madison Park Funding XIX, Ltd. |
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| CLO subordinated notes, estimated yield |
|
$ |
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$ |
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$ |
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Octagon Investment Partners 49, Ltd. |
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| CLO subordinated notes, estimated yield |
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Sound Point CLO XVI, Ltd. |
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| CLO subordinated notes, estimated yield |
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Telos CLO 2013-3, Ltd. |
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| CLO subordinated notes, estimated yield |
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Telos CLO 2014-5, Ltd. |
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| CLO subordinated notes, estimated yield |
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Venture XVII, Ltd. |
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| CLO subordinated notes, estimated yield |
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Venture XX, Ltd. |
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| CLO subordinated notes, estimated yield |
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|
Venture 35 CLO, Limited |
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||||||||||
| CLO subordinated notes, estimated yield |
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|
Venture 39 CLO, Limited |
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| CLO subordinated notes, estimated yield |
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|
West CLO 2014-1, Ltd. |
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| CLO subordinated notes, estimated yield |
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|
Zais CLO 6, Ltd. |
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| CLO subordinated notes, estimated yield |
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|
Total Structured Finance |
|
$ |
|
$ |
|
|
% |
|||||||
|
Total Collateralized Loan Obligation – Equity Investments |
|
$ |
|
$ |
|
|
% |
|||||||
|
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|||||||||||
|
Common Stock |
|
|
|
|
||||||||||
|
IT Consulting |
|
|
|
|
||||||||||
|
UniTek Global Services, Inc. |
|
|
|
|
||||||||||
|
common equity(7)(27) |
|
|
|
$ |
|
$ |
|
|||||||
|
Total IT Consulting |
|
$ |
|
$ |
|
% |
||||||||
|
Total Common Stock |
|
$ |
|
$ |
|
% |
||||||||
(continued on next page)
The accompanying notes are an integral part of these financial statements.
6
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS (unaudited) — (continued)
March 31, 2024
|
COMPANY/INVESTMENT(1)(20) |
ACQUISITION |
PRINCIPAL |
COST |
FAIR |
% OF |
||||||||
|
Preferred Stock |
|
|
|
||||||||||
|
IT Consulting |
|
|
|
||||||||||
|
UniTek Global Services, Inc. |
|
|
|
||||||||||
|
Series B Preferred Stock(3)(17)(21)(27) |
|
|
$ |
|
$ |
|
|||||||
|
Series B Senior Preferred Stock(3)(17)(22)(27) |
|
|
|
|
|
|
|||||||
|
Series B Super Senior Preferred Stock(3)(17)(23)(27) |
|
|
|
|
|
|
|
||||||
|
Total IT Consulting |
$ |
|
$ |
|
|
% |
|||||||
|
Total Preferred Equity |
$ |
|
$ |
|
|
% |
|||||||
|
|
|
|
|||||||||||
|
Total Investments in Securities(8) |
$ |
|
$ |
|
|
% |
|||||||
|
|
|
|
|||||||||||
|
Cash Equivalents |
|
|
|
||||||||||
| First American Government Obligations Fund – Class Z Shares, |
|
$ |
|
$ |
|
|
|||||||
|
Total Cash Equivalents |
$ |
|
$ |
|
|
% |
|||||||
|
Total Investments in Securities and Cash |
$ |
|
$ |
|
|
% |
|||||||
____________
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(continued on next page)
The accompanying notes are an integral part of these financial statements.
7
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS (unaudited) — (continued)
March 31, 2024
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
|
Name of Issuer |
Title of Issue |
Amount of |
Fair Value |
Gross |
Gross |
Net |
Fair Value |
||||||||||||||||
|
AFFILIATED INVESTMENT: |
|
|
|
|
|
|
|
||||||||||||||||
|
Unitek Global Systems, Inc |
Common Stock |
$ |
$ |
$ |
$ |
$ |
|
$ |
|||||||||||||||
|
Series B Preferred Stock |
|
|
|
|
|
|
|
||||||||||||||||
|
Series B Senior Preferred Stock |
|
|
|
|
|
|
( |
) |
|
||||||||||||||
|
Series B Super Senior Preferred Stock |
|
|
|
|
|
|
( |
) |
|
|
|||||||||||||
|
Total Affiliated Investment |
|
|
|
|
|
|
( |
) |
|
|
|||||||||||||
|
Total Control Investment |
|
|
|
|
|
|
|
||||||||||||||||
|
TOTAL CONTROL AND AFFILIATED INVESTMENTS |
$ |
$ |
|
$ |
$ |
$ |
( |
) |
$ |
|
|||||||||||||
____________
(a)
(b) Gross additions include increases in investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of discounts and fees. For the three months ended March 31, 2024, a total of approximately $1.4 million of PIK dividends were entitled to be received yet deemed uncollectible.
(c)
(continued on next page)
The accompanying notes are an integral part of these financial statements.
8
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS (unaudited) — (continued)
March 31, 2024
(28) As part of a restructuring completed on September 17, 2021, a portion of the Company’s investment in the first lien senior secured notes of Premiere Global Services, Inc. was converted into a like amount of a new revolving credit facility (the “Replacement Revolver”). On March 15, 2023, the maturity date of the Replacement Revolver was amended from March 15, 2023 to April 7, 2023. The cost basis of the Replacement Revolver was established by allocating a portion of the cost basis from the first lien senior secured notes pro-rata based on the amount of principal that was converted from the first lien senior secured notes to the Replacement Revolver. The Replacement Revolver has no unfunded commitment and is on non-accrual status as of March 31, 2024.
(29)
(30)
(31)
(32) As of March 31, 2024, the effective yield has been estimated to be 0%. The aggregate projected amount of future recurring distributions and terminal principal payment is less than the amortized investment cost.
The accompanying notes are an integral part of these financial statements.
9
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS
December 31, 2023
|
COMPANY/INVESTMENT(1)(20) |
ACQUISITION |
PRINCIPAL |
COST |
FAIR |
% OF |
|||||||||
|
Senior Secured Notes |
|
|
|
|
||||||||||
|
Business Services |
|
|
|
|
||||||||||
|
Access CIG, LLC |
|
|
|
|
||||||||||
| second lien senior secured notes, |
|
$ |
|
$ |
|
$ |
|
|
||||||
|
|
|
|
|
|||||||||||
|
Convergint Technologies, LLC |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
| second lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|||||||||||
|
Premiere Global Services, Inc. |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
|
|
|
|
|
|
|||||||
| replacement revolver, |
|
|
|
|
|
|
|
|
||||||
| second lien senior secured notes, |
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|||||||||||
|
Verifone Systems, Inc. |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
|
Total Business Services |
|
$ |
|
$ |
|
|
% |
|||||||
|
|
|
|
|
|||||||||||
|
Diversified Insurance |
|
|
|
|
||||||||||
|
Affinion Insurance Solutions, Inc. (f/k/a AIS Intermediate, LLC) |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
|
|
$ |
|
$ |
|
|
||||||
|
Total Diversified Insurance |
|
$ |
|
$ |
|
|
% |
|||||||
|
|
|
|
|
|||||||||||
|
Healthcare |
|
|
|
|
||||||||||
|
Careismatic Brands, Inc. (f/k/a New Trojan Parent, Inc.) |
|
|
|
|
||||||||||
| second lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|||||||||||
|
HealthChannels, Inc. (f/k/a ScribeAmerica, LLC) |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
(continued on next page)
The accompanying notes are an integral part of these financial statements.
10
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS — (continued)
December 31, 2023
|
COMPANY/INVESTMENT(1)(20) |
ACQUISITION |
PRINCIPAL |
COST |
FAIR |
% OF |
|||||||||
|
Senior Secured Notes – (continued) |
|
|
|
|
||||||||||
|
Healthcare – (continued) |
|
|
|
|
||||||||||
|
Viant Medical Holdings, Inc. |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
$ |
|
$ |
|
$ |
|
|
||||||
| second lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
|
Total Healthcare |
|
$ |
|
$ |
|
|
% |
|||||||
|
|
|
|
|
|||||||||||
|
Software |
|
|
|
|
||||||||||
|
Alvaria, Inc. (f/k/a Aspect Software, Inc.) |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
| second lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|||||||||||
|
Dodge Data & Analytics, LLC |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
| second lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|||||||||||
|
Help/Systems Holdings, Inc. |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
| second lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|||||||||||
|
Kofax, Inc. |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|||||||||||
|
Magenta Buyer, LLC (f/k/a McAfee Enterprise) |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
| second lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|||||||||||
|
Quest Software, Inc. |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
| second lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
(continued on next page)
The accompanying notes are an integral part of these financial statements.
11
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS — (continued)
December 31, 2023
|
COMPANY/INVESTMENT(1)(20) |
ACQUISITION |
PRINCIPAL |
COST |
FAIR |
% OF |
|||||||||
|
Senior Secured Notes – (continued) |
|
|
|
|
||||||||||
|
Software – (continued) |
|
|
|
|
||||||||||
|
RSA Security, LLC |
|
|
|
|
||||||||||
| second lien senior secured notes, |
|
$ |
|
$ |
|
$ |
|
|
||||||
|
|
|
|
|
|||||||||||
|
Veritas USA, Inc. |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
|
Total Software |
|
$ |
|
$ |
|
|
% |
|||||||
|
|
|
|
|
|||||||||||
|
Telecommunication Services |
|
|
|
|
||||||||||
|
ConvergeOne Holdings, Inc. |
|
|
|
|
||||||||||
| first lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
| second lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|||||||||||
|
Global Tel Link Corp. |
|
|
|
|
||||||||||
| second lien senior secured notes, |
|
|
|
|
|
|
|
|
||||||
|
Total Telecommunication Services |
|
$ |
|
$ |
|
|
% |
|||||||
|
|
|
|
|
|||||||||||
|
Utilities |
|
|
|
|
||||||||||
|
CLEAResult Consulting, Inc. |
|
|
|
|
||||||||||
| second lien senior secured notes, |
|
|
|
$ |
|
$ |
|
|
||||||
|
Total Utilities |
|
$ |
|
$ |
|
|
% |
|||||||
|
Total Senior Secured Notes |
|
$ |
|
$ |
|
|
% |
|||||||
|
|
|
|
|
|||||||||||
|
Collateralized Loan Obligation – Equity Investments |
|
|
|
|
||||||||||
|
Structured Finance |
|
|
|
|
||||||||||
|
Ares XLIV CLO Ltd. |
|
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|||||||||||
|
Atlas Senior Loan Fund XI, Ltd. |
|
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|||||||||||
|
BlueMountain CLO 2014-2 Ltd. |
|
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|||||||||||
|
Carlyle Global Market Strategies CLO 2013-2, Ltd. |
|
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|||||||||||
|
Carlyle Global Market Strategies CLO 2021-6, Ltd. |
|
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
|
||||||
(continued on next page)
The accompanying notes are an integral part of these financial statements.
12
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS — (continued)
December 31, 2023
|
COMPANY/INVESTMENT(1)(20) |
ACQUISITION |
PRINCIPAL |
COST |
FAIR |
% OF |
||||||||
|
Collateralized Loan Obligation – Equity Investments – (continued) |
|
|
|
||||||||||
|
Structured Finance – (continued) |
|
|
|
||||||||||
|
Cedar Funding II CLO, Ltd. |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
$ |
|
$ |
|
$ |
|
||||||
|
|
|
|
|||||||||||
|
Cedar Funding VI CLO, Ltd. |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
||||||
|
|
|
|
|||||||||||
|
CIFC Funding 2014-3, Ltd. |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
||||||
|
|
|
|
|||||||||||
|
Dryden 43 Senior Loan Fund |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
||||||
|
|
|
|
|||||||||||
|
Gulf Stream Meridian 4 Ltd. |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
||||||
|
|
|
|
|||||||||||
|
Madison Park Funding XVIII, Ltd. |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
||||||
|
|
|
|
|||||||||||
|
Madison Park Funding XIX, Ltd. |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
||||||
|
|
|
|
|||||||||||
|
Octagon Investment Partners 49, Ltd. |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
||||||
|
|
|
|
|||||||||||
|
Sound Point CLO XVI, Ltd. |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
||||||
|
|
|
|
|||||||||||
|
Telos CLO 2013-3, Ltd. |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
||||||
|
|
|
|
|||||||||||
|
Telos CLO 2014-5, Ltd. |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
||||||
|
|
|
|
|||||||||||
|
Venture XVII, Ltd. |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
||||||
|
|
|
|
|||||||||||
|
Venture XX, Ltd. |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|||||||
|
|
|
|
|||||||||||
|
Venture 35 CLO, Limited |
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
||||||
(continued on next page)
The accompanying notes are an integral part of these financial statements.
13
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS — (continued)
December 31, 2023
|
COMPANY/INVESTMENT(1)(20) |
ACQUISITION |
PRINCIPAL |
COST |
FAIR |
% OF |
|||||||||
|
Collateralized Loan Obligation – Equity Investments – (continued) |
|
|
|
|
||||||||||
|
Structured Finance – (continued) |
|
|
|
|
||||||||||
|
Venture 39 CLO, Limited |
|
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
$ |
|
$ |
|
$ |
|
|
||||||
|
|
|
|
|
|||||||||||
|
West CLO 2014-1, Ltd. |
|
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|||||||||||
|
Zais CLO 6, Ltd. |
|
|
|
|
||||||||||
| CLO subordinated notes, estimated yield |
|
|
|
|
|
|
|
|
||||||
|
Total Structured Finance |
|
$ |
|
$ |
|
|
% |
|||||||
|
Total Collateralized Loan Obligation – Equity Investments |
|
$ |
|
$ |
|
|
% |
|||||||
|
|
|
|
|
|||||||||||
|
Common Stock |
|
|
|
|
||||||||||
|
IT Consulting |
|
|
|
|
||||||||||
|
UniTek Global Services, Inc. |
|
|
|
|
||||||||||
|
common equity(7)(27) |
|
|
|
$ |
|
$ |
|
|||||||
|
Total IT Consulting |
|
$ |
|
$ |
|
% |
||||||||
|
Total Common Stock |
|
$ |
|
$ |
|
% |
||||||||
|
|
|
|
|
|||||||||||
|
Preferred Stock |
|
|
|
|
||||||||||
|
IT Consulting |
|
|
|
|
||||||||||
|
UniTek Global Services, Inc. |
|
|
|
|
||||||||||
|
Series B Preferred Stock(3)(17)(21)(27) |
|
|
|
$ |
|
$ |
|
|||||||
|
Series B Senior Preferred Stock(3)(17)(22)(27) |
|
|
|
|
|
|
|
|
||||||
|
Series B Super Senior Preferred Stock(3)(17)(23)(27) |
|
|
|
|
|
|
|
|
||||||
|
Total IT Consulting |
|
$ |
|
$ |
|
|
% |
|||||||
|
Total Preferred Stock |
|
$ |
|
$ |
|
|
% |
|||||||
|
|
|
|
|
|||||||||||
|
Total Investments in Securities(8) |
|
$ |
|
$ |
|
|
% |
|||||||
|
|
|
|
|
|||||||||||
|
Cash Equivalents |
|
|
|
|
||||||||||
| First American Government Obligations Fund – Class Z Shares, |
|
|
$ |
|
$ |
|
|
|||||||
|
Total Cash Equivalents |
|
$ |
|
$ |
|
|
% |
|||||||
|
Total Investments in Securities and Cash |
|
$ |
|
$ |
|
|
% |
|||||||
____________
(1)
the meaning of the Securities Act). Unless otherwise noted, all securities were acquired in transactions not subject to registration under the Securities Act.
(2)
(3) As of December 31, 2023, the portfolio includes $16,649,364 principal amount of debt investments and 34,503,824 shares of preferred stock investments which contain a PIK provision.
(4)
(5)
(6)
(continued on next page)
The accompanying notes are an integral part of these financial statements.
14
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS — (continued)
December 31, 2023
(7)
(8)
(9)
(10)
(11) Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the 1940 Act. The Company may include CLO equity side letter related investments within CLO equity subordinated notes line items, and those side letter related investments may 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 December 31, 2023, the Company held qualifying assets that represented 70.6% of its total assets.
(12)
(13)
(14)
(15)
(16)
(17) As of December 31, 2023, this debt or preferred equity investment was on non-accrual status and no interest or dividend income has been recognized on this investment during the twelve months ended December 31, 2023. The aggregate fair value of these investments was approximately $5.8 million.
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(continued on next page)
The accompanying notes are an integral part of these financial statements.
15
OXFORD SQUARE CAPITAL CORP.
SCHEDULE OF INVESTMENTS — (continued)
December 31, 2023
(27)
|
Name of Issuer |
Title of Issue |
Amount of |
Fair Value |
Gross |
Gross |
Net |
Fair Value |
||||||||||||||||
|
AFFILIATED INVESTMENTS: |
|
|
|
|
|
|
|
||||||||||||||||
|
Unitek Global Systems, Inc |
Common Stock |
$ |
$ |
$ |
$ |
$ |
|
$ |
|||||||||||||||
|
Series B Preferred Stock |
|
|
|
|
|
|
|
||||||||||||||||
|
Series B Senior Preferred Stock |
|
|
|
|
|
|
( |
) |
|
|
|||||||||||||
|
Series B Super Senior Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total Affiliated Investments |
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total Control Investments |
|
|
|
|
|
|
|
||||||||||||||||
|
TOTAL CONTROL AND AFFILIATED INVESTMENTS |
$ |
$ |
|
$ |
$ |
$ |
|
|
$ |
|
|||||||||||||
____________
(a) Represents the total amount of interest or distributions credited to income for the portion of the period an investment was an affiliate investment.
(b)
(c) Gross reductions include decreases in investments resulting from principal collections related to investment repayments or sales, the amortization of premiums and acquisition costs.
(28)
(29)
(30)
(31)
(32) The CLO equity investment was optionally redeemed. Expected value of residual distributions, once received, is anticipated to be recognized as return of capital, pending any remaining amortized cost, and/or realized gain for any amounts received in excess of such amortized cost.
The accompanying notes are an integral part of these financial statements.
16
OXFORD SQUARE CAPITAL CORP.
STATEMENTS OF OPERATIONS
(unaudited)
|
Three Months |
Three Months |
|||||||
|
INVESTMENT INCOME |
|
|
|
|
||||
|
From non-affiliated/non-control investments: |
|
|
|
|
||||
|
Interest income – debt investments |
$ |
|
|
$ |
|
|
||
|
Income from securitization vehicles and investments |
|
|
|
|
|
|
||
|
Other income |
|
|
|
|
|
|
||
|
Total investment income from non-affiliated/non-control investments |
|
|
|
|
|
|
||
|
Total investment income |
|
|
|
|
|
|
||
|
EXPENSES |
|
|
|
|
||||
|
Interest expense |
|
|
|
|
|
|
||
|
Base Fee |
|
|
|
|
|
|
||
|
Professional fees |
|
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|
|
|
||
|
Compensation expense |
|
|
|
|
|
|
||
|
General and administrative |
|
|
|
|
|
|
||
|
Total expenses before incentive fees |
|
|
|
|
|
|
||
|
Net Investment Income Incentive Fees |
|
|
|
|
|
|||
|
Capital gains incentive fees |
|
|
|
|
||||
|
Total incentive fees |
|
|
|
|
|
|||
|
Total expenses |
|
|
|
|
|
|
||
|
Net investment income before taxes |
|
|
|
|
|
|
||
|
Excise tax |
|
|
|
|
|
|||
|
Net investment income after taxes |
|
|
|
|
|
|
||
|
NET UNREALIZED APPRECIATION/(DEPRECIATION) AND REALIZED GAINS/(LOSSES) ON INVESTMENT TRANSACTIONS |
|
|
|
|
||||
|
Net change in unrealized appreciation/(depreciation) on investments: |
|
|
|
|
||||
|
Non-Affiliate/non-control investments |
|
|
|
|
( |
) |
||
|
Affiliated investments |
|
( |
) |
|
|
|
||
|
Total net change in unrealized depreciation on investments |
|
( |
) |
|
( |
) |
||
|
Net realized losses: |
|
|
|
|
||||
|
Non-affiliated/non-control investments |
|
( |
) |
|
|
|||
|
Total net realized losses |
|
( |
) |
|
|
|||
|
Net (decrease)/increase in net assets resulting from operations |
$ |
( |
) |
$ |
|
|
||
| $ |
|
|
$ |
|
|
|||
| $ |
( |
) |
$ |
|
|
|||
|
|
|
|
|
|
|
|||
|
Distributions per share |
$ |
|
|
$ |
|
|
||
The accompanying notes are an integral part of these financial statements.
17
OXFORD SQUARE CAPITAL CORP.
STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
|
Three Months |
Three Months |
|||||||
|
(Decrease)/increase in net assets from operations: |
|
|
|
|
||||
|
Net investment income |
$ |
|
|
$ |
|
|
||
|
Net change in unrealized depreciation on investments |
|
( |
) |
|
( |
) |
||
|
Net realized losses |
|
( |
) |
|
|
|||
|
Net (decrease)/increase in net assets resulting from operations |
|
( |
) |
|
|
|
||
|
Distributions to stockholders |
|
|
|
|
||||
|
Distributions from net investment income |
|
( |
) |
|
( |
) |
||
|
Total distributions to stockholders |
|
( |
) |
|
( |
) |
||
|
|
|
|
|
|||||
|
Capital share transactions: |
|
|
|
|
||||
| Issuance of common stock (net of underwriting fees and offering costs of $ |
|
|
|
|
|
|||
|
Reinvestment of distributions |
|
|
|
|
|
|
||
|
Net increase in net assets from capital share transactions |
|
|
|
|
|
|
||
|
Total (decrease)/increase in net assets |
|
( |
) |
|
|
|
||
|
Net assets at beginning of year |
|
|
|
|
|
|
||
|
Net assets at end of year |
$ |
|
|
$ |
|
|
||
|
|
|
|
|
|||||
|
Capital share activity: |
|
|
|
|
||||
|
Shares issued |
|
|
|
|
|
|||
|
Shares issued from reinvestment of distributions |
|
|
|
|
|
|
||
|
Net increase in capital share activity |
|
|
|
|
|
|
||
The accompanying notes are an integral part of these financial statements.
18
OXFORD SQUARE CAPITAL CORP.
STATEMENTS OF CASH FLOWS
(unaudited)
|
Three Months |
Three Months |
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
||||
|
Net (decrease)/increase in net assets resulting from operations |
$ |
( |
) |
$ |
|
|
||
|
Adjustments to reconcile net (decrease)/increase in net assets resulting from operations to net cash provided by operating activities: |
|
|
|
|
||||
|
Accretion of discounts on investments |
|
( |
) |
|
( |
) |
||
|
Accretion of discount on notes payable and deferred debt issuance costs |
|
|
|
|
|
|
||
|
Non-cash interest income due to PIK |
|
( |
) |
|
|
|||
|
Purchases of investments |
|
( |
) |
|
( |
) |
||
|
Repayments of principal |
|
|
|
|
|
|
||
|
Proceeds from the sale of investments |
|
|
|
|
|
|||
|
Net realized losses on investments |
|
|
|
|
|
|||
|
Reductions to CLO equity cost value |
|
|
|
|
|
|
||
|
Net change in unrealized depreciation on investments |
|
|
|
|
|
|
||
|
Decrease/(increase) in interest and distributions receivable |
|
|
|
|
( |
) |
||
|
Decrease in other assets |
|
|
|
|
|
|
||
|
(Decrease)/increase in Base Fee and Net Investment Income Incentive Fee payable |
|
( |
) |
|
|
|
||
|
Increase in accrued expenses |
|
|
|
|
|
|
||
|
Net cash provided by operating activities |
|
|
|
|
|
|
||
|
|
|
|
|
|||||
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
||||
| Distributions paid (net of stock issued under distribution reinvestment plan of $ |
|
( |
) |
|
( |
) |
||
|
Proceeds from issuance of common stock |
|
|
|
|
|
|||
|
Underwriting fees and offering costs for the issuance of common stock |
|
( |
) |
|
|
|||
|
Net cash used in financing activities |
|
( |
) |
|
( |
) |
||
|
Net increase in cash and cash equivalents |
|
|
|
|
|
|
||
|
Cash and cash equivalents, beginning of year |
|
|
|
|
|
|
||
|
Cash and cash equivalents, end of year |
$ |
|
|
$ |
|
|
||
|
|
|
|
|
|||||
|
NON-CASH FINANCING ACTIVITIES |
|
|
|
|
||||
|
Value of shares issued in connection with distribution reinvestment plan |
$ |
|
|
$ |
|
|
||
|
Distributions payable |
$ |
|
|
$ |
|
|||
|
|
|
|
|
|||||
|
SUPPLEMENTAL DISCLOSURES |
|
|
|
|
||||
|
Cash paid for interest |
$ |
|
|
$ |
|
|
||
|
Securities purchased not settled |
$ |
|
|
$ |
|
|
||
The accompanying notes are an integral part of these financial statements.
19
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 1. UNAUDITED INTERIM FINANCIAL STATEMENTS
Interim financial statements of Oxford Square Capital Corp. (“OXSQ” or the “Company”), 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 Articles 6, 10 and 12 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments, consisting solely of normal accruals, considered necessary for the fair statement of the results for the interim period included herein. The current period’s results of operations are not necessarily indicative of results that may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission (“SEC”) on March 19, 2024.
NOTE 2. ORGANIZATION
The Company was incorporated under the General Corporation Laws of the State of Maryland (“MGCL”) on July 21, 2003 and is a 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”) beginning with its 2003 taxable year. The Company’s investment objective is to maximize its total return, by investing primarily in corporate debt securities and, to a lesser extent, collateralized loan obligation (“CLO”) structured finance investments that own corporate debt securities.
The Company’s investment activities are managed by Oxford Square Management, LLC (“Oxford Square Management”). Oxford Square Management is an investment adviser registered under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Oxford Square Management is owned by Oxford Funds, LLC (“Oxford Funds”), its managing member, and Charles M. Royce, a member of the Company’s Board of Directors (the “Board” or “Board of Directors”) 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 investment advisory fee (the “Base 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.”
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company follows the accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services — Investment Companies.
In the normal course of business, the Company enters into a variety of undertakings containing a variety of warranties and indemnifications that may expose the Company to some risk of loss. The risk of future loss arising from such undertakings, while not quantifiable, is expected to be remote.
USE OF ESTIMATES
The financial statements have been prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates, and these differences could be material.
20
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
CONSOLIDATION
As provided under Regulation S-X and ASC Topic 946-810, Consolidation (“ASC 946-810”), 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of deposits held at custodian banks, and highly liquid investments, such as money market funds, with original maturities of three months or less. The Company places its 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 schedule of investments. Certain cash equivalents are carried at cost or amortized cost, which approximates fair value, and investments held in money market funds are valued at net asset value (“NAV”) per share.
INVESTMENT VALUATION
The Company determines its investment portfolio at fair value in accordance with the provisions of ASC 820, Fair Value Measurement (“ASC 820”) and Rule 2a-5 under the 1940 Act (“Rule 2a-5”). Estimates made in the preparation of the Company’s 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. The Company values its investments for which market quotations are not readily available at fair value as determined in good faith by the Board on at least a quarterly basis. 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 the Company’s investments are based upon Level 3 inputs as of March 31, 2024 and December 31, 2023.
The Board of Directors 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 has and may continue to 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 of Directors ultimately determines the appropriate valuation of each such investment. Changes in fair value, as described above, are recorded in the statements of operations as net change in unrealized appreciation/depreciation on investments.
21
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Syndicated Loans (Including Senior Secured Notes)
In accordance with ASC 820-10, the Company’s valuation procedures specifically provide for the review of indicative quotes supplied by the large agent banks that make a market for each security. However, the marketplace from which the Company obtains indicative bid quotes for purposes of determining the fair value of its syndicated loan investments has shown attributes of illiquidity as described by ASC 820-10. During such periods of illiquidity, when the Company believes that the non-binding indicative bids received from agent banks for certain syndicated loan investments that it owns may not be determinative of their fair value, or when no market indicative quote is available, the Company has and may continue to engage third-party valuation firms to provide assistance in valuing certain syndicated investments that the Company owns. The third-party valuation firms may use the income or market approach in arriving at a valuation. Unobservable inputs utilized could include discount rates derived from estimated credit spreads and earnings before interest, taxes, depreciation, and amortization (“EBITDA”) multiples. In addition, Oxford Square Management analyzes each syndicated loan by reviewing the portfolio company’s financial statements, covenant compliance and 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 Company’s Valuation Committee (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 debt and equity positions in CLO investment vehicles and can purchase CLO warehouse facilities. 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 available information on other relevant transactions including firm bids and offers in the market and 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. In periods of illiquidity and volatility, the Company may rely more heavily on other qualities and metrics, including but not limited to, the collateral manager, time left in the reinvestment period, expected cash flows and overcollateralization ratios, instead of the Company’s generated valuation yields. 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.
Bilateral Investments (Including Equity)
Bilateral investments (as defined below) 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
22
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
firm will prepare valuations for each of the Company’s bilateral investments that, when combined with all other investments in the same portfolio company, have a value as of the previous quarter of greater than or equal to
The term “Bilateral investments” means debt and equity investments directly negotiated between the Company and a portfolio company, but excludes syndicated loans (i.e., corporate loans arranged by an agent on behalf of a company, portions of which are held by multiple investors in addition to OXSQ).
Refer to “Note 4. Fair Value” in the notes to the Company’s financial statements for more information on investment valuation and the Company’s portfolio of 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 generally 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 March 31, 2024, the Company had six debt investments in three portfolio companies that were on non-accrual status. As of December 31, 2023, the Company had four debt investments in two portfolio companies that were on non-accrual status.
Interest income also includes a payment-in-kind (“PIK”) component on certain investments in the Company’s portfolio. Refer to the section below, “Payment-In-Kind,” for a description of PIK income and its impact on interest income.
Payment-In-Kind
The Company has debt and preferred stock investments in its portfolio that contain contractual PIK provisions. PIK interest and preferred stock dividends are computed at their contractual rates and are accrued into income and recorded as interest and dividend income, respectively. The PIK amounts are added to the principal balances on the capitalization dates. Upon capitalization, the PIK portions of the investments are valued at their respective fair values. If the Company believes that a PIK is not fully expected to be realized, the PIK investment would be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest or dividends would be reversed from the related receivable through interest or dividend income, respectively.
23
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
PIK investments on non-accrual status are restored to accrual status once it becomes probable that such PIK will be ultimately collectible in cash. For the three months ended March 31, 2024, approximately $
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, Beneficial Interests in Securitized Financial Assets, based upon estimated cash flows, amounts and timing, including those CLO equity investments that have not made their inaugural distribution for the relevant period end. We monitor the expected residual payments, and effective yield is determined and updated periodically, as needed. Accordingly, investment income recognized on CLO equity securities in the statements of operations differs from both the tax-basis investment income and from the cash distributions actually received by the Company during the period.
The Company also records income on its investments in CLO warehouse facilities based on a stated rate per the underlying note purchase agreement plus accrued interest or, if there is no stated rate, then an estimated rate is calculated using a base case model projecting the timing of the ramp-up of the CLO warehouse facility. For the three months ended March 31, 2024 and 2023, no income was recognized related to CLO warehouse facilities. As of March 31, 2024 and December 31, 2023, the Company did not hold any investments in CLO warehouse facilities.
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 above the amortized cost, and are recorded as other income when earned. The Company may also earn success fees associated with its investments in certain securitization vehicles or CLO warehouse facilities, which are contingent upon a repayment of the warehouse by a permanent CLO securitization structure; such fees are earned and recognized when the repayment is completed.
Preferred Stock Dividends
The Company holds preferred stock investments in its portfolio that contain cumulative preferred dividends that accumulate quarterly. The Company will generally record cumulative preferred dividends as investment income when they are received or declared by the portfolio company’s board of directors or upon any voluntary or involuntary liquidation, dissolution or winding up of the portfolio company, and are collectible. There were no cumulative preferred dividends recorded as dividend income during the three months ended March 31, 2024 and 2023, as the Company deemed them to be uncollectible.
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs consist of fees and expenses incurred in connection with the closing or amending of credit facilities and debt offerings, and are capitalized at the time of payment. These costs are amortized using the straight line method over the terms of the respective credit facilities and debt securities. The amortized expenses are included in interest expense in the Company’s financial statements. The unamortized deferred debt issuance costs are included on the Company’s statements of assets and liabilities as a direct deduction from the related debt liability. Upon early termination or partial principal pay down of debt, or a credit facility, the unamortized costs related to such debt are accelerated into realized losses on extinguishment of debt on the Company’s statements of operations.
24
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
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.
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 Maryland, MGCL 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 the trade date. Realized gains and losses on investments sold are recorded on the basis of specific identification. An optional redemption (“optionally redeemed”) 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 paid either through 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. Distributions received on CLO equity investments where the optional redemption feature has been exercised are first applied to the remaining cost basis until it is reduced to zero, after which distributions are recorded as realized gains.
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 timely distributed to stockholders. To qualify for RIC tax treatment, the Company is required to distribute at least
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 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 March 31, 2024, 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 2023 or 2024 tax returns. The Company identifies its major tax jurisdictions as U.S. Federal and the state of Connecticut. The Company did not have any uncertain tax positions that met the recognition measurement criteria of ASC 740-10-25, Income Taxes, nor did the Company
25
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
have any unrecognized tax benefits as of the periods presented herein. The Company files tax returns with the Internal Revenue Service and the state of Connecticut. Generally, each of the tax years in the four-year period ended March 31, 2024 remains subject to examination by taxing authorities.
For tax purposes, the cost basis of the portfolio investments as of March 31, 2024 and December 31, 2023, was approximately $
NOTE 4. FAIR VALUE
|
Fair Value Measurements at Reporting Date Using |
Total |
|||||||||||
|
Assets ($ in millions) |
Quoted Prices |
Significant |
Significant |
|||||||||
|
Senior Secured Notes |
$ |
$ |
$ |
|
$ |
|
||||||
|
CLO Equity |
|
|
|
|
|
|
||||||
|
Equity and Other Investments |
|
|
|
|
|
|
||||||
|
Total Investments at fair value(1) |
|
|
|
|
|
|
||||||
|
Cash equivalents |
|
|
|
|
|
|
||||||
|
Total assets at fair value |
$ |
|
$ |
$ |
|
$ |
|
|||||
____________
(1) Totals may not sum due to rounding
|
Fair Value Measurements at Reporting Date Using |
Total(1) |
|||||||||||
|
Assets ($ in millions) |
Quoted Prices |
Significant |
Significant |
|||||||||
|
Senior Secured Notes |
$ |
$ |
$ |
|
$ |
|
||||||
|
CLO Equity |
|
|
|
|
|
|
||||||
|
Equity and Other Investments |
|
|
|
|
|
|
||||||
|
Total Investments at fair value(1) |
|
|
|
|
|
|
||||||
|
Cash equivalents |
|
|
|
|
|
|
||||||
|
Total assets at fair value |
$ |
|
$ |
$ |
|
$ |
|
|||||
____________
(1)
26
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(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 March 31, 2024 and December 31, 2023, respectively. The Company’s Valuation Policy, which was previously approved by the Board, 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 tables below are based on fair values for all debt related calculations and CLO equity.
|
Quantitative Information about Level 3 Fair Value Measurements |
Impact to |
||||||||||
|
Assets ($ in millions) |
Fair Value |
Valuation |
Unobservable |
Range/Weighted |
|||||||
|
Senior Secured Notes |
$ |
|
|
|
|
|
|||||
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
||||||
|
CLO equity |
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
||||||
|
Equity/Other Investments |
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|||||||
|
Total Fair Value for Level 3 Investments |
$ |
|
|||||||||
____________
(1)
(2)
(3)
(4)
(5)
(6)
27
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 4. FAIR VALUE (cont.)
(7)
(8)
(9)
(10)
(11) Totals may not sum due to rounding.
|
Quantitative Information about Level 3 Fair Value Measurements |
Impact to |
||||||||||
|
Assets ($ in millions) |
Fair Value |
Valuation |
Unobservable |
Range/Weighted |
|||||||
|
Senior Secured Notes |
$ |
|
|
|
|
|
|||||
|
|
|
|
|
|
|
||||||
|
CLO equity |
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
||||||
|
Equity |
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|||||||
|
Total Fair Value for Level 3 Investments |
$ |
|
|||||||||
____________
(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 the fair value measurement. Market 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 Multiples/EBITDA, in isolation, would result in an increase in the fair value measurement. Yield analysis refers to determining a yield through projected, discounted future cash flows. Once the yield is calculated, that yield corresponds to a specific fair value. An increase to the yield, in isolation, would result in a decrease in the 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.
28
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 4. FAIR VALUE (cont.)
(4) Prices provided by independent pricing services are evaluated in conjunction with actual trades and payoffs and, in certain cases, the value represented by actual trades or payoffs may be more representative of fair value as determined by the Valuation Committee.
(5) The 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”).
(6) The Company calculates 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 also considers 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.
(7) Discount rate represents the rate at which future cash flows are discounted to calculate a present value, reflecting market assumptions for risk.
(8) Enterprise value is defined as the total value of a company, including debt and cash. For senior secured notes 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.
(9) 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. “LTM” refers to “last twelve months.”
(10) The fair value of those CLO equity positions which have been optionally redeemed are generally valued using a liquidation net asset value basis which represents the estimated expected residual value of the CLO as of the end of the period.
Financial Instruments Disclosed, But Not Carried, At Fair Value
|
($ in millions) |
Carrying |
Fair |
Level 1 |
Level 2 |
Level 3 |
||||||||||
|
6.25% Unsecured Notes |
|
|
|
|
|
|
|
|
|||||||
|
5.50% Unsecured Notes |
|
|
|
|
|
|
|
|
|||||||
|
Total(3) |
$ |
|
$ |
|
$ |
$ |
|
$ |
|||||||
____________
(1)
29
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 4. FAIR VALUE (cont.)
(2)
(3)
|
($ in millions) |
Carrying Value(1) |
Fair |
Level 1 |
Level 2 |
Level 3 |
||||||||||
|
6.25% Unsecured Notes |
$ |
|
$ |
|
$ |
$ |
|
$ |
|||||||
|
5.50% Unsecured Notes |
|
|
|
|
|
|
|
|
|||||||
|
Total(3) |
$ |
|
$ |
|
$ |
$ |
|
$ |
|||||||
____________
(1)
(2)
(3) Totals may not sum due to rounding.
|
($ in millions) |
Senior |
CLO |
Equity and |
Total(2) |
||||||||||||
|
Balance at December 31, 2023 |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
|
Net realized losses included in earnings |
|
( |
) |
|
( |
) |
|
|
|
( |
) |
|||||
|
Net unrealized (depreciation)/appreciation included in earnings(2) |
|
( |
) |
|
|
|
|
( |
) |
|
( |
) |
||||
|
Accretion of discount |
|
|
|
|
|
|
|
|
|
|
||||||
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Repayments and Sales(2) |
|
( |
) |
|
( |
) |
|
|
|
( |
) |
|||||
|
Reductions to CLO Equity cost value(1) |
|
|
|
( |
) |
|
|
|
( |
) |
||||||
|
Transfers in and/or (out) of level 3 |
|
|
|
|
|
|
|
|
||||||||
|
Balance at March 31, 2024(2) |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
|
Net change in unrealized depreciation on Level 3 |
$ |
( |
) |
$ |
|
|
$ |
( |
) |
$ |
( |
) |
||||
30
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 4. FAIR VALUE (cont.)
____________
(1)
(2)
|
($ in millions) |
Senior |
CLO |
Equity |
Total(2) |
|||||||||||
|
Balance at December 31, 2022 |
$ |
|
|
$ |
|
|
$ |
|
$ |
|
|
||||
|
Net realized gains/(losses) included in earnings |
|
|
|
|
( |
) |
|
|
( |
) |
|||||
|
Net unrealized (depreciation)/appreciation included in earnings |
|
( |
) |
|
|
|
|
|
|
|
|
||||
|
Accretion of discount |
|
|
|
|
|
|
|
|
|
||||||
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|||||
|
Repayments and Sales |
|
( |
) |
|
( |
) |
|
|
( |
) |
|||||
|
Reductions to CLO Equity cost value(1) |
|
|
|
( |
) |
|
|
( |
) |
||||||
|
Transfers in and/or (out) of level 3 |
|
|
|
|
|
|
|
||||||||
|
Balance at December 31, 2023(2) |
$ |
|
|
$ |
|
|
$ |
|
$ |
|
|
||||
|
Net change in unrealized (depreciation)/appreciation on Level 3 investments still held as of December 31, 2023 |
$ |
( |
) |
$ |
|
|
$ |
|
$ |
( |
) |
||||
____________
(1)
(2) Totals may not sum due to rounding.
|
($ in millions) |
March 31, 2024 |
December 31, 2023 |
||||||||||
|
Investments at |
Percentage of |
Investments at |
Percentage of |
|||||||||
|
Senior Secured Notes |
$ |
|
|
% |
$ |
|
|
% |
||||
|
CLO Equity |
|
|
|
% |
|
|
|
% |
||||
|
Equity and Other Investments |
|
|
|
% |
|
|
|
% |
||||
|
Total(1) |
$ |
|
|
% |
$ |
|
|
% |
||||
____________
(1)
NOTE 5. CASH AND CASH EQUIVALENTS
31
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
|
March 31, |
December 31, |
|||||
|
Cash |
$ |
|
$ |
|
||
|
Cash Equivalents |
|
|
|
|
||
|
Total Cash and Cash Equivalents |
$ |
|
$ |
|
||
For further details regarding the composition of cash, cash equivalents and restricted cash refer to “Note 3. Summary of Significant Accounting Policies.”
NOTE 6. BORROWINGS
In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least
|
($ in millions) |
As of |
|||||||||||||||||
|
March 31, 2024 |
December 31, 2023 |
|||||||||||||||||
|
Principal |
Carrying |
Fair |
Principal |
Carrying |
Fair |
|||||||||||||
|
6.25% Unsecured Notes |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||
|
5.50% Unsecured Notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total(2) |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||
____________
(1)
(2)
The weighted average stated interest rate and weighted average maturity on the Company’s borrowings as of March 31, 2024 were
The tables below summarize the components of interest expense for the three months ended March 31, 2024 and March 31, 2023, respectively:
32
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 6. BORROWINGS (cont.)
|
($ in thousands) |
Three Months Ended March 31, 2024 |
||||||||
|
Stated Interest |
Amortization of |
Total |
|||||||
|
6.25% Unsecured Notes |
$ |
|
$ |
|
$ |
|
|||
|
5.50% Unsecured Notes |
|
|
|
|
|
|
|||
|
Total |
$ |
|
$ |
|
$ |
|
|||
|
($ in thousands) |
Three Months Ended March 31, 2023 |
||||||||
|
Stated Interest |
Amortization of |
Total(1) |
|||||||
|
6.50% Unsecured Notes |
$ |
|
$ |
|
$ |
|
|||
|
6.25% Unsecured Notes |
|
|
|
|
|
|
|||
|
5.50% Unsecured Notes |
|
|
|
|
|
|
|||
|
Total(1) |
$ |
|
$ |
|
$ |
|
|||
____________
(1)
Notes Payable — 6.25% Unsecured Notes Due 2026 (the “6.25% Unsecured Notes”)
On April 3, 2019, the Company completed an underwritten public offering of approximately $
The aggregate accrued interest payable on the
Notes Payable — 5.50% Unsecured Notes Due 2028 (the “5.50% Unsecured Notes”)
On May 20, 2021, the Company completed an underwritten public offering of approximately $
The aggregate accrued interest payable on the
33
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 6. BORROWINGS (cont.)
Notes Payable — 6.50% Unsecured Notes Due 2024 (the “6.50% Unsecured Notes”)
On April 12, 2017, the Company completed an underwritten public offering of approximately $
On July 24, 2023, the Company redeemed $
There was no cash paid nor interest expense incurred for the three months ended March 31, 2024. The cash paid and the effective annualized interest rate for the three months ended March 31, 2023 were approximately $
NOTE 7. RELATED PARTY TRANSACTIONS
The Company pays Oxford Square Management a fee for its services under the Investment Advisory Agreement consisting of — a base investment advisory fee (the “Base Fee”) based on its gross assets, as described below, and two types of incentive fees. The cost of both the Base Fee and any incentive fees earned by Oxford Square Management are ultimately borne by the Company’s common stockholders.
As described in greater detail under Item 1. Business — Investment Advisory Agreement — Advisory Fee in its Annual Report on Form 10-K for the year ended December 31, 2023, the Company first calculates the Base Fee and any incentive fee under the terms of the Investment Advisory Agreement, then calculates the Base Fee and any incentive fee under the terms of the fee waiver letter unilaterally adopted by Oxford Square Management, effective April 1, 2016 (the “2016 Fee Waiver”), and, finally, adopts the lower of two combined results as the total fees payable to Oxford Square Management.
Base Fee
The Base Fee is payable quarterly in arrears, calculated based on a percentage of the average value of the Company’s gross assets at the end of the two most recently completed calendar quarters, and appropriately prorated for any partial quarter. Accordingly, the Base Fee will be payable regardless of whether the value of the Company’s gross assets has decreased during the quarter.
Under the terms of the Investment Advisory Agreement, the Base Fee is calculated at an annual rate of
Under the terms of the 2016 Fee Waiver, for the purpose of calculating the amount of total advisory fees (if any) to be waived during a particular calendar quarter, the Base Fee (as a portion of the total calculation) is calculated at an annual rate of
34
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 7. RELATED PARTY TRANSACTIONS (cont.)
|
($ in millions) |
Three Months |
Three Months |
||||
|
Base Fee |
$ |
|
$ |
|
||
The Base Fee payable to Oxford Square Management as of March 31, 2024 and December 31, 2023 was $
Incentive Fee
The incentive fees are commonly referred to as the “Income Incentive Fee” and the “Capital Gains Incentive Fee,” with the first fee payable quarterly in arrears and the second fee payable in arrears at the end of each calendar year.
Net Investment Income Incentive Fee
The first fee (the “Net Investment Income Incentive Fee”), is determined by reference to the Company’s “Pre-Incentive Fee Net Investment Income” (as defined below). Given that this incentive fee is payable without regard to any gain, loss or unrealized depreciation that may occur during the quarter, Oxford Square Management’s incentive fee may be payable notwithstanding a decline in net asset value that quarter.
Under the terms of the Investment Advisory Agreement, the Net Investment Income Incentive Fee is calculated based on the Company’s “Pre-Incentive Fee Net Investment Income” for the immediately preceding calendar quarter.
• For this purpose, “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter minus the Company’s operating expenses for the quarter (including the Base Fee, expenses payable under the administration agreement, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest, and zero coupon securities), accrued income that we have not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
• Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of the Company’s net assets at the end of the immediately preceding calendar quarter, is compared to one-fourth of an annual “hurdle rate.” The annual hurdle rate is determined as of the immediately preceding December 31st by adding
35
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 7. RELATED PARTY TRANSACTIONS (cont.)
and
a. The operation of the incentive fee with respect to the Company’s Pre-Incentive Fee Net Investment Income for each quarter is as follows:
i. no incentive fee is payable to Oxford Square Management in any calendar quarter in which the Pre-Incentive Fee Net Investment Income does not exceed one fourth of the annual hurdle rate (
ii.
Under the terms of the 2016 Fee Waiver, for the purpose of calculating the amount of total advisory fees (if any) to be waived during a particular calendar quarter, the Income Incentive Fee (as a portion of the total calculation) is calculated based on the amount by which (x) the “Pre-Incentive Fee Net Investment Income” (as defined below) for the calendar quarter exceeds (y) the “Preferred Return Amount” (as defined below) for the calendar quarter.
a. A “Preferred Return Amount” is calculated on a quarterly basis by multiplying
b. The Net Investment Income Incentive Fee is then calculated as follows:
(a) no Net Investment Income Incentive Fee is payable to Oxford Square Management in any calendar quarter in which the “Pre-Incentive Fee Net Investment Income” does not exceed the “Preferred Return Amount”;
(b)
(c) for any quarter in which the “Pre-Incentive Fee Net Investment Income” exceeds the “Catch-Up Amount,” the Net Investment Income Incentive Fee will be
c. There is no accumulation of amounts from quarter to quarter for the “Preferred Return Amount,” and accordingly there is no claw back of amounts previously paid to Oxford Square Management if the “Pre-Incentive Fee Net Investment Income” for subsequent quarters is below the quarterly “Preferred Return Amount,” and there is no delay of payment of incentive fees to Oxford Square Management if the “Pre-Incentive Fee Net Investment Income” for prior quarters is below the quarterly “Preferred Return Amount” for the quarter for which the calculation is being made.
d. The calculation of the Company’s Net Investment Income Incentive Fee is subject to a total return requirement that provides that a Net Investment Income Incentive Fee will not be payable to Oxford Square Management except to the extent
36
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 7. RELATED PARTY TRANSACTIONS (cont.)
quarter for which such fees are being calculated and the eleven (11) preceding quarters exceeds the cumulative Net Investment Income Incentive Fees accrued and/or paid for such eleven (11) preceding quarters.
In the event that the advisory fee calculations under the 2016 Fee Waiver produce a higher combined Base Fee and Net Investment Income Incentive Fee for any quarterly period, the combined fees are set to the original (lower) level, calculated pursuant to the Investment Advisory Agreement. In the event that advisory fee calculations under the 2016 Fee Wavier produce a lower combined Base Fee and Net Investment Income Incentive Fee for that quarterly period, those lower combined fees are adopted for that quarterly period. In either case, the lower level of combined fees is used for that quarter, and, accordingly, the advisory fee payable to Oxford Square Management can only be reduced, and never increased, as a result of the 2016 Fee Waiver.
|
($ in millions) |
Three Months |
Three Months |
||||
|
Net Investment Income Incentive Fee |
$ |
$ |
|
|||
There was no Net Investment Income Incentive Fee payable to Oxford Square Management as of March 31, 2024 and December 31, 2023.
Capital Gains Incentive Fee
The Capital Gains Incentive Fee, which is calculated identically under the Investment Advisory Agreement and under the 2016 Fee Waiver, is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals
The amount of Capital Gains Incentive Fee expense related to the hypothetical liquidation of the portfolio (and assuming no other changes in realized or unrealized gains and losses) would only become payable to Oxford Square Management in the event of a complete liquidation of the Company’s portfolio as of period end and the termination of the Investment Advisory Agreement on such date. Also, it should be noted that the Capital Gains Incentive Fee expense fluctuates with the Company’s overall investment results.
There were no Capital Gains Incentive Fees based on hypothetical liquidation for the three months ended March 31, 2024 and 2023. There were no accrued Capital Gains Incentive Fees payable to Oxford Square Management as of March 31, 2024 and December 31, 2023.
37
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 7. RELATED PARTY TRANSACTIONS (cont.)
Administration Agreement
The Company has also entered into the Administration Agreement with Oxford Funds under which Oxford Funds provides administrative services for the Company. The Company pays Oxford Funds an allocable portion of overhead and other expenses incurred by Oxford Funds on its behalf under the Administration Agreement, including a portion of the rent and the compensation of the Chief Financial Offer, accounting staff and other administrative support personnel, which creates potential conflicts of interest that the Board must monitor. The Company also reimburses Oxford Funds for the costs associated with the functions performed by the Company’s Chief Compliance Officer that Oxford Funds pays on the Company’s behalf pursuant to the terms of an agreement between the Company and ACA Group, LLC.
Oxford Square Management is controlled by Oxford Funds, its managing member. Charles M. Royce, a member of the Board, holds a minority, non-controlling interest in Oxford Square Management. Oxford Funds manages the business and internal affairs of Oxford Square Management. Jonathan H. Cohen, the Company’s Chief Executive Officer, as well as a Director, is the Chief Executive Officer of Oxford Square Management and managing member of Oxford Funds. Saul B. Rosenthal, the Company’s President and Chief Operating Officer, is also the President and Chief Operating Officer of Oxford Square Management and a member of Oxford Funds. Messrs. Cohen and Rosenthal together control the equity interests in Oxford Funds.
For the three months ended March 31, 2024 and 2023, the Company incurred approximately $
Co-Investment Exemptive Relief
On June 14, 2017, the SEC issued an order permitting the Company and certain of its affiliates to complete negotiated co-investment transactions in portfolio companies, subject to certain conditions (the “Order”). Subject to satisfaction of certain conditions to the Order, the Company and certain of its affiliates are permitted, together with any future BDCs, registered closed-end funds and certain private funds, each of whose investment adviser is Oxford Square Management or an investment adviser controlling, controlled by, or under common control with the Oxford Square Management, to co-invest in negotiated investment opportunities where doing so would otherwise be prohibited under the 1940 Act, providing the Company’s stockholders with access to a broader array of investment opportunities.
Pursuant to the Order, the Company is permitted to co-invest in such investment opportunities with its affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of its independent directors make
38
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
certain conclusions in connection with a co-investment transaction, including, but not limited to, that (1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching in respect of the Company or its stockholders on the part of any person concerned, and (2) the potential co-investment transaction is consistent with the interests of the Company’s stockholders and is consistent with the Company’s then-current investment objective and strategies.
NOTE 8. EARNINGS PER SHARE
|
Three Months |
Three Months |
||||||
|
Net investment income |
$ |
|
|
$ |
|
||
|
Weighted average common shares outstanding |
|
|
|
|
|
||
| $ |
|
|
$ |
|
|||
|
Net (decrease)/increase in net assets resulting from operations |
$ |
( |
) |
$ |
|
||
| $ |
( |
) |
$ |
|
|||
NOTE 9. DISTRIBUTIONS
The Company intends to continue to operate so as to qualify to be taxed as a RIC under the Code and, as such, the Company would not be subject to federal income tax on the portion of its taxable income and gains distributed to stockholders. To qualify to be taxed as a RIC, the Company is required, among other requirements, to distribute at least
The Company intends to comply with the applicable provisions of the Code pertaining to RICs to make distributions of taxable income sufficient to relieve it of substantially all federal income taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a
The Company has adopted an “opt out” distribution reinvestment plan for its common stockholders. As a result, if the Company makes a cash distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of its common stock, unless they specifically “opt out” of the distribution reinvestment plan so as to receive cash distributions. During the three months ended March 31, 2024 and 2023, the Company issued
39
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 9. DISTRIBUTIONS (cont.)
$
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), the Company is permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term losses rather than being considered all short-term as under previous law.
The tax character of distributions for the three months ended March 31, 2024, represented, on an estimated basis, $
NOTE 10. NET ASSET VALUE PER SHARE
The Company’s net asset value per share as of March 31, 2024, and December 31, 2023, was $
NOTE 11. SHARE ISSUANCE AND REPURCHASE PROGRAMS
On August 22, 2023, the Company entered into Amendment No. 1 to that certain Equity Distribution Agreement dated August 1, 2019 with Ladenburg Thalmann & Co. through which the Company may offer for sale, from time to time, up to $
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 Maryland, MGCL requires share repurchases to be accounted for as a share retirement. The cost of repurchased shares is charged against capital on the settlement date. During the three months ended March 31, 2024 and 2023, the Company was not authorized to repurchase any shares of outstanding common stock.
40
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 12. INVESTMENT INCOME
|
Three Months |
Three Months |
||||||
|
Interest Income |
|
|
|
||||
|
Stated interest income |
$ |
|
|
$ |
|
||
|
Original issue discount and market discount income |
|
|
|
|
|
||
|
(Amortization of premium)/discount income derived from unscheduled remittances at par |
|
( |
) |
|
|
||
|
Total interest income |
$ |
|
|
$ |
|
||
|
Income from securitization vehicles and investments |
$ |
|
|
$ |
|
||
|
Commitment, amendment and other fee income |
|
|
|
||||
|
Fee letters |
$ |
|
|
$ |
|
||
|
Loan prepayment and bond call fees |
|
|
|
||||
|
Money market fund income and all other fees |
|
|
|
|
|
||
|
Total commitment, amendment and other fee income |
$ |
|
|
$ |
|
||
|
Total investment income |
$ |
|
|
$ |
|
||
The 1940 Act requires that a BDC offer significant managerial assistance to its portfolio companies. The Company may receive fee income for managerial assistance it renders to portfolio companies in connection with its investments. For the three months ended March 31, 2024 and 2023, the Company received no fee income for managerial assistance.
NOTE 13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into a variety of undertakings containing a variety of warranties and indemnifications that may expose the Company to some risk of loss. The risk of future loss arising from such undertakings, while not quantifiable, is expected to be remote. As of March 31, 2024, the Company did not have any commitments to purchase additional debt investments.
The Company is not currently subject to any material legal proceedings. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of these legal proceedings, if any, cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon its results of operations and financial condition.
41
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 14. FINANCIAL HIGHLIGHTS
|
Three Months |
Three Months |
|||||||
|
Per Share Data |
|
|
|
|
||||
|
Net asset value at beginning of period |
$ |
|
|
$ |
|
|
||
|
Net investment income(1) |
|
|
|
|
|
|
||
|
Net realized and unrealized (losses)/gains(2) |
|
( |
) |
|
( |
) |
||
|
Net (decrease)/increase in net asset value from operations |
|
( |
) |
|
|
|
||
|
Distributions per share from net investment income |
|
( |
) |
|
( |
) |
||
|
Tax return of capital distributions(3) |
|
|
|
|
||||
|
Total distributions |
|
( |
) |
|
( |
) |
||
|
Effect of shares issued/repurchased, gross |
|
|
|
|
||||
|
Net asset value at end of period |
$ |
|
|
$ |
|
|
||
|
Per share market value at beginning of period |
$ |
|
|
$ |
|
|
||
|
Per share market value at end of period |
$ |
|
|
$ |
|
|
||
|
Total return based on Market Value(4) |
|
|
% |
|
|
% |
||
|
Total return based on Net Asset Value(5) |
|
( |
)% |
|
|
% |
||
|
Shares outstanding at end of period |
|
|
|
|
|
|
||
|
|
|
|
|
|||||
|
Ratios/Supplemental Data(8) |
|
|
|
|
||||
|
Net assets at end of period (000’s) |
$ |
|
|
$ |
|
|
||
|
Average net assets (000’s) |
$ |
|
|
$ |
|
|
||
|
Ratio of expenses to average net assets(6) |
|
|
% |
|
|
% |
||
|
Ratio of net investment income to average net assets(6) |
|
|
% |
|
|
% |
||
|
Portfolio turnover rate(7) |
|
|
% |
|
|
% |
||
____________
(1)
(2)
(3)
(4)
(5)
(6)
(7)
42
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 14. FINANCIAL HIGHLIGHTS (cont.)
(8)
|
Three Months |
Three Months |
|||||||
|
Ratio of expenses to average net assets: |
|
|
||||||
|
Operating expenses, including excise tax, before incentive fees |
|
% |
|
% |
||||
|
Net investment income incentive fees |
— |
% |
|
% |
||||
|
Ratio of expenses, including excise tax and excluding interest expense, to average net assets |
|
% |
|
% |
||||
NOTE 15. RISKS AND UNCERTAINTIES
The Company may be materially adversely affected by market conditions. Government spending, government policies, increases in certain interest rates by the U.S. Federal Reserve in 2023, and disruptions in supply chains in the United States and elsewhere in conjunction with other factors, have led and could continue to lead to inflationary economic environments that could affect the Company’s portfolio companies, financial condition and results of operations. The Company has exposure to interest rate risks to the extent prevailing interest rates change and it could negatively affect the fair value of the Company’s investments. If interest rates continue to rise in response to inflation, the value, volatility and liquidity of income paying investments could be adversely affected. Market volatility, dramatic change to interest rates and/or unfavorable economic conditions may lower performance or impair the Company’s ability to achieve its investment objective. The occurrence of any of the above events could have a significant adverse impact on the value and risk profile of the Company’s investments.
Although it is difficult to predict the extent of the impact of economic disruptions on the Company’s portfolio companies and underlying CLO vehicles the Company invests in, the failure by a portfolio company or CLO vehicle to satisfy certain financial covenants, including with respect to adequate collateralization and/or interest coverage tests, could lead to a reduction in its payments to us. In the event that a CLO vehicle fails certain tests, holders of debt senior to us may be entitled to additional payments that would, in turn, reduce the payments we would otherwise be entitled to receive. A portfolio company’s failure to satisfy financial or operating covenants imposed by the Company or other lenders could lead to defaults and, potentially, termination of the portfolio company’s loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the debt securities that the Company holds.
Separately, the Company may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company, CLO vehicle or any other investment we may make. In addition, if a portfolio company goes bankrupt, even though the Company may have structured its investment as senior debt or secured debt, depending on the facts and circumstances, including the extent to which the Company actually provided significant managerial assistance, if any, to that portfolio company, a bankruptcy court might re-characterize the Company’s debt holding and subordinate all or a portion of the Company’s claim to that of other creditors. If any of these occur, it could materially and adversely affect the Company’s operating results and cash flows.
The Company places its cash in an overnight money market fund and, at times, cash and cash equivalents may exceed the Federal Deposit Insurance Corporation insured limit. In addition, the Company’s portfolio may be concentrated in a limited number of portfolio companies, which will subject the Company to a risk of significant loss if any of these companies defaults on its obligations under any of its debt securities that the Company holds or if those sectors experience a market downturn.
43
OXFORD SQUARE CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 15. RISKS AND UNCERTAINTIES (cont.)
Various social and political circumstances in the United States and around the world (including wars and other forms of conflict and other uncertainties regarding actual and potential shifts in the U.S. and foreign, trade, economic and other policies with other countries, terrorist acts, security operations and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes and global health epidemics), may also contribute to increased market volatility and economic uncertainties or deterioration in the United States and worldwide. The Israel-Hamas war and the conflict between Russia and Ukraine, and resulting market volatility, could also adversely affect the Company’s business, operating results, and financial condition. The extent and duration or escalation of such conflicts, resulting sanctions and resulting future market disruptions are impossible to predict, but could be significant. Any disruptions resulting from such conflicts and any future conflict (including cyberattacks, espionage or the use or threatened use of nuclear weapons) or resulting from actual or threatened responses to such actions could cause disruptions to any of the Company’s portfolio companies located in Europe or the Middle East or that have substantial business relationships with companies in affected regions. It is not possible to predict the duration or extent of longer-term consequences of these conflicts, which could include further sanctions, retaliatory and escalating measures, embargoes, regional instability, geopolitical shifts and adverse effects on or involving macroeconomic conditions, the energy sector, supply chains, inflation, security conditions, currency exchange rates and financial markets around the globe. Any such market disruptions could have a material adverse effect on the Company’s business, financial condition and results of operations. These market and economic disruptions could also negatively impact the operating results of the Company’s portfolio companies.
NOTE 16. SUBSEQUENT EVENTS
|
Date Declared |
Record Date |
Payable Date |
Per Share Distribution |
|||
| |
|
|
$ |
|||
| |
|
|
$ |
|||
| |
|
|
$ |
|||
| |
|
|
$ |
|||
| |
|
|
$ |
|||
| |
|
|
$ |
The Company’s management evaluated subsequent events through the date of issuance of these financial statements and noted no other events that necessitate adjustments to or disclosure in the financial statements.
44
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about Oxford Square Capital Corp., our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties, including statements as to:
• our future operating results, including our ability to achieve objectives;
• our business prospects and the prospects of our portfolio companies;
• the impact of investments that we expect to make;
• our contractual arrangements and relationships with third parties;
• the dependence of our future success on the general economy and its impact on the industries in which we invest;
• the ability of our portfolio companies and CLO investments to achieve their objectives;
• the valuation of our investments in portfolio companies and CLOs, particularly those having no liquid trading market;
• market conditions and our ability to access alternative debt markets and additional debt and equity capital;
• our expected financings and investments;
• the adequacy of our cash resources and working capital;
• the timing of cash flows, if any, from the operations of our portfolio companies and CLO investments; and
• the ability of our investment adviser to locate suitable investments for us and monitor and administer our investments.
These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
• an economic downturn could impair our portfolio companies’ and CLO investments’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies and CLO investments;
• a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;
• interest rate volatility could adversely affect our results, particularly because we use leverage as part of our investment strategy;
• the elevated levels of inflation and its impact on our investment activities and the industries in which we invest;
• currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars;
45
• the impact of information technology system failures, data security breaches, data privacy compliance, network disruptions and cybersecurity attacks; and
• the risks, uncertainties and other factors we identify in Item 1A. — Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2023, elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC.
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in Item 1A. — Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2023, and elsewhere in this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Because we are an investment company, the forward-looking statements and projections contained in this quarterly report are excluded from the safe harbor protections provided by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995).
Except where the context requires otherwise, the terms “OXSQ,” “Company,” “we,” “us” and “our” refer to Oxford Square Capital Corp.; “Oxford Square Management” refers to Oxford Square Management, LLC; and “Oxford Funds” refers to Oxford Funds, LLC.
The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
Our investment objective is to maximize our portfolio’s total return. Our primary focus is to seek an attractive risk-adjusted total return by investing primarily in corporate debt securities and, to a lesser extent, in collateralized loan obligations (“CLO”), which are structured finance investments that own corporate debt securities. CLO investments may also include warehouse facilities, which are early-stage CLO vehicles intended to aggregate loans that may be used to form the basis of a traditional CLO vehicle. We operate as a closed-end management investment company and have elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). We have 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”).
Our investment activities are managed by Oxford Square Management, LLC (“Oxford Square Management”), a registered investment adviser under the Investment Advisers Act of 1940, as amended. Oxford Square Management is owned by Oxford Funds, LLC (“Oxford Funds”), its managing member, and a related party, Charles M. Royce, a member of our Board of Directors (“Board”) who holds a minority, non-controlling interest in Oxford Square Management. Jonathan H. Cohen, our Chief Executive Officer, and Saul B. Rosenthal, our President, are the controlling members of Oxford Funds. Under an investment advisory agreement (the “Investment Advisory Agreement”), we have agreed to pay Oxford Square Management an annual base management fee calculated on gross assets, and an incentive fee based upon our performance. Under an amended and restated administration agreement (the “Administration Agreement”), we have agreed to pay or reimburse Oxford Funds, as administrator, for certain expenses incurred in operating the Company. Our executive officers and directors, and the executive officers of Oxford Square Management and Oxford Funds, serve or may serve as officers and directors of entities that operate in a line of business similar to our own. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders.
We generally expect to invest between $5 million and $50 million in each of our portfolio companies, although this investment size may vary proportionately as the size of our capital base changes and market conditions warrant. We expect that our investment portfolio will be diversified among a large number of investments with few investments, if any, exceeding 5.0% of the total portfolio. As of March 31, 2024, our debt
46
investments had stated interest rates of between 9.19% and 15.33% and maturity dates of between 0 and 82 months. In addition, our total portfolio had a weighted average annualized yield on debt investments of approximately 13.94% as of March 31, 2024.
The weighted average annualized yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our fees and expenses. The weighted average annualized yield was computed using the effective interest rates as of March 31, 2024, including accretion of original issue discount (“OID”) and excluding any debt investments on non-accrual status. There can be no assurance that the weighted average annualized yield will remain at its current level.
We have borrowed funds to make investments and may continue to borrow funds to make investments. As a result, we are exposed to the risks of leverage, which may be considered a speculative investment technique. Borrowings, also known as leverage, magnify the potential for gain and loss on amounts invested and therefore increase the risks associated with investing in our securities. In addition, the costs associated with our borrowings, including any increase in the management fees payable to Oxford Square Management, will be borne by our common stockholders.
In addition, as a BDC under the 1940 Act, we are required to make available significant managerial assistance, for which we may receive fees, to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. These fees would be generally non-recurring, however in some instances they may have a recurring component. We have received no fee income for managerial assistance to date.
To the extent possible, we will generally seek to invest in loans that are collateralized by a security interest in the borrower’s assets or guaranteed by a principal to the transaction. Interest payments, if not deferred, are normally payable quarterly with most debt investments having scheduled principal payments on a monthly or quarterly basis. When we receive a warrant to purchase stock in a portfolio company, the warrant will typically have a nominal strike price, and will entitle us to purchase a modest percentage of the borrower’s stock.
During the three months ended March 31, 2024, U.S. loan market performance improved versus the prior quarter. U.S. loan prices, as defined by the Morningstar/LSTA US Leveraged Loan Index, increased from 96.23% of par as of December 31, 2023 to 96.69% of par as of March 31, 2024.
As of March 31, 2024, the Company’s Board of Directors approved the fair value of the Company’s investment portfolio of approximately $250.9 million in good faith in accordance with the Company’s valuation procedures.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the date of the financial statements, and (iii) revenues and expenses during the periods reported. Our critical accounting estimates, including those relating to the valuation of our investment portfolio, are described below. Actual results could materially differ from those estimates. The critical accounting estimates should be read in conjunction with our risk factors as disclosed in Item 1A. — Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2023. See “Note 3. Summary of Significant Accounting Policies” to our financial statements for the three months ended March 31, 2024 for more information on our critical accounting policies.
Investment Valuation
We fair value our investment portfolio in accordance with the provisions of ASC 820, Fair Value Measurement and Disclosure (“ASC 820”) and Rule 2a-5 under the 1940 Act. Estimates made in the preparation of our financial statements include the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. We believe that there is no single definitive method for determining fair value. 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 we make.
47
ASC 820-10 clarifies 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.
We consider the attributes of current market conditions on an on-going basis and have determined that due to the general illiquidity of the market for our investment portfolio, whereby little or no market data exists, substantially all of our fair valued investments are measured based upon Level 3 inputs as of March 31, 2024 and December 31, 2023.
Our Board of Directors determines the value of our 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. We may also engage a third-party valuation firm to provide assistance in valuing certain of our syndicated loans and bilateral investments, including related equity investments, although our Board of Directors ultimately determines the appropriate valuation of each such investment. Changes in fair value, as described above, are recorded in the statements of operations as net change in unrealized appreciation/depreciation.
Our corporate loan portfolio investments are valued using several valuation processes. The quantitative inputs and data points that determine which method to utilize to value any given investment include, but are not limited to:
• Bid/offer prices;
• Depth, which is defined as the number of securities firms that make a market in a respective corporate syndicated loan and contribute data on the corporate syndicated loan to market data providers;
• Liquidity score, which is a metric to help market participants ascertain their ability to exit a position within a given time frame and near a prevailing indicative price, which provides a benchmark of liquidity risk;
• Financial performance of the underlying portfolio company;
• Recent business developments;
• Covenant compliance; and
• Recent transactions.
In instances where secondary market data is limited, we may engage a third-party valuation firm to independently determine an estimate of fair value. Currently, we have a single company valued via a third-party valuation firm. This valuation method employs a waterfall method whereby the enterprise value (“EV”) of the company is estimated based on company financial performance inputs, such as EBITDA, and publicly traded comparable company multiples. The EV is then attributed to each debt tranche, preferred equity tranche, and common equity, in order of seniority, to arrive at a valuation for our holdings. Generally speaking, as estimated EV increases, the fair value of our investments will also increase. As market multiples and EBITDA increase, estimated EV will also increase.
In valuing our CLO debt and equity investments, we consider 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 brokers who arrange transactions in such investment vehicles. We also consider those instances 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
48
a downward adjustment to the indicative price representing substantially all of the pending distribution. Additional factors include any available information on other relevant transactions including firm bids and offers in the market and information resulting from bids-wanted-in-competition. In addition, we consider the operating metrics of the specific investment vehicle, including compliance with collateralization tests, defaulted and restructured securities, and payment defaults, if any. We 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. Oxford Square Management or its 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 our Board for its determination of fair value of these investments.
Recently Issued Accounting Standards
See “Note 3. Summary of Significant Accounting Policies” to our financial statements for a description of recent accounting pronouncements, including the impact on our financial statements.
PORTFOLIO COMPOSITION AND INVESTMENT ACTIVITY
The total fair value of our investment portfolio was approximately $250.9 million and $266.9 million as of March 31, 2024, and December 31, 2023, respectively. The decrease in the value of investments during the three month period ended March 31, 2024, was due primarily to debt repayments of approximately $17.9 million, sales of investments of approximately $1.4 million, net realized losses of approximately $8.1 million, and net unrealized depreciation on our investment portfolio of approximately $0.2 million (which incorporates reductions to CLO equity cost value of $0.8 million), which were partially offset by investment acquisitions of approximately $12.1 million.
A reconciliation of the investment portfolio for the three months ended March 31, 2024 and the year ended December 31, 2023 follows:
|
($ in millions) |
March 31, |
December 31, |
||||||
|
Beginning investment portfolio |
$ |
266.9 |
|
$ |
314.7 |
|
||
|
Portfolio investments acquired |
|
12.1 |
|
|
11.7 |
|
||
|
Debt repayments |
|
(17.9 |
) |
|
(15.8 |
) |
||
|
Sales of securities |
|
(1.4 |
) |
|
(19.6 |
) |
||
|
Reductions to CLO equity cost value(1) |
|
(0.8 |
) |
|
(15.3 |
) |
||
|
Accretion of discounts on investments |
|
0.3 |
|
|
1.1 |
|
||
|
Net change in unrealized (depreciation)/appreciation on investments |
|
(0.2 |
) |
|
7.1 |
|
||
|
Net realized (losses) on investments |
|
(8.1 |
) |
|
(17.1 |
) |
||
|
Ending investment portfolio(2) |
$ |
250.9 |
|
$ |
266.9 |
|
||
____________
(1) For the three months ended March 31, 2024, the reductions to CLO equity cost value of approximately $0.8 million represented the distributions received, or entitled to be received, on our investments held in CLO equity subordinated and income notes of approximately $4.8 million, plus the amortization of cost on our CLO fee notes of approximately $5,000, less the effective yield interest income recognized on our CLO equity subordinated and income notes of approximately $3.9 million. For the year ended December 31, 2023, the reductions to CLO equity cost value of approximately $15.3 million represented the distributions received, or entitled to be received, on our investments held in CLO equity subordinated and income notes of approximately $32.0 million, plus the amortization of cost on our CLO fee notes of approximately $123,000, less the effective yield interest income recognized on our CLO equity subordinated and income notes of approximately $16.8 million.
(2) Totals may not sum due to rounding.
During the three months ended March 31, 2024 we purchased approximately $12.1 million in portfolio investments, which includes additional investments of approximately $5.3 million in existing portfolio companies and approximately $6.8 million in new portfolio companies. During the year ended December 31, 2023, we purchased approximately $11.7 million in portfolio investments, including additional investments of approximately $3.5 million in existing portfolio companies and approximately $8.2 million in new portfolio companies.
49
In certain instances, we receive investment proceeds based on the scheduled amortization of the outstanding loan balances and from the sales of portfolio investments. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period.
For the three months ended March 31, 2024, we recognized proceeds from the sales of securities of approximately $1.4 million. For the year ended December 31, 2023, we recognized proceeds from the sales of securities of approximately $19.6 million. Also, during the three months ended March 31, 2024 and the year ended December 31, 2023, we had loan principal repayments of approximately $17.9 million and $15.8 million, respectively.
As of March 31, 2024, we had investments in debt securities of, or loans to, 20 portfolio companies, with a fair value of approximately $161.7 million, CLO equity investments of approximately $84.2 million, and other equity investments of approximately $4.9 million.
As of December 31, 2023, we had investments in debt securities of, or loans to, 19 portfolio companies, with a fair value of approximately $179.5 million, CLO equity investments of approximately $82.2 million, and other equity investments of approximately $5.3 million.
The following table indicates the quarterly portfolio investment activity for the past five quarters:
|
Three Months Ended ($ in millions) |
Purchases of |
Debt |
Sales of |
Reductions to |
||||||||
|
March 31, 2024 |
$ |
12.1 |
$ |
17.9 |
$ |
1.4 |
$ |
0.8 |
||||
|
Total 2024 to date |
$ |
12.1 |
$ |
17.9 |
$ |
1.4 |
$ |
0.8 |
||||
|
|
|
|
|
|||||||||
|
December 31, 2023 |
$ |
3.5 |
$ |
0.8 |
$ |
3.7 |
$ |
2.8 |
||||
|
September 30, 2023 |
|
— |
|
14.2 |
|
1.9 |
|
5.1 |
||||
|
June 30, 2023 |
|
— |
|
0.4 |
|
13.9 |
|
4.4 |
||||
|
March 31, 2023 |
|
8.2 |
|
0.3 |
|
— |
|
3.0 |
||||
|
Total(2) |
$ |
11.7 |
$ |
15.8 |
$ |
19.6 |
$ |
15.3 |
||||
____________
(1) Reductions to CLO equity cost value represent the distributions received, or entitled to be received, on our investments held in CLO equity subordinated and income notes, plus the amortization of cost of our CLO fee notes, less the effective yield interest income recognized on our CLO equity subordinated and income notes.
(2) Totals may not sum due to rounding.
The following table shows the fair value of our portfolio of investments by asset class as of March 31, 2024 and December 31, 2023:
|
March 31, 2024 |
December 31, 2023 |
|||||||||||
|
($ in millions) |
Investments at |
Percentage of |
Investments at |
Percentage of |
||||||||
|
Senior Secured Notes |
$ |
161.7 |
64.4 |
% |
$ |
179.5 |
67.2 |
% |
||||
|
CLO Equity |
|
84.2 |
33.6 |
% |
|
82.2 |
30.8 |
% |
||||
|
Equity and Other Investments |
|
4.9 |
2.0 |
% |
|
5.3 |
2.0 |
% |
||||
|
Total(1) |
$ |
250.9 |
100.0 |
% |
$ |
266.9 |
100.0 |
% |
||||
____________
(1) Totals may not sum due to rounding.
Qualifying assets must represent at least 70.0% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. As of March 31, 2024 and December 31, 2023, we held qualifying assets that represented 69.4% and 70.6%, respectively, of the total assets. No additional non-qualifying assets were acquired during the periods when qualifying assets were less than 70.0% of the total assets.
50
The following table shows our portfolio of investments by industry at fair value, as of March 31, 2024 and December 31, 2023:
|
March 31, 2024 |
December 31, 2023 |
|||||||||||
|
Investments at |
Percentage of |
Investments at |
Percentage of |
|||||||||
|
($ in millions) |
($ in millions) |
|||||||||||
|
Structured finance(1) |
$ |
84.2 |
33.6 |
% |
$ |
82.2 |
30.8 |
% |
||||
|
Software |
|
62.6 |
25.0 |
% |
|
66.0 |
24.7 |
% |
||||
|
Business services |
|
28.6 |
11.4 |
% |
|
43.0 |
16.1 |
% |
||||
|
Healthcare |
|
28.0 |
11.1 |
% |
|
28.4 |
10.7 |
% |
||||
|
Telecommunication services |
|
16.4 |
6.5 |
% |
|
20.9 |
7.8 |
% |
||||
|
Diversified insurance |
|
13.8 |
5.5 |
% |
|
13.9 |
5.2 |
% |
||||
|
Utilities |
|
7.4 |
3.0 |
% |
|
7.2 |
2.7 |
% |
||||
|
Food and beverage |
|
5.0 |
2.0 |
% |
|
— |
— |
% |
||||
|
IT consulting |
|
4.9 |
1.9 |
% |
|
5.3 |
2.0 |
% |
||||
|
Total |
$ |
250.9 |
100.0 |
% |
$ |
266.9 |
100.0 |
% |
||||
____________
(1) Reflects our equity investments in CLOs as of March 31, 2024, and December 31, 2023, respectively.
PORTFOLIO GRADING
We have adopted a credit grading system to monitor the quality of our debt investment portfolio. As of March 31, 2024 and December 31, 2023, our portfolio had a weighted average grade of 2.3 and 2.3, respectively, based upon the fair value of the debt investments in the portfolio. Equity securities and investments in CLOs are not graded.
As of March 31, 2024 and December 31, 2023, our debt investment portfolio was graded as follows:
|
($ in millions) |
March 31, 2024 |
|||||||||||||
|
Grade |
Summary Description |
Principal |
Percentage |
Portfolio |
Percentage |
|||||||||
|
1 |
Company is ahead of expectations and/or outperforming financial covenant requirements of the specific tranche and such trend is expected to continue. |
$ |
— |
— |
% |
$ |
— |
— |
% |
|||||
|
2 |
Full repayment of the outstanding amount of OXSQ’s cost basis and interest is expected for the specific tranche. |
|
151.5 |
53.8 |
% |
|
116.6 |
72.1 |
% |
|||||
|
3 |
Closer monitoring is required. Full repayment of the outstanding amount of OXSQ’s cost basis and interest is expected for the specific tranche. |
|
66.7 |
23.6 |
% |
|
43.1 |
26.7 |
% |
|||||
|
4 |
A loss of interest income has occurred or is expected to occur and, in most cases, the investment is placed on non-accrual status. Full repayment of the outstanding amount of OXSQ’s cost basis is expected for the specific tranche. |
|
— |
— |
% |
|
— |
— |
% |
|||||
|
5 |
Full repayment of the outstanding amount of OXSQ’s cost basis is not expected for the specific tranche and the investment is placed on non-accrual status. |
|
63.8 |
22.6 |
% |
|
2.0 |
1.2 |
% |
|||||
|
Total(1) |
$ |
282.1 |
100.0 |
% |
$ |
161.7 |
100.0 |
% |
||||||
____________
(1) Totals may not sum due to rounding.
51
|
($ in millions) |
December 31, 2023 |
|||||||||||||
|
Grade |
Summary Description |
Principal |
Percentage |
Portfolio |
Percentage |
|||||||||
|
1 |
Company is ahead of expectations and/or outperforming financial covenant requirements of the specific tranche and such trend is expected to continue. |
$ |
— |
— |
% |
$ |
— |
— |
% |
|||||
|
2 |
Full repayment of the outstanding amount of OXSQ’s cost basis and interest is expected for the specific tranche. |
|
175.5 |
60.4 |
% |
|
134.5 |
74.9 |
% |
|||||
|
3 |
Closer monitoring is required. Full repayment of the outstanding amount of OXSQ’s cost basis and interest is expected for the specific tranche. |
|
72.3 |
24.8 |
% |
|
43.3 |
24.1 |
% |
|||||
|
4 |
A loss of interest income has occurred or is expected to occur and, in most cases, the investment is placed on non-accrual status. Full repayment of the outstanding amount of OXSQ’s cost basis is expected for the specific tranche. |
|
— |
— |
% |
|
— |
— |
% |
|||||
|
5 |
Full repayment of the outstanding amount of OXSQ’s cost basis is not expected for the specific tranche and the investment is placed on non-accrual status |
|
42.9 |
14.8 |
% |
|
1.7 |
1.0 |
% |
|||||
|
Total |
$ |
290.7 |
100.0 |
% |
$ |
179.5 |
100.0 |
% |
||||||
____________
(1) Totals may not sum due to rounding.
A portion of our investments are, and will continue to be, in the grades 3, 4 or 5 categories from time to time, and, as such, we are required to work with troubled portfolio companies to improve their business and protect our investment. The number and amount of investments included in grades 3, 4 or 5 may fluctuate from period to period.
52
RESULTS OF OPERATIONS
Set forth below is a comparison of our results of operations for the three months ended March 31, 2024 to the three months ended March 31, 2023.
Investment Income
Investment income for the three months ended March 31, 2024 and March 31, 2023 was approximately $10.7 million and $12.9 million, respectively. The following tables set forth the components of investment income for the three months ended March 31, 2024 and March 31, 2023:
|
Three Months Ended |
Three Months Ended |
||||||
|
Interest Income |
|
|
|
||||
|
Stated interest income |
$ |
6,142,029 |
|
$ |
7,945,032 |
||
|
Original issue discount and market discount income |
|
302,275 |
|
|
340,019 |
||
|
(Amortization of premium)/discount income derived from unscheduled remittances at par |
|
(23,257 |
) |
|
9,109 |
||
|
Total interest income |
$ |
6,421,047 |
|
$ |
8,294,160 |
||
|
Income from securitization vehicles and investments |
$ |
3,932,374 |
|
$ |
4,379,495 |
||
|
Commitment, amendment and other fee income |
|
|
|
||||
|
Fee letters |
$ |
131,988 |
|
$ |
155,078 |
||
|
Loan prepayment and bond call fees |
|
— |
|
|
— |
||
|
Money market fund income and all other fees |
|
192,015 |
|
|
113,065 |
||
|
Total commitment, amendment and other fee income |
$ |
324,003 |
|
$ |
268,143 |
||
|
Total investment income |
$ |
10,677,424 |
|
$ |
12,941,798 |
||
The decrease in total investment income for the three months ended March 31, 2024 was primarily due to a decrease in interest income for the three months ended March 31, 2024.
The total principal value of income producing debt investments as of March 31, 2024 and March 31, 2023 was approximately $218.2 million and $287.7 million, respectively. As of March 31, 2024, our debt investments had a range of stated interest rates of 9.19% and 15.33% and maturity dates of between 0 and 82 months compared to a range of stated interest rates of 8.09% and 14.83% and maturity dates of between 0 and 83 months as of March 31, 2023. In addition, our total debt portfolio had a weighted average yield on debt investments of approximately 13.94% as of March 31, 2024, compared to approximately 12.36% as of March 31, 2023. As of March 31, 2024, six debt investments in three portfolio companies were on non-accrual status with a combined fair value of approximately $2.0 million and total principal value of approximately $63.8 million. As of March 31, 2023, three debt investments in one portfolio company were on non-accrual status with a fair value of approximately $0.1 million and total principal value of approximately $28.7 million.
Income from securitization vehicles for the three months ended March 31, 2024 and March 31, 2023, was approximately $3.9 million and $4.4 million, respectively. The total principal outstanding on our investments in CLOs as of March 31, 2024 and March 31, 2023, was approximately $314.7 million and $363.1 million, respectively. The weighted average yield on CLO equity investments as of March 31, 2024 and March 31, 2023, was approximately 9.5% and 9.1%, respectively.
Operating Expenses
Total expenses, including taxes, for the three months ended March 31, 2024 and 2023, were approximately $4.1 million and $6.5 million, respectively. These amounts consisted of base management fees, interest expense, professional fees, compensation expense, general and administrative expenses, excise tax, and incentive fees. That decrease is primarily due to lower interest expense, base management fees, and incentive fees, partially offset by greater excise tax expense.
The base management fee for the three months ended March 31, 2024 was approximately $1.0 million compared with $1.2 million for the three months ended March 31, 2023. That decrease for the three months ended March 31, 2024 was due largely to a decrease in the weighted average gross assets.
53
There was no net investment income incentive fee for the three months ended March 31, 2024. The net investment income incentive fee for the three months ended March 31, 2023 was approximately $1.2 million. That decrease for the three months ended March 31, 2024 was due to the Company’s performance not exceeding the total return requirement.
Interest expense for the three months ended March 31, 2024, was approximately $2.0 million, which primarily relates to our 5.50% unsecured notes due 2028 (the “5.50% Unsecured Notes”) and 6.25% unsecured notes due 2026 (the “6.25% Unsecured Notes”). Interest expense for the three months ended March 31, 2023, was approximately $3.1 million, which primarily relates to our 5.50% Unsecured Notes, 6.25% Unsecured Notes, and 6.50% unsecured notes due 2024.
Professional fees, consisting of legal, consulting, valuation, audit and tax fees, were approximately $312,000 for the three months ended March 31, 2024, compared to approximately $336,000 for the three months ended March 31, 2023. That decrease for the three months ended March 31, 2024 was primarily due to lower legal fees.
Compensation expense was approximately $207,000 for the three months ended March 31, 2024, compared to approximately $267,000 for the three months ended March 31, 2023. Compensation expense reflects the allocation of compensation expenses for the services of our Chief Financial Officer, accounting personnel, and other administrative support staff.
General and administrative expenses, consisting primarily of directors’ fees, insurance, listing fees, transfer agent and custodian fees, office supplies, facilities costs and other expenses, was approximately $347,000 for the three months ended March 31, 2024, compared to approximately $373,000 for the three months ended March 31, 2023. Office supplies, facilities costs and other expenses are allocated to us under the terms of the Administration Agreement.
Excise tax was approximately $326,000 for the three months ended March 31, 2024. There was no excise tax for the three months ended March 31, 2023.
Incentive Fees
There was no net investment income incentive fee (“Net Investment Income Incentive Fee”) recorded for the three months ended March 31, 2024. The Net Investment Income Incentive Fee recorded for the three months ended March 31, 2023 was approximately $1.2 million. The Net Investment Income Incentive Fee is calculated and payable quarterly in arrears based on the amount by which (x) the “Pre-Incentive Fee Net Investment Income” for the immediately preceding calendar quarter exceeds (y) the “Preferred Return Amount” for the calendar quarter. For this purpose, “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income accrued during the calendar quarter minus our operating expenses for the quarter (including the Base Fee, expenses payable under the Administration Agreement with Oxford Funds, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Refer to “Note 7. Related Party Transactions” in the notes to our financial statements.
The expense attributable to the capital gains incentive fee (the “Capital Gains Incentive Fee”), as reported under GAAP, is calculated as if the Company’s entire portfolio had been liquidated at period end, and therefore is calculated on the basis of net realized and unrealized gains and losses at the end of each period. That expense (or the reversal of such an expense) related to that hypothetical liquidation of the portfolio (and assuming no other changes in realized or unrealized gains and losses) would only become payable to our investment adviser in the event of a complete liquidation of our portfolio as of period end and the termination of the Investment Advisory Agreement on such date. For the three months ended March 31, 2024 and 2023, no accrual was required as a result of the impact of accumulated net unrealized depreciation and net realized losses on our portfolio.
The amount of the Capital Gains Incentive Fee which will actually be payable is determined in accordance with the terms of the Investment Advisory Agreement and is calculated as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). The terms of the Investment Advisory Agreement state that the Capital Gains Incentive Fee calculation is based on net realized gains, if any, offset by gross unrealized depreciation for the calendar year. No effect is given to gross unrealized appreciation in this calculation. For the three months ended March 31, 2024 and 2023, such an accrual was not required under the terms of the Investment Advisory Agreement.
54
Realized and Unrealized Gains/Losses on Investments
For the three months ended March 31, 2024, we recognized realized losses of approximately $8.1 million. $7.9 million of those realized losses were recognized on our former investments in Alvaria, Inc. first and second lien senior secured notes, as Alvaria, Inc. went through a debt restructuring. We also sold a CLO equity investment for approximately $1.4 million and recognized a realized loss of approximately $236,000.
For the three months ended March 31, 2024, our net change in unrealized depreciation was approximately $0.2 million, composed of $6.9 million in gross unrealized appreciation, $15.3 million in gross unrealized depreciation and approximately $8.2 million relating to the reversal of prior period net unrealized depreciation as investment gains and losses were realized. This includes net unrealized appreciation of approximately $0.8 million resulting from reductions to the cost value of our CLO equity investments representing the difference between distributions received, or entitled to be received, on our investments held in CLO equity subordinated notes and fee notes, of approximately $4.8 million and the effective yield interest income recognized on our CLO equity subordinated notes and the amortized cost adjusted income on our CLO equity fee notes of approximately $3.9 million. The most significant components of the net change in unrealized depreciation during the three months ended March 31, 2024, were as follows (in millions):
|
Portfolio Company |
Changes in |
|||
|
Alvaria, Inc. (f/k/a Aspect Software, Inc.) |
$ |
7.7 |
|
|
|
Octagon Investment Partners 49, Ltd. |
|
4.2 |
|
|
|
Magenta Buyer, LLC (f/k/a McAfee Enterprise) |
|
(1.6 |
) |
|
|
Quest Software, Inc. |
|
(3.4 |
) |
|
|
ConvergeOne Holdings, Inc. |
|
(4.5 |
) |
|
|
Net all other |
|
(2.6 |
) |
|
|
Total |
$ |
(0.2 |
) |
|
For the three months ended March 31, 2023, we did not sell any positions, nor recognize any realized gains or losses.
For the three months ended March 31, 2023, our net change in unrealized depreciation was approximately $0.2 million, composed of $7.8 million in gross unrealized appreciation and $8.0 million in gross unrealized depreciation. This includes net unrealized appreciation of approximately $3.0 million resulting from reductions to the cost value of our CLO equity investments representing the difference between distributions received, or entitled to be received, on our investments held in CLO equity subordinated notes and fee notes, of approximately $7.3 million and the effective yield interest income recognized on our CLO equity subordinated notes and the amortized cost adjusted income on our CLO equity fee notes of approximately $4.3 million. The most significant components of the net change in unrealized depreciation during the three months ended March 31, 2023, were as follows (in millions):
|
Portfolio Company |
Changes in |
|||
|
Dodge Data & Analytics, LLC |
$ |
1.3 |
|
|
|
RSA Security, LLC |
|
1.0 |
|
|
|
Verifone Systems, Inc. |
|
(0.8 |
) |
|
|
ConvergeOne Holdings, Inc. |
|
(1.0 |
) |
|
|
HealthChannels, Inc. (f/k/a ScribeAmerica, LLC) |
|
(2.3 |
) |
|
|
Net all other |
|
1.6 |
|
|
|
Total |
$ |
(0.2 |
) |
|
55
Net Increase in Net Assets Resulting from Net Investment Income
Net investment income for the three months ended March 31, 2024 and March 31, 2023 was approximately $6.5 million and $6.5 million, respectively.
For the three months ended March 31, 2024, the net increase in net assets resulting from net investment income per common share was $0.11 (basic and diluted), compared to the net increase in net assets resulting from net investment income per share of $0.13 (basic and diluted) for the three months ended March 31, 2023. The per share decrease was primarily due to a decrease in investment income, partially offset by a decrease in Net Investment Income Incentive Fees.
Net (Decrease)/Increase in Net Assets Resulting from Operations
Net decrease in net assets resulting from operations for the three months ended March 31, 2024 was approximately $1.8 million compared with a net increase in net assets resulting from operations of approximately $6.3 million for the three months ended March 31, 2023.
For the three months ended March 31, 2024, the net decrease in net assets resulting from operations per common share was $0.03 (basic and diluted), compared to a net increase in net assets resulting from operations per share of $0.13 (basic and diluted) for the three months ended March 31, 2023.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2024, cash and cash equivalents were approximately $20.9 million as compared to approximately $5.7 million as of December 31, 2023. For the three months ended March 31, 2024, net cash provided by operating activities for the period, consisting primarily of the items described in “— Results of Operations,” was approximately $20.3 million, largely reflecting repayments of principal of approximately $17.9 million, net realized losses of approximately $8.1 million, and sales of investments of approximately $1.4 million, partially offset by cash purchases of investments of approximately $8.1 million. For the three months ended March 31, 2024, net cash used in financing activities was approximately $5.1 million, reflecting the payment of distributions of approximately $6.1 million, partially offset by the issuance of common stock in connection with our ATM program of approximately $0.9 million.
Contractual Obligations
A summary of our significant contractual payment obligations as of March 31, 2024, is as follows:
|
Payments Due by Period |
|||||||||||||||
|
Contractual obligations (in millions) |
Principal Amount |
Less than |
1 – 3 years |
3 – 5 years |
More than |
||||||||||
|
Long-term debt obligations: |
|
|
|
|
|
||||||||||
|
6.25% Unsecured Notes |
$ |
44.8 |
$ |
— |
$ |
44.8 |
$ |
— |
$ |
— |
|||||
|
5.50% Unsecured Notes |
|
80.5 |
|
— |
|
— |
|
80.5 |
|
— |
|||||
|
$ |
125.3 |
$ |
— |
$ |
44.8 |
$ |
80.5 |
$ |
— |
||||||
Refer to “Note 6. Borrowings” in the notes to our financial statements.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into a variety of undertakings containing a variety of warranties and indemnifications that may expose us to some risk of loss. The risk of future loss arising from such undertakings, while not quantifiable, is expected to be remote. As of March 31, 2024, we did not have any commitments to purchase additional investments.
Share Issuance and Repurchase Programs
On August 22, 2023, we entered into Amendment No. 1 to that certain Equity Distribution Agreement dated August 1, 2019 with Ladenburg Thalmann & Co. through which we may offer for sale, from time to time, up to $150.0 million of our common stock through an At-the-Market (“ATM”) offering. We issued a total of
56
324,122 shares of common stock pursuant to the ATM offering during the three months ended March 31, 2024. The total amount of capital raised net of underwriting fees and offering costs was approximately $923,000 during the three months ended March 31, 2024.
From time to time, the Board may authorize a share repurchase program under which shares are purchased in open market transactions. Since we are incorporated in Maryland, MGCL requires share repurchases to be accounted for as a share retirement. The cost of repurchased shares is charged against capital on the settlement date. During the three months ended March 31, 2024 and 2023, we were not authorized to repurchase any shares of outstanding common stock.
Borrowings
In accordance with the 1940 Act, with certain limited exceptions, as of March 31, 2024, we were only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, was at least 150%, immediately after such borrowing. As of March 31, 2024 and December 31, 2023, our asset coverage for borrowed amounts was approximately 213% and 219%, respectively.
The weighted average stated interest rate and weighted average maturity on all of the Company’s debt outstanding as of March 31, 2024, were 5.77% and 3.5 years, respectively, and as of December 31, 2023, were 5.77% and 3.8 years, respectively.
On April 3, 2019, we completed an underwritten public offering of approximately $44.8 million in aggregate principal amount of the 6.25% Unsecured Notes. The 6.25% Unsecured Notes will mature on April 30, 2026, and may be redeemed in whole or in part at any time or from time to time at our option on or after April 30, 2022. The 6.25% Unsecured Notes bear interest at a rate of 6.25% per year payable quarterly on January 31, April 30, July 31, and October 31 of each year. The 6.25% Unsecured Notes are listed on the NASDAQ Global Select Market under the trading symbol “OXSQZ.”
On May 20, 2021, we completed an underwritten public offering of approximately $80.5 million in aggregate principal amount of 5.50% Unsecured Notes. The 5.50% Unsecured Notes will mature on July 31, 2028, and may be redeemed in whole or in part at any time or from time to time at our option (on or after May 31, 2024). The 5.50% Unsecured Notes bear interest at a rate of 5.50% per year payable quarterly on January 31, April 30, July 31, and October 31, of each year. The 5.50% Unsecured Notes are listed on the NASDAQ Global Select Market under the trading symbol “OXSQG.”
Refer to “Note 6. Borrowings” in the notes to our financial statements.
Distributions
In order to qualify for tax treatment as a RIC, and to avoid corporate level tax on the income we distribute to our stockholders, we are required, under Subchapter M of the Code, to distribute at least 90% of our ordinary income and short-term capital gains to our stockholders on an annual basis.
To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our taxable ordinary income or capital gains. Stockholders should read any written disclosure accompanying a distribution payment carefully and should not assume that the source of any distribution is taxable ordinary income or capital gains. The final determination of the nature of our distributions can only be made upon the filing of our tax return. We have until October 15, 2025, to file our federal income tax return for the year ended December 31, 2024.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable regulated investment company tax treatment. We cannot assure stockholders that they will receive any distributions.
57
The following table reflects the cash distributions, including distributions reinvested, if any, per share that our Board has declared on our common stock since the beginning of 2023:
|
Date Declared |
Record Date |
Payment Date |
Total |
GAAP Net |
Distributions in |
|||||||||||
|
Fiscal 2024(1) |
|
|
|
|
|
|
||||||||||
|
April 25, 2024 |
September 16, 2024 |
September 30, 2024 |
$ |
0.035 |
|
$ |
N/A |
|
$ |
— |
|
|||||
|
April 25, 2024 |
August 16, 2024 |
August 30, 2024 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
April 25, 2024 |
July 17, 2024 |
July 31, 2024 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
Total (Third Quarter 2024) |
|
0.105 |
|
|
— |
(3) |
|
— |
|
|||||||
|
|
|
|
|
|
|
|||||||||||
|
March 14, 2024 |
June 14, 2024 |
June 28, 2024 |
|
0.035 |
|
$ |
N/A |
|
|
— |
|
|||||
|
March 14, 2024 |
May 17, 2024 |
May 31, 2024 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
March 14, 2024 |
April 16, 2024 |
April 30, 2024 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
Total (Second Quarter 2024) |
|
0.105 |
|
|
— |
(3) |
|
— |
|
|||||||
|
|
|
|
|
|
|
|||||||||||
|
November 2, 2023 |
March 15, 2024 |
March 29, 2024 |
|
0.035 |
|
$ |
N/A |
|
|
— |
|
|||||
|
November 2, 2023 |
February 15, 2024 |
February 29, 2024 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
November 2, 2023 |
January 17, 2024 |
January 31, 2024 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
Total (First Quarter 2024) |
|
0.105 |
|
|
0.11 |
|
|
(0.01 |
) |
|||||||
|
|
|
|
|
|
|
|||||||||||
|
Fiscal 2023(1) |
|
|
|
|
|
|
||||||||||
|
August 3, 2023 |
December 15, 2023 |
December 29, 2023 |
$ |
0.035 |
|
$ |
N/A |
|
$ |
— |
|
|||||
|
August 3, 2023 |
November 16, 2023 |
November 30, 2023 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
August 3, 2023 |
October 17, 2023 |
October 31, 2023 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
Total (Fourth Quarter 2023) |
|
0.105 |
|
|
0.13 |
|
|
(0.03 |
) |
|||||||
|
|
|
|
|
|
|
|||||||||||
|
August 3, 2023 |
September 15, 2023 |
September 29, 2023 |
$ |
0.120 |
(4) |
$ |
N/A |
|
|
— |
|
|||||
|
April 25, 2023 |
September 15, 2023 |
September 29, 2023 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
April 25, 2023 |
August 17, 2023 |
August 31, 2023 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
April 25, 2023 |
July 17, 2023 |
July 31, 2023 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
Total (Third Quarter 2023) |
|
0.225 |
|
|
0.11 |
(3) |
|
0.12 |
|
|||||||
|
|
|
|
|
|
|
|||||||||||
|
March 16, 2023 |
June 16, 2023 |
June 30, 2023 |
|
0.035 |
|
$ |
N/A |
|
|
— |
|
|||||
|
March 16, 2023 |
May 17, 2023 |
May 31, 2023 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
March 16, 2023 |
April 14, 2023 |
April 28, 2023 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
Total (Second Quarter 2023) |
|
0.105 |
|
|
0.13 |
(3) |
|
(0.03 |
) |
|||||||
|
|
|
|
|
|
|
|||||||||||
|
October 20, 2022 |
March 17, 2023 |
March 31, 2023 |
|
0.035 |
|
$ |
N/A |
|
|
— |
|
|||||
|
October 20, 2022 |
February 14, 2023 |
February 28, 2023 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
October 20, 2022 |
January 17, 2023 |
January 31, 2023 |
|
0.035 |
|
|
N/A |
|
|
— |
|
|||||
|
Total (First Quarter 2023) |
|
0.105 |
|
|
0.13 |
|
|
(0.03 |
) |
|||||||
|
Total (2023) |
$ |
0.54 |
|
$ |
0.51 |
(2) |
$ |
0.03 |
(2) |
|||||||
____________
(1) The tax characterization of cash distributions for the year ending December 31, 2024 and year ended December 31, 2023 will not be known until the tax return for such years are finalized. For the year ending December 31, 2024 and year ended December 31, 2023, the amounts and sources of distributions reported are only estimates and are not being provided for U.S. tax reporting purposes. The final determination of the source of all distributions in 2024 and 2023 will be made after year-end and the amounts represented may be materially different from the amounts disclosed in the final Form 1099-DIV notice. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the our investment performance and may be subject to change based on tax regulations.
(2) Totals may not sum due to rounding.
(3) We have not yet reported investment income for this period.
(4) Special distribution.
58
Related Parties
We have a number of business relationships with affiliated or related parties, including the following:
• We have entered into the Investment Advisory Agreement with Oxford Square Management. Oxford Square Management is controlled by Oxford Funds, its managing member. In addition to Oxford Funds, Oxford Square Management is owned by Charles M. Royce, a member of our Board, who holds a minority, non-controlling interest in Oxford Square Management as the non-managing member. Oxford Funds, as the managing member of Oxford Square Management, manages the business and internal affairs of Oxford Square Management. In addition, Oxford Funds provides us with office facilities and administrative services pursuant to the Administration Agreement.
• Messrs. Cohen and Rosenthal also currently serve as Chief Executive Officer and President, respectively, at Oxford Gate Management, LLC, the investment adviser to Oxford Gate Master Fund, LLC, Oxford Gate, LLC and Oxford Gate (Bermuda), LLC (collectively, the “Oxford Gate Funds”) and Oxford Bridge II, LLC. Oxford Funds is the managing member of Oxford Gate Management, LLC. In addition, Bruce L. Rubin serves as the Chief Financial Officer and Secretary, and Gerald Cummins serves as the Chief Compliance Officer, respectively, of Oxford Gate Management, LLC.
• Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and President, respectively, of Oxford Lane Capital Corp., a non-diversified closed-end management investment company that invests primarily in equity and junior debt tranches of CLO vehicles, and its investment adviser, Oxford Lane Management, LLC. Oxford Funds provides Oxford Lane Capital Corp. with office facilities and administrative services pursuant to an administration agreement and also serves as the managing member of Oxford Lane Management, LLC. In addition, Bruce L. Rubin serves as the Chief Financial Officer, Treasurer and Corporate Secretary of Oxford Lane Capital Corp. and Chief Financial Officer and Treasurer of Oxford Lane Management, LLC, and Mr. Cummins serves as the Chief Compliance Officer of Oxford Lane Capital Corp. and Oxford Lane Management, LLC.
• Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and President, respectively, of Oxford Park Income Fund, Inc., a non-diversified closed-end management investment company that invests primarily in equity and junior debt tranches of CLO vehicles, and its investment adviser, Oxford Park Management, LLC. Oxford Funds provides Oxford Park Income Fund, Inc. with office facilities and administrative services pursuant to an administration agreement and also serves as the managing member of Oxford Park Management, LLC. In addition, Bruce L. Rubin serves as the Chief Financial Officer, Treasurer and Corporate Secretary of Oxford Park Income Fund, Inc. and Chief Financial Officer and Treasurer of Oxford Park Management, LLC, and Mr. Cummins serves as the Chief Compliance Officer of Oxford Park Income Fund, Inc. and Oxford Park Management, LLC.
As a result, certain conflicts of interest may arise with respect to the management of our portfolio by Messrs. Cohen and Rosenthal on the one hand, and the obligations of Messrs. Cohen and Rosenthal to manage Oxford Lane Capital Corp., Oxford Park Income Fund, Inc., Oxford Bridge II, LLC and the Oxford Gate Funds, respectively, on the other hand.
Oxford Square Management, Oxford Lane Management, LLC, Oxford Park Management, LLC and Oxford Gate Management, LLC are subject to a written policy with respect to the allocation of investment opportunities among the Company, Oxford Lane Capital Corp., Oxford Park Income Fund, Inc., Oxford Bridge II, LLC and the Oxford Gate Funds. Where investments are suitable for more than one entity, the allocation policy generally provides that, depending on size and subject to current and anticipated cash availability, the absolute size of the investment as well as its relative size compared to the total assets of each entity, current and anticipated weighted average costs of capital, among other factors, an investment amount will be determined by the adviser to each entity. If the investment opportunity is sufficient for each entity to receive its investment amount, then each entity receives the investment amount; otherwise, the investment amount is reduced pro rata. On June 14, 2017, the Securities and Exchange Commission issued an order permitting the Company and certain of its affiliates to complete negotiated co-investment transactions in portfolio companies, subject to certain conditions (the “Order”). Subject to satisfaction of certain conditions to the Order, the Company and certain of its affiliates are now permitted, together with any future BDCs, registered closed-end funds and certain private funds, each of whose investment adviser is the Company’s investment adviser or an investment adviser controlling, controlled by, or under common control
59
with the Company’s investment adviser, to co-invest in negotiated investment opportunities where doing so would otherwise be prohibited under the 1940 Act, providing the Company’s stockholders with access to a broader array of investment opportunities. Pursuant to the Order, we are permitted to co-invest in such investment opportunities with our affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including, but not limited to, that (1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned, and (2) the potential co-investment transaction is consistent with the interests of our stockholders and is consistent with our then-current investment objective and strategies.
In the ordinary course of business, we may enter into transactions with portfolio companies that may be considered related party transactions. In order to ensure that we do not engage in any prohibited transactions with any persons affiliated with us, we have implemented certain policies and procedures whereby our executive officers screen each of our transactions for any possible affiliations between the proposed portfolio investment, us, companies controlled by us and our employees and directors. We will not enter into any agreements unless and until we are satisfied that doing so will not raise concerns under the 1940 Act or, if such concerns exist, we have taken appropriate actions to seek board review and approval or exemptive relief for such transaction. Our Board reviews these procedures on an annual basis.
We have also adopted a Code of Business Conduct and Ethics which applies to our senior officers, including our Chief Executive Officer and Chief Financial Officer, as well as all of our officers, directors and employees. Our Code of Business Conduct and Ethics requires that all employees and directors avoid any conflict, or the appearance of a conflict, between an individual’s personal interests and our interests. Pursuant to our Code of Business Conduct and Ethics, each employee and director must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict. Our Audit Committee is charged with approving any waivers under our Code of Business Conduct and Ethics. As required by the NASDAQ Global Select Market corporate governance listing standards, the Audit Committee of our Board is also required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K).
Information concerning related party transactions is included in the financial statements and related notes, appearing elsewhere in this quarterly report on Form 10-Q.
RECENT DEVELOPMENTS
The following distributions payable to stockholders are shown below:
|
Date Declared |
Record Date |
Payable Date |
Per Share Distribution |
|||
|
March 14, 2024 |
April 16, 2024 |
April 30, 2024 |
$0.035 |
|||
|
March 14, 2024 |
May 17, 2024 |
May 31, 2024 |
$0.035 |
|||
|
March 14, 2024 |
June 14, 2024 |
June 28, 2024 |
$0.035 |
|||
|
April 25, 2024 |
July 17, 2024 |
July 31, 2024 |
$0.035 |
|||
|
April 25, 2024 |
August 16, 2024 |
August 30, 2024 |
$0.035 |
|||
|
April 25, 2024 |
September 16, 2024 |
September 30, 2024 |
$0.035 |
60
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to financial market risks, including changes in interest rates. As of March 31, 2024, all but six of our variable rate investments were income producing. The variable rates are generally based upon the five-year U.S. Department of Treasury note, the Prime rate, or SOFR, and, in the case of our bilateral investments, are generally reset annually, whereas our non-bilateral investments generally reset quarterly. We expect that future debt investments will generally be made at variable rates. Many of the variable rate investments contain interest rate floors.
Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, including relative changes in different interest rates, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest earning assets and our interest expense incurred in connection with our interest-bearing debt and liabilities. Changes in interest rates can also affect, among other things, our ability to acquire leveraged loans, high yield bonds and other debt investments and the value of our investment portfolio.
We may in the future hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.
Based on our Statements of Assets and Liabilities as of March 31, 2024, the following table shows the annualized impact on net investment income of hypothetical base rate changes in interest rates for our settled investments (considering interest rate floors for floating rate instruments), excluding CLO equity investments. The base interest rate case assumes the rates on our portfolio investments remain unchanged from the actual effective interest rates as of March 31, 2024. These hypothetical calculations are based on a model of the investments in our portfolio, held as of March 31, 2024, and are only adjusted for assumed changes in the underlying base interest rates. Although management believes that this analysis is indicative of our existing interest rate sensitivity, it does not adjust for changes in the credit quality, size and composition of our portfolio, and other business developments, including a change in the level of our borrowings, that could affect the net increase (or decrease) in net assets resulting from operations. Accordingly, no assurances can be given that actual results would not differ materially from the results under this hypothetical analysis.
|
Hypothetical Change in Base Rates |
Estimated |
||
|
Up 300 basis points |
15.3 |
% |
|
|
Up 200 basis points |
10.2 |
% |
|
|
Up 100 basis points |
5.1 |
% |
|
|
Down 100 basis points |
(5.1 |
)% |
|
|
Down 200 basis points |
(10.2 |
)% |
|
|
Down 300 basis points |
(15.3 |
)% |
|
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
As of March 31, 2024 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time
61
periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.
(b) Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
62
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not currently subject to any material legal proceedings. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings, if any, cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
ITEM 1A. RISK FACTORS.
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in “Item 1A — Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results. There have been no material changes known to us during the three months ended March 31, 2024, to the risk factors discussed in “Item 1A. — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Sales of Unregistered Equity Securities
While we did not engage in unregistered sales of equity securities during the three months ended March 31, 2024, we issued 47,743 shares of common stock under our distribution reinvestment plan. This issuance was not subject to the registration requirements of the Securities Act of 1933, as amended. The aggregate value for the shares of common stock issued under the distribution reinvestment plan during the three months ended March 31, 2024 was approximately $139,000.
Issuer Purchases of Equity Securities
During the three months ended March 31, 2024, no common stock was repurchased by the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
Rule 10b5-1 Trading Plans
During the fiscal quarter ended March 31, 2024, none of our directors or officers
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ITEM 6. EXHIBITS.
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
____________
* Filed herewith
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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OXFORD SQUARE CAPITAL CORP. |
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Date: May 2, 2024 |
By: |
/s/ Jonathan H. Cohen |
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Jonathan H. Cohen |
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Chief Executive Officer |
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(Principal Executive Officer) |
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Date: May 2, 2024 |
By: |
/s/ Bruce L. Rubin |
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Bruce L. Rubin |
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Chief Financial Officer |
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(Principal Accounting Officer) |
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