OFSSH filing — read by section

Item 7. Management’s Discussion and Analysis

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 
 FORWARD-LOOKING STATEMENTS 
 This Annual Report on Form 10-K 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 us, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements. 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: 
 • our ability and experience operating a BDC or an SBIC, or maintaining our tax treatment as a RIC under Subchapter M of the Code; 
 • our dependence on key personnel; 
 • our ability to maintain or develop referral relationships; 
 • our ability to replicate historical results; 
 • the ability of OFS Advisor to identify, invest in and monitor companies that meet our investment criteria; 
 • the belief that the carrying amounts of our financial instruments, such as cash, receivables and payables approximate the fair value of such items due to the short maturity of such instruments and that such financial instruments are held with high credit quality institutions to mitigate the risk of loss due to credit risk; 
 • actual and potential conflicts of interest with OFS Advisor and other affiliates of OFSAM; 
 • constraint on investment due to access to material nonpublic information; 
 • restrictions on our ability to enter into transactions with our affiliates; 
 • our ability to comply with SBA regulations and requirements; 
 • the use of borrowed money to finance a portion of our investments; 
 • the belief that our financing facilities will enable us to be competitive in our markets; 
 • our ability to incur additional leverage pursuant to Section 61(a)(2) of the 1940 Act and the impact of such leverage on our net investment income and results of operations; 
 • competition for investment opportunities; 
 • our plans to focus on lower-yielding, first lien senior secured loans to larger borrowers and the impact on our risk profile, including our belief that the seniority of such loans in a borrower's capital structure may provide greater downside protection against the impact of the coronavirus ("COVID-19") pandemic; 
 • the percentage of investments that will bear interest on a floating rate or fixed rate basis; 
 • interest rate volatility, including the decommissioning of LIBOR; 
 • the ability of SBIC I LP to make distributions enabling us to meet RIC requirements; 
 • plans by SBIC I LP to repay its outstanding SBA debentures; 
 • our ability to raise debt or equity capital as a BDC; 
 • the timing, form and amount of any distributions from our portfolio companies; 
 • the impact of a protracted decline in the liquidity of credit markets on our business; 
 • changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, including with respect to changes from the impact of the COVID-19 pandemic; the length and duration of the COVID-19 pandemic in the United States as well as worldwide and the magnitude of the economic impact of the outbreak; the effect of the COVID-19 pandemic on our business, financial condition, results of operations and cash flows and those of our portfolio companies (including the expectation that a shift from cash interest to PIK interest will result from concessions granted to borrowers due to the COVID-19 pandemic), including our and their ability to achieve our respective objectives; the effect of the disruptions caused by the COVID-19 pandemic on our ability to continue to effectively manage our business (including our belief 
 
 

 
 

 that new loan activity in the market in which we operate has slowed) and on the availability of equity and debt capital and our use of borrowed money to finance a portion of our investments; 
 • the general economy and its impact on the industries in which we invest; 
 • the belief that we have sufficient levels of liquidity to support our existing portfolio companies and deploy capital in new investment opportunities; 
 • uncertain valuations of our portfolio investments, including our belief that reverting back to an equal weighting of the Reunderwriting Analysis method and Synthetic Rating Analysis method more accurately captures certain data related to the observed return of market liquidity and the historic correlative relationship between these markets; 
 • the belief that one or more of our investments can be restored to accrual status in the near term, or otherwise; and 
 • the effect of new or modified laws or regulations governing our operations. 
 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. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Annual Report on Form 10-K should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include, among others, those described or identified in “Item 1A. Risk Factors” in this Annual Report on Form 10-K. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report on Form 10-K. 
 We have based the forward-looking statements on information available to us on the date of this Annual Report on Form 10-K. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The forward-looking statements and projections contained in this annual report on Form 10-K are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act. 
 The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this Annual Report on Form 10-K. 
 Overview 
 Key performance metrics are presented below: 
 
 December 31, 2020 December 31, 2019 
 Net asset value per common share $ 11.85 $ 12.46 

 
 
 
 Year Ended December 31, 
 2020 2019 2018 
 Net investment income per common share $ 0.92 $ 1.43 $ 1.38 
 Net increase in net assets resulting from operations per common share 0.28 0.71 0.72 
 Distributions paid per common share 0.86 1.36 1.73 

 
 
 Net investment income per share during the year ended December 31, 2020 declined $0.51 from the prior year primarily due to an approximate $0.76 decline in net interest margin—total interest income less interest expense—per share. Weighted average yield on debt and Structured Finance Notes as of December 31, 2020, declined to 9.15% from 9.94% as of December 31, 2019, due to the Company's continuing shift to lower-yielding, first lien senior secured loans of larger borrowers, as well as the placement of our loans to Online Tech Stores, LLC and 3rd Rock Gaming Holding, LLC, with an aggregate cost of $35.7 million, on non-accrual status. The decline in net interest margin was partially offset by declines in management and incentive fees of $0.25 per share. For the year ended December 31, 2020, our weighted-average interest costs increased to 5.32% from 4.99% in the year ended December 31, 2019, principally due to a full year’s interest on the Unsecured Notes Due October 2026 and the issuance in September 2020 of the Unsecured Notes Due September 2023. As of December 31, 2020, approximately 90% of our debt was fixed rate. 
 During the year ended December 31, 2020, our portfolio experienced net losses of $6.7 million, or $0.50 per share, principally due to net losses of $6.8 million on our directly originated debt and equity investments, partially offset by net gains 
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 of $0.1 million in our Structured Finance Notes and broadly syndicated loan investments. The net loss in our directly originated investments was primarily due to our debt investments in 3rd Rock Gaming Holdings, LLC and Online Tech Stores, LLC, which combined for unrealized losses of $21.4 million. The unrealized losses were offset by unrealized gains in our common equity investment in Pfanstiehl Holdings, Inc., a pharmaceutical ingredients manufacturer, which appreciated $24.2 million due to performance improvements and expansion of the valuation multiple. 
 Additionally, during the year ending December 31, 2020, our net asset value decreased $1.1 million, or $0.08 per share, due to the impairment of goodwill, and $0.8 million, or $0.06 per share, due to the loss on extinguishment of debt related to the prepayment of $44.6 million of SBA debentures that were contractually due in 2023 and 2024, as well the commitment reduction on the PWB Credit Facility from $100.0 million to $20.0 million. 
 Since OFS Advisor implemented its business continuity plan in mid-March 2020, the entire team effectively transitioned to remote work and maintained our normal functionality and we remain capable of completing our operational requirements. 
 We have actively monitored our portfolio companies throughout this period of economic uncertainty, which has included assessments of our portfolio companies' operational and liquidity outlook. During the year ended December 31, 2020, we extended the maturity date of loans, rescheduled due dates of interest payments, and converted cash interest to PIK interest in order to support our portfolio companies through the COVID-19 pandemic. As of December 31, 2020, we have unfunded commitments of $5.8 million to four portfolio companies. For details on our portfolio activity for the year ended December 31, 2020, see “Portfolio Composition and Investment Activity — Investment Activity”. 
 We will continue to monitor the rapidly evolving situation relating to the COVID-19 pandemic and guidance from U.S. and international authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plan of operation. 
 We cannot predict the full impact of the COVID-19 pandemic, including its duration in the United States and worldwide, and the magnitude of the economic impact of the outbreak, including the impact of travel restrictions, business closures and other quarantine measures imposed on service providers and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which the COVID-19 pandemic will further negatively affect our portfolio companies’ operating results, or the impact that such disruptions may have on our results of operations and financial condition. Depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies will continue to experience financial distress and possibly default on their financial obligations to us and their other capital providers. We also expect that some of our portfolio companies may significantly curtail business operations, furlough or lay-off employees and terminate service providers, and defer capital expenditures if subjected to prolonged and severe financial distress, which would likely impair their business on a permanent basis. These developments would likely result in a decrease in the value of our investment in any such portfolio company, as well as adversely affect our result of operations and cash flow, and such impacts could be material. See “Item 1A. Risk Factors — Risks Related to the COVID-19 Pandemic” for additional information. 
 We are also subject to financial risks, including changes in market interest rates. As of December 31, 2020, approximately $309 million (principal amount) of our debt investments bore interest at variable rates, which are generally LIBOR-based, and many of which are subject to reference-rate floors. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased, primarily in the second quarter of 2020. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the credit spread over LIBOR that we earn on our portfolio investments, or a decrease in our operating expenses, including our incentive fee and the interest costs on our liabilities indexed to LIBOR. As of December 31, 2020, the majority of our variable rate debt investments are subject to the base rate floor, partially mitigating the impact of the recent decrease in LIBOR on our gross investment income. See “Item 1A. Risk Factors — Risks Related to our Business and Structure” for additional information. 
 At December 31, 2020, our asset coverage ratio of 176% was within minimum asset coverage requirements under the 1940 Act, and we remained in compliance with all applicable financial covenants under our revolving credit facilities and outstanding debt. During the year ended December 31, 2020, we amended the PWB Credit Facility to provide greater flexibility with financial covenants and reduced the total commitment from $50.0 million to $20.0 million. As of December 31, 2020, we had an unused commitment of $19.4 million under our PWB Credit Facility, as well as an unused commitment of $118.6 million under our BNP Facility, both subject to a borrowing base and other covenants. Based on fair values and net asset value at December 31, 2020, we could access these available lines of credit for a total of $111 million and remain in compliance with our asset coverage requirements. We continue to believe that we have sufficient levels of liquidity to support our existing portfolio companies and will continue to selectively deploy capital in new investment opportunities. 
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 On March 2, 2021, the Board declared a distribution of $0.20 per share for the first quarter of 2021, payable on March 31, 2021, to stockholders of record as of March 24, 2021. 
 Critical Accounting Policies and Significant Estimates 
 The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. Critical accounting policies are those that require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact on our current and future financial condition and results of operations. 
 Our critical accounting policies and estimates are those relating to revenue recognition and fair value estimates. Management has discussed the development and selection of each critical accounting policy and estimate with the Audit Committee of the Board. For a descriptions of our revenue recognition and fair value policies, see Note 2 to the consolidated financial statements included in "Item 8.–Financial Statements" of this report. 
 Revenue recognition. Our direct lending activities frequently involve the acquisition of multiple financial instruments or rights either in an initial transaction, or in subsequent or "follow-on" transactions, including amendments to existing securities. These financial instruments can include loans, preferred and common stock, warrants, or membership interests in limited liability companies. Acquired rights can include fixed or variable fees that can be either guaranteed or contingent upon operating performance of the underlying portfolio companies. Moreover, these fees may be payable in cash or additional securities. 
 The revenue recognized on these instruments is a function of the fee or other consideration allocated to them, including amounts allocated to loan syndication fees at the time of acquisition. Additionally, subsequent amendments to these instruments can involve both: 
 • a determination as to whether the amendment is 
 ◦ of such significance to deem it the consummation of the initial investment transaction and the acquisition of new instruments (i.e., a "significant modification"), or 
 ◦ a modification of those instruments to be recognized over their remaining lives, and 
 • an additional allocation of consideration among newly acquired Instruments. 
 These allocations are generally based on the relative fair value of the instruments at the time of the transaction, a process involving fair value estimates which is also a critical accounting policy and significant estimate. Moreover, these allocations and determinations can differ between GAAP and federal income tax bases. Once determined, these allocations directly affect the discount/premium and yield on debt securities, the cost and net gains/losses on equity securities, and capital structuring fees recognized in the statements of operations; and ICTI. These allocations require an understanding of the terms and conditions of the underlying agreements and requires significant management judgment. 
 PIK Income . Our recognition of PIK interest and dividends include assessments of collectibility, and may result in recognition of the PIK income that corresponds to the fair value of the associated investment. If the in-kind securities received is non-accretive to overall value of the Company’s investment position (i.e., the recognition of PIK income merely results in the recognition of offsetting unrealized depreciation on the position, and no increase in the Company’s net assets), the PIK income for the in-kind securities received will be adjusted downwards, in some instances to zero. Furthermore, the recognition of PIK interest at zero does not necessarily correspond to the placement of a loan on non-accrual status, which can result in the non-recognition of cash interest as well. 
 Structured Finance Notes . Recognition of interest income on our Structured Finance Notes requires development of numerous assumptions regarding the performance and behavior of the underlying loans and portfolio companies, as well as assumption regarding the actions expected by the collateral managers of the CLOs. Income recognized under ASC Sub-topic 325-40, Beneficial Interests in Securitized Financial Assets , the authoritative accounting literature for income recognition on our Structured Finance Notes, is the constant yield-to-redemption that equates the expected cash flows from the instrument to 
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 its cost or amortized cost. The estimated cash flows from a subordinated note structured finance instrument are estimated, on a period-by-period basis, as 
 • the expected cash flows from the underlying portfolio of the CLO vehicle, derived by adjusting the contractual amounts due on the portfolio investments for, among other things 
 ◦ expected losses on defaults, 
 ◦ expected prepayments, and 
 ◦ the impact to cash flows (positive or negative) from the assumed reinvestment of recoveries on defaults and amounts collected on prepayments, less 
 • the amounts contractually due on tranches senior to the subordinated notes, which generally requires use of forward reference rate curves and the stated spread over such rates specified in the CLO indentures, 
 through the expected redemption of the subordinated notes, which is generally assumed to occur upon the exercise of an optional redemption by the collateral manager of the underlying CLO sometime after the reinvestment period specified in the CLO indenture. Following the reinvestment period specified in the indenture, CLO instruments enter their amortization period during which the principle balances of the CLO senior debt tranches are reduced through amortization payment. As the senior CLO debt tranches amortize, the management of the CLO becomes less economically viable to its collateral manager, prompting the manager to exercise options to liquidate the underlying portfolio, distribute cash to remaining tranches in order of seniority, and wind-up the CLO vehicle. Depending on where the CLO vehicle is in its reinvestment period, the period over which these cash flows are forecast can be several years from the valuation date and cross several business cycles. Such estimates involve significant judgement by management. When the amortized cost of an CLO instrument exceeds the undiscounted expected cash flows from the instrument as of the estimation date, the yield on that instrument is set to zero percent (-0-%). 
 The cash flow assumptions utilized in our Structured Finance Notes revenue recognition determination (our “Revenue Assumptions” generally involve the same economic considerations as the cash flow assumptions utilized in our period-end fair value estimates for these instruments (our “Fair Value Assumptions”), though on an factor-by-factor basis the assumptions will not be identical as the assumptions are developed by independent parties. To ensure that our Revenue Assumptions and our Fair Value Assumptions are consistent, management performs period tests involving with-and-without type considerations to ensure the collection of assumptions for each purpose produce consistent cash flows in all material respects. 
 Fair value estimates. As of December 31, 2020, total investments representing approximately 91% of our total assets were carried on the consolidated balance sheet at fair value. As discussed more fully in “Item 8.–Financial Statements–Note 2” GAAP requires us to categorize fair value measurements according to a three-level valuation hierarchy. The hierarchy gives the highest priority to quoted, active market prices for identical assets and liabilities (Level 1) and the lowest priority to valuation techniques that require significant management judgment because one or more of the significant inputs are unobservable in the market place (Level 3). All of our investments carried at fair value are classified as Level 2 and Level 3, with a significant portion of our investments classified as Level 3. We typically do not hold equity securities or other instruments that are actively traded on an exchange. 
 Rule 2a-5 under the 1940 Act was recently adopted by the SEC and establishes requirements for determining fair value in good faith for purposes of the 1940 Act. We are evaluating the impact of adopting Rule 2a-5 on the consolidated financial statements and intend to comply with the new rule’s requirements on or before the compliance date in September 2022. 
 As described in “Item 8.–Financial Statements–Note 5”, we follow a process, under the supervision and review of the Board, to determine these unobservable inputs used in the fair value estimates of our investments. The most significant unobservable inputs in the Level 3 fair value measurements are the discount rates and EBITDA multiples. Investments classified as Level 2 are measured on the basis of Indicative Prices provided by pricing services. 
 Our discounted cash flow valuations involve a determination of discount rate commensurate with the risk inherent in each investment. Management uses two primary methods to estimate discount rates: a method based upon a hypothetical recapitalization of the entity given its current operating performance and current market conditions; and a synthetic debt rating method, which assigns a surrogate debt rating to the entity based on known industry standards for assigning such ratings and then estimates the discount rate based on observed market yields for actual rated debt. Management may also use a relative value method to estimate yields, which involves estimating the discount rate of non-traded subject debt investments based on an expected or assumed relationship between Indicative Prices or observed prices on traded debt and the subject debt for a portfolio company. All methods for estimating the discount rate generally involve calibration of unobservable inputs utilized in estimating the discount rate on the subject investment to its internal rate of return at close or purchase date. These methods generally produce a range of discount rates, and we generally select the midpoint of the range for use in fair value measures, subject to limitations on the basis of the borrowers' ability to prepay the debt without penalty. 
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 Our market approach valuations, generally applied to equity investments and investments in non-performing debt, involve a determination of an enterprise value multiple to a financial performance metric of the portfolio company, generally EBITDA. These determinations are based on identification of a comparable set of publicly traded companies and determination of a public-to-private liquidity adjustment factor, generally through calibration to transaction prices in the subject investment instrument. This method generally produces a range of multiplier values and management, under the supervision of the Board, generally select the midpoint of the range for fair value measures. 
 We adjusted our approach to fair value estimates throughout 2020 in response to the economic uncertainty associated with the spread of the COVID-19 pandemic. Our use of Indicative Prices includes assessments of whether a sufficient number of market quotations are available and whether the depth of the markets from which those Indicative Prices were received is sufficient to transact in amounts approximating our positions in such assets without impacting such prices. Moreover, these assessments are generally based on 90-day moving averages of our depth and liquidity metrics. The 90-day moving average generally counters the effects of intermittent quoting activity observed at month- and quarter-ends, irregular quoting activity that tends to artificially inflate our market depth and liquidity metrics. We observed significant declines in market liquidity beginning in the middle of March 2020 and concluded the 90-day moving average was not representative of market conditions given the significant market dislocation during that period. Accordingly, we adjusted our depth and liquidity assessment to one based on a 5-day moving average of the metrics in our liquidity assessments as of March 31, 2020, and partially reverted, utilizing 30-day and 60-day moving average, in our June 30, 2020, and September 30, 2020, assessments respectively, as liquidity continued to return to the loan market. We fully reverted to use of the 90-day moving average in our December 31, 2020, assessments. One measure of liquidity in the broadly syndicated loan market is the average bid-ask spread on the Refinitiv Market Overall (North America) Loan Index which narrowed to 1.98 points at June 30, 2020, and 1.53 points at September 30, 2020, from 3.41 points at March 31, 2020, and has not yet returned to its long-term historic average of 1.0, but narrowed to 1.24 at December 31, 2020. These changes to our depth and liquidity metrics, as well as changes in the level of the metrics themselves, led to securities with a fair value of $12.7 million and $2.9 million to transfer from Indicative Prices to models and Level 3 inputs at March 31, 2020 and June 30, 2020, respectively; however, as of December 31, 2020, only one instrument with an aggregate amortized cost of $0.6 million remained at Level 3 within the fair value hierarchy. 
 We also adjusted the relative weighting of our Level 3 fair value models throughout this period of heightened economic uncertainty. Our processes included assessments of the impact of the COVID-19 pandemic on the financial condition, results of operations or cash flows of our portfolio companies. Initially, such forward-looking assessments were fragmentary; however as such forward-looking estimates became more reliable, such information was directly incorporated into our fair value models. In circumstances in which reliable forward-looking information was unavailable, we considered the market impact on performance-metric multiples and related impact on enterprise values. Additionally, management observed a decrease in the historic correlation between market spreads used in our synthetic debt rating method and those used in our reunderwriting analysis. These market spreads, though highly correlated before the on set of COVID-19, relate to different segments of the lending market primarily on the basis of borrower size. The synthetic debt rating method is based on market spreads for larger borrowers with rated debt, while the reunderwring analysis market spreads are generally used for what are considered middle-market borrowers. Management concluded, given the break-down in this relationship, the relative weight given to each of these methods required adjustment to correspond to the market most closely associated with the subject investment. Accordingly, we decreased the weighting for the synthetic debt rating method and increased the weighting for the reunderwriting analysis in the current period year, from a weighting of 50/50 to a weighting of 10/90, at March 31, 2020, and partially reverted to generally 25/75 at June 30, 2020. We believed the overweighting to the Reunderwriting Analysis during this period more accurately captured the market in which these instruments are exchanged. By September 30, 2020, we had fully reverted to an equal weighting of these models as we have observed a return, in all significant respects, of the historic correlative relationship between these markets. 
 
 
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 The following table illustrates the impact of our fair value measures if we selected the low or high end of the range for all investments at December 31, 2020, (in thousands): 
 
 Fair Value at December 31, 2020 Range of Fair Value 
 Investment Type 
 Low-end High-end 
 Debt investments: 
 Senior Secured $ 300,193 $ 294,686 $ 305,480 
 Senior Secured (valued at Transaction Price) 6,111 6,111 6,111 
 Subordinated 15,067 12,872 17,073 
 
 Structured Finance Notes: 
 Subordinated notes 54,724 52,941 56,505 
 Mezzanine bonds 1,701 1,657 1,746 
 
 Equity investments: 
 Preferred equity 11,543 10,317 13,577 
 Common equity and warrants 
 52,984 48,719 56,902 
 $ 442,323 $ 427,303 $ 457,394 

 
 
 Related Party Transactions 
 We have entered into a number of business relationships with affiliated or related parties, including the following: 
 • The Investment Advisory Agreement with OFS Advisor to manage our operating and investment activities. Under the Investment Advisory Agreement we have agreed to pay OFS Advisor an annual base management fee based on the average value of our total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) as well as an incentive fee based on our investment performance. See “Item 1—Management and Other Agreements” and “Item 8–Financial Statements and Supplementary Data–Note 3.” 
 • The Administration Agreement with OFS Services, an affiliate of OFS Advisor, to provide us with the office facilities and administrative services necessary to conduct our operations. See “Item 1–Management and Other Agreements” and “Item 8–Financial Statements and Supplementary Data–Note 3.” 
 • A license agreement with OFSAM, the parent company of OFS Advisor, under which OFSAM has agreed to grant us a non-exclusive, royalty-free license to use the name “OFS.” Under this agreement, we have a right to use the “OFS” name for so long as OFS Advisor or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we have no legal right to the “OFS” name. This license agreement will remain in effect for so long as the Investment Advisory Agreement with OFS Advisor is in effect. 
 On June 11, 2019, OFS Advisor agreed to reduce a portion of its base management fee by reducing the portion of such fee from 0.4375% per quarter (1.75% annualized) to 0.25% per quarter (1.00% annualized) of the OFSCC-FS Assets at the end of the two most recently completed calendar quarters to the extent that such portion of the OFSCC-FS Assets are financed using leverage (also calculated on an average basis) that causes the Company’s statutory asset coverage ratio to fall below 200%. When calculating its statutory asset coverage ratio, the Company excludes its SBA guaranteed debentures from its total outstanding senior securities as permitted pursuant to exemptive relief granted by the SEC dated November 26, 2013. Effective as of January 1, 2020 and January 1, 2021, OFS Advisor agreed to further reduce the base management fee to 0.25% per quarter (1.00% annualized) of the average value of the portion of total assets held by the Company through OFSCC-FS at the end of the two most recently completed calendar quarters without regard to the statutory asset coverage ratio. The base management fee reduction by OFS Advisor is renewable on an annual basis and the amount of the base management fee reduction with respect to the OFSCC-FS Assets shall not be subject to recoupment by OFS Advisor. This agreement was renewed for the 2021 calendar year on February 16, 2021. 
 OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to us and OFS Advisor is free to furnish similar services to other entities, including other BDCs managed by OFS Advisor, so long as its services to us are not impaired. OFS Advisor also serves as the investment adviser or collateral manager to CLOs and other assets, including HPCI and OCCI. Additionally, OFS Advisor provides sub-advisory services to CMFT Securities Investments, LLC, a wholly owned subsidiary of CIM Real Estate Finance Trust, Inc., a corporation that qualifies as a real estate investment trust, and to CIM Real 
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 Assets & Credit Fund, an externally managed registered investment company that operates as an interval fund that invests primarily in a combination of real estate, credit and related investments. 
 BDCs generally are prohibited under the 1940 Act from knowingly participating in certain transactions with their affiliates without the prior approval of their independent directors and, in some cases, of the SEC. Those transactions include purchases and sales, and so-called “joint” transactions, in which a BDC and one or more of its affiliates engage in certain types of profit-making activities. Any person that owns, directly or indirectly, five percent or more of a BDC’s outstanding voting securities will be considered an affiliate of the BDC for purposes of the 1940 Act, and a BDC generally is prohibited from engaging in purchases from, sales of assets to, or joint transactions with, such affiliates, absent the prior approval of the BDC’s independent directors. Additionally, without the approval of the SEC, a BDC is prohibited from engaging in purchases from, sales of assets to, or joint transactions with, the BDC’s officers, directors, and employees, and advisor (and its control affiliates). 
 BDCs may, however, invest alongside certain related parties or their respective other clients in certain circumstances where doing so is consistent with current law and SEC staff interpretations. For example, a BDC may invest alongside such accounts consistent with guidance promulgated by the SEC staff permitting the BDC and such other accounts to purchase interests in a single class of privately placed securities so long as certain conditions are met, including that the BDC’s advisor, acting on the BDC’s behalf and on behalf of other clients, negotiates no term other than price. Co-investment with such other accounts is not permitted or appropriate under this guidance when there is an opportunity to invest in different securities of the same issuer or where the different investments could be expected to result in a conflict between the BDC’s interests and those of other accounts. 
 The 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting the BDC to do so. On August 4, 2020, we received exemptive relief from the SEC to permit us to co-invest in portfolio companies with certain Affiliated Funds in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions. The Order superseded a previous order we received on October 12, 2016 and provides us with greater flexibility to enter into co-investment transactions with Affiliated Funds. We are generally permitted to co-invest with Affiliated Funds if under the terms of the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies. 
 In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs, through December 31, 2020, we were permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates even if such other funds had not previously invested in such existing portfolio company. Without this order, affiliated funds would not be able to participate in such co-investments with us unless the affiliated funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the conditional exemptive order has expired, the SEC’s Division of Investment Management has indicated that until March 31, 2022, it will not recommend enforcement action, to the extent that any BDC with an existing co-investment order continues to engage in certain transactions described in the conditional exemptive order, pursuant to the same terms and conditions described therein. 
 Conflicts may arise when we make an investment in conjunction with an investment being made by an Affiliated Account, or in a transaction where an Affiliated Account has already made an investment. Investment opportunities are, from time to time, appropriate for more than one account in the same, different or overlapping securities of a portfolio company’s capital structure. Conflicts arise in determining the terms of investments, particularly where these accounts may invest in different types of securities in a single portfolio company. Questions arise as to whether payment obligations and covenants should be enforced, modified or waived, or whether debt should be restructured, modified or refinanced. See "Item 1A. Business — Conflicts of Interest", "Item 1A. Risk Factors — Risks Related to OFS Advisor and its Affiliates —We have potential conflicts of interest related to the purchases and sales that OFS Advisor makes on our behalf and/or on behalf of Affiliated Accounts" and ""Item 1A. Risk Factors — Regulations — Conflicts of Interest - Conflicts Related to Portfolio Investments." 
 Portfolio Composition and Investment Activity 
 Our portfolio consists of Portfolio Company Investments, as well as indirect investments in such securities through investment in other investment companies including Structured Finance Notes. 
 Portfolio Composition. As of December 31, 2020, the fair value of our debt investment portfolio totaled $321.4 million in 49 portfolio companies, of which 95% and 5% were senior secured loans and subordinated loans, respectively, and $64.5 million in equity investments in 10 portfolio companies in which we also held debt investments and 13 portfolio companies in which we solely held an equity investment. We had unfunded commitments of $5.8 million to four portfolio 
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 companies at December 31, 2020. We also have 12 investments in Structured Finance Notes with a fair value of $56.4 million. Set forth in the tables and charts below is selected information with respect to our portfolio as of December 31, 2020 and 2019. 
 The following table presents our investment portfolio by each wholly owned legal entity within the consolidated group as of December 31, 2020 and 2019 (in thousands): 
 
 December 31, 2020 December 31, 2019 
 Amortized Cost Fair Value Amortized Cost Fair Value 
 OFS Capital Corporation (Parent) $ 190,627 $ 172,249 $ 181,980 $ 169,230 
 SBIC I LP 191,192 190,573 256,858 246,371 
 OFSCC-FS 67,781 68,037 88,458 88,936 
 OFSCC-MB 11,423 11,464 11,375 12,394 
 Total investments $ 461,023 $ 442,323 $ 538,671 $ 516,931 

 Portfolio Yields : The weighted average yield on total investments 1 was 8.56% and 9.59% at December 31, 2020 and 2019, respectively. The following table displays the composition of our debt investment and Structured Finance Note portfolio by yield range and its weighted average yields as of December 31, 2020 and 2019: 
 
 December 31, 
 2020 2019 
 Yield Range Senior Secured Debt Subordinated Debt Structured Finance Notes Total Senior Secured Debt Subordinated Debt Structured Finance Notes Total 
 Less than 8% 29.5 % — % 1.4 % 24.0 % 20.1 % — % — % 17.3 % 
 8% – 10% 52.0 — 1.4 42.2 21.5 — — 18.5 
 10% – 12% 13.5 — — 10.9 48.8 8.6 — 42.7 
 12% – 14% 3.4 53.6 12.5 7.0 8.4 38.3 25.1 12.0 
 Greater than 14% 1.6 46.4 84.7 15.9 1.2 53.1 74.9 9.5 
 Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 
 Weighted average yield – performing debt and Structured Finance Note investments (2) 
 8.92 % 14.88 % 16.56 % 10.27 % 9.80 % 13.52 % 15.13 % 10.40 % 
 Weighted average yield – total debt and Structured Finance Note investments (3) 
 8.38 % 5.53 % 16.56 % 9.15 % 9.57 % 10.57 % 15.13 % 9.94 % 

 (1) Weighted average yield on total investments is computed as (a) the sum of (i) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of Net Loan Fees, (ii) the annual effective yield on Structured Finance Notes, (iii) the effective yield on our performing preferred equity investments, divided by (b) the amortized cost of our total investment portfolio, including assets in non-accrual status as of the balance sheet date. 
 (2) The weighted average yield on our performing debt and Structured Finance Note investments is computed as (a) the sum of (i) the annual stated accruing interest on debt investments plus the annualized accretion of Net Loan Fees; and (ii) the annual effective yield on Structured Finance Notes divided by (b) the sum of the amortized cost of our debt and Structured Finance Note investments, in each case, excluding debt investments in non-accrual status as of the balance sheet date. 
 (3) The weighted average yield on our total debt and Structured Finance Note investments is computed as (a) the sum of (i) the annual stated accruing interest on debt investments plus the annualized accretion of Net Loan Fees and (ii) the annual effective yield on Structured Finance Notes divided by (b) the sum of the amortized cost of our debt and Structured Finance Note investments, in each case, including debt investments in non-accrual status as of the balance sheet date. 
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 The weighted average yield of our investments is not the same as a return on investment for our stockholders but, rather, the gross investment income from our investment portfolio before the payment of all of our fees and expenses. There can be no assurance that the weighted average yield will remain at its current level. 
 The weighted average yield on our performing debt and Structured Finance Notes decreased from 10.40% at December 31, 2019 to 10.27% at December 31, 2020, primarily due to the decrease in LIBOR and deployment of approximately $70.6 million in new debt investments with a weighted average yield of 8.2%, partially offset by the deployment of approximately $33.5 million in new Structured Finance Notes with a weighted average yield of 16.7% and LIBOR floors on the majority of the debt portfolio. 
 As of December 31, 2020 and 2019, floating rate loans at fair value were 96% and 93% of our debt investment portfolio, respectively, and fixed rate loans at fair value were 4% and 7% of our debt investment portfolio, respectively. 
 Portfolio Company Investments . The following table summarizes the composition of our Portfolio Company Investments as of December 31, 2020 and 2019 (dollar amounts in thousands): 
 
 December 31, 2020 December 31, 2019 
 Amortized Cost Fair Value Amortized Cost Fair Value 
 Senior secured debt investments (1) 
 $ 325,647 $ 306,304 $ 421,970 $ 408,724 
 Subordinated debt investments 45,409 15,067 56,731 43,091 
 Preferred equity 18,648 11,543 21,925 17,729 
 Common equity and warrants 15,459 52,984 14,919 25,777 
 Total $ 405,163 $ 385,898 $ 515,545 $ 495,321 
 Number of portfolio companies 62 62 85 85 

 (1) Includes debt investments in which we have entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, we have agreed to receive our principal payments after the repayment of certain co-lenders pursuant to a payment waterfall. The aggregate amortized cost and fair value of these investments was $55,776 and $56,217 at December 31, 2020, respectively, and $65,300 and $65,337, at December 31, 2019, respectively. 
 Approximately 79% of our Portfolio Company Investments at fair value are senior securities of the borrower, rather than in the subordinated securities, preferred equity or common equity. We believe the seniority of our debt investments in the borrowers' capital structures may provide greater downside protection against the impact of the COVID-19 pandemic. 
 As of December 31, 2020, the three largest industries of our Portfolio Company Investments by fair value, were (1) Manufacturing (24.9%), (2) Professional, Scientific, and Technical Services (19.2%), and (3) Health Care and Social Assistance (14.9%), totaling approximately 59.0% of the investment portfolio. For a full summary of our investment portfolio by industry, see "Note 4, Investments" to the consolidated financial statements included in "Part II, Item 8. Financial Statements and Supplementary Data" of this report. 
 The following table presents our debt investment portfolio by investment size as of December 31, 2020 and 2019, (dollar amounts in thousands): 
 
 Amortized Cost Fair Value 
 December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 
 Up to $4,000 $ 30,427 8.2 % $ 77,809 16.3 % $ 33,149 10.3 % $ 75,033 16.6 % 
 $4,001 to $7,000 72,030 19.4 71,558 14.9 68,939 21.5 68,806 15.2 
 $7,001 to $10,000 51,874 14.0 95,567 20.0 43,735 13.6 77,978 17.3 
 $10,001 to $13,000 21,013 5.7 54,273 11.3 33,470 10.4 53,903 11.9 
 Greater than $13,000 195,711 52.7 179,494 37.5 142,078 44.2 176,095 39.0 
 Total $ 371,055 100.0 % $ 478,701 100.0 % $ 321,371 100.0 % $ 451,815 100.0 % 

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 Structured Finance Notes . The following table summarizes our Structured Finance Notes as of December 31, 2020 and December 31, 2019, (dollar amounts in thousands): 
 
 December 31, 2020 December 31, 2019 
 Amortized Cost Fair Value Amortized Cost Fair Value 
 Subordinated notes $ 54,280 $ 54,724 $ 23,127 $ 21,610 
 Mezzanine bonds 1,580 1,701 — — 
 Total Structured Finance Notes $ 55,860 $ 56,425 $ 23,127 $ 21,610 
 Number of Structured Finance Notes 12 12 4 4 

 The weighted average yield on Structured Finance Notes increased to 16.6% at December 31, 2020, from 15.13% at December 31, 2019 partially due to investments of $33.5 million in Structured Finance Notes with a weighted average annual effective yield of 16.7%. 
 Notable investments in new Structured Finance Notes during the year ended December 31, 2020, include Apex Credit CLO 2020 ($9.3 million subordinated note) and Madison Park Funding XXIII, Ltd. ($7.5 million subordinated note). 
 We focused on investing in subordinated note securities with longer reinvestment periods in order to take advantage of market volatility and maximize cash flows, and all current subordinated note investments have reinvestment periods ending in 2022 or beyond. We believe longer reinvestment periods provide collateral managers with more flexibility to maximize cash flows by reinvesting loan repayments into new loans, potentially at discounted levels with higher yields and to reposition the portfolio to adapt to changing market conditions. 
 Investment Activity. The following is a summary of our Portfolio Company Investment cash investment activity for the years ended December 31, 2020 and 2019, (dollar amounts in millions): 
 
 Year Ended December 31, 2020 Year Ended December 31, 2019 
 Debt
Investments Equity
Investments Debt
Investments Equity
Investments 
 Investments in new portfolio companies $ 49.0 $ — $ 141.6 $ 5.6 
 Investments in existing portfolio companies: 
 Follow-on investments 41.0 0.3 42.0 — 
 Restructured investments 0.9 — — — 
 Delayed draw and revolver funding 5.7 — 9.6 — 
 Total investments in existing portfolio companies 47.6 0.3 51.6 — 
 Total investments in new and existing portfolio companies $ 96.6 $ 0.3 $ 193.2 $ 5.6 
 Number of new portfolio company investments 14 — 45 3 
 Number of existing portfolio company investments 25 3 29 — 
 Proceeds/distributions from principal payments/equity investments $ 129.6 $ — $ 60.9 $ — 
 Proceeds from investments sold or redeemed 66.9 3.9 34.8 0.2 
 Total proceeds from principal payments, equity distributions and investments sold 
 $ 196.5 $ 3.9 $ 95.7 $ 0.2 

 
 Notable investments in new portfolio companies during the year ended December 31, 2020 include A&A Transfer Buyer, Inc. ($25.2 million senior secured loan), SourceHOV Tax, Inc. ($19.7 million senior secured loan), as well as $5.2 million senior secured loans in I&I Sales Group, LLC, respectively. 
 During the year ended December 31, 2020, the weighted-average yield of Portfolio Company Investments in new portfolio companies was 8.2%. 
 During the year ended December 31, 2020, we also invested $33.5 million in Structured Finance Notes with a weighted average annual effective yield of 16.7%. 
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 Non-cash Investment Activity . On March 27, 2020, our debt investment in Constellis Holdings, LLC was restructured to converted our non-accrual debt investment into 20,628 common shares of equity. The cost and fair value of the 20,628 common shares of equity received was $0.7 million and $0.7 million, respectively, which we recognized as the investment's cost. 
 On January 31, 2019, Maverick Healthcare Equity, LLC was acquired by a third party in a purchase transaction. Proceeds from this transaction were insufficient to redeem the class of equity held by the Company. Accordingly, we received $-0- proceeds and recognized a net loss of $0.1 million, comprised of $0.9 million realized loss net of $(0.8) million unrealized loss reversal, for the year ended December 31, 2019. 
 Our level of investment activity may vary substantially from period to period depending on various factors, including, but not limited to, the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make. 
 PIK and Cash Dividend Accruals 
 Payment-in-kind dividends on preferred equity securities are recognized at fair value when earned. However, at December 31, 2020, we owned five preferred equity securities (Contract Datascan Holdings, Inc., Master Cutlery, LLC, Stancor, L.P., My Alarm Center, LLC and TRS Services, LLC), with an aggregate amortized cost and fair value of $12.4 million and $4.9 million, respectively, for which, notwithstanding the fair value of the preferred equity securities, the fair value of those securities most-recent PIK dividend as of December 31, 2020, was recognized at $-0-. At December 31, 2019, we owned four preferred equity securities (Master Cutlery, LLC, Stancor, L.P., My Alarm Center, LLC and TRS Services, LLC), with an aggregate amortized cost and fair value of $9.9 million and $5.7 million, respectively, for which, notwithstanding the fair value of the preferred equity securities, the fair value of those securities most-recent PIK dividend as of December 31, 2019, was recognized at $-0-. 
 Risk Monitoring 
 We categorize debt investments into seven risk categories based on relevant information about the ability of borrowers to service their debt. For additional information regarding our risk categories, see “Item 1. Business—Portfolio Review/Risk Monitoring.” The following table shows the classification of our debt investments portfolio by risk category as of December 31, 2020 and 2019 (dollar amounts in thousands): 
 
 As of December 31, 
 2020 2019 
 Risk Category Debt
Investments, at
Fair Value % of Debt
Investments Debt
Investments, at
Fair Value % of Debt
Investments 
 1 (Low Risk) $ — — % $ — — % 
 2 (Below Average Risk) — — 17,953 4.0 
 3 (Average) 263,934 82.2 387,654 85.8 
 4 (Special Mention) 45,302 14.1 45,546 10.1 
 5 (Substandard) 11,684 3.6 — — 
 6 (Doubtful) 451 0.1 662 0.1 
 7 (Loss) — — — — 
 $ 321,371 100.0 % $ 451,815 100.0 % 

 During the year ended December 31, 2020, we had debt investments with risk downgrades from risk category 3 to risk category 4 with a fair value of $15.9 million at December 31, 2020. We also had debt investments with risk downgrades from risk category 3 to risk category 5 with a fair value of $11.7 million at December 31, 2020. 
 During the year ended December 31, 2019, we had a debt investment with a risk upgrade from risk category 3 to risk category 2 with a fair value of $14.2 million at December 31, 2019. We also had a debt investment with a risk upgrade from risk category 4 to risk category 3 with a fair value of $14.6 million at December 31, 2019. We had debt investments with risk rating downgrades from risk category 3 to risk category 4 with an aggregate fair value of $34.0 million at December 31, 2019. We also had a debt investment with risk rating downgrade from risk category 4 to risk category 6 with a fair value of $0.4 million at December 31, 2019. 
 All other year-over-year changes in the fair value of our debt investments within each category, were a result of new debt investments, the receipt of amortization payments on existing debt investments, repayment of certain debt investments in full, changes in the fair value of our existing debt investments within the categories, and other investment activity. 
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 Non-Accrual Loans 
 At December 31, 2020, we had four loans on non-accrual status (Community Intervention Services, Inc., Master Cutlery, LLC, 3rd Rock Gaming Holdings, LLC, and Online Tech Stores, LLC) with respect to all interest and Net Loan Fee amortization, with an aggregate amortized cost and fair value of $48.1 million and $12.1 million, respectively. The change to non-accrual status for our investments in Online Tech Stores and 3rd Rock Gaming Holdings, LLC were effective January 1, 2020 and April 1, 2020, respectively. 
 At December 31, 2019, we had four loans on non-accrual status (Community Intervention Services, Inc., Master Cutlery, LLC, Southern Technical Institute, LLC and Constellis Holdings, LLC) with respect to all interest and Net Loan Fee amortization, with an aggregate amortized cost and fair value of $22.2 million and $0.7 million, respectively. The change to non-accrual status for our investment in Constellis Holdings, LLC was effective November 1, 2019. 
 On March 27, 2020, our debt investment in Constellis Holdings, LLC was restructured. We converted our non-accrual debt investment into 20,628 common shares of equity. The cost and fair value of the common shares received were $0.7 million and $0.7 million, respectively as of December 31, 2020. We recognized a realized loss on the restructuring of $9.1 million for the year ended December 31, 2020, which was fully recognized as unrealized losses as of December 31, 2019. 
 On September 30, 2020, our non-accrual debt investment in Southern Technical Institute, LLC was restructured, pursuant to which we received proceeds of $0.5 million, in full satisfaction of contractually due interest of $0.2 million and principal of $1.7 million. The investment was carried at a cost of $-0-. Accordingly, during the year ended December 31, 2020, we recognized a realized gain of $0.3 million. As of December 31, 2020, we hold equity appreciation rights with a cost and fair value of $-0- and $4,295 respectively. 
 Results of Operations 
 Key Financial Measures. The following is a discussion of the key financial measures that management employs in reviewing the performance of our operations. 
 Net Investment Income . Total investment income less total expenses (“NII”) is a key performance metric in obtaining part of our investment objective of providing current income to stockholders. NII can be a general indicator of ICTI and the amount of distributions that will be required to made due to RIC requirements. One of our main objectives is to increase NII, and in turn, increase distributions to stockholders. 
 Total Investment Income . We generate revenue primarily in the form of interest income on debt investments and Structured Finance Notes. Our debt investments typically have a term of three to eight years and typically bear interest at floating rates. As of December 31, 2020, floating rate and fixed rate loans comprised 96% and 4%, respectively, of our current debt investment portfolio at fair value. In some cases, our investments provide for PIK interest, or PIK dividends (meaning interest or dividends paid in the form of additional principal amount of the loan or equity security instead of in cash). Net Loan Fees are capitalized, and accreted or amortized over the life of the loan as interest income. When we receive principal payments on a loan in an amount that exceeds its amortized cost, we recognize the excess principal payment as income in the period it is received. From time to time, our common equity investments declare dividends, which are recognized when declared. 
 We also generate revenue in the form of other contractual fees, which are recognized as the related services are rendered. In the general course of business, we receive certain non-recurring fees from portfolio companies, such as prepayment fees on loans that repaid prior to their scheduled due date, which are recognized as earned when received. Syndication fees are received for capital structuring, loan syndication or advisory services from certain portfolio companies, which are recognized as earned upon closing of the investment. Syndication fees are dependant on our pipeline and loan originations of middle-market loans. 
 Expenses . Our primary operating expenses include interest expense due under our outstanding borrowings, the payment of fees to OFS Advisor under the Investment Advisory Agreement and our allocable portion of overhead expenses under the Administration Agreement. We also incur professional fees such as legal and accounting fees in connection with compliance oblgiations under the 1940 Act and other applicable U.S. federal and state securities law. We also will incur standard operating costs common to BDCs such as transfer agent, custodial and board of director fees. Additionally, we will pay interest expense on any outstanding debt under any new credit facility or other debt instrument we may enter into. We will bear all other out-of-pocket costs and expenses of our operations and transactions, whether incurred by us directly, OFS Services or its affiliates, or on our behalf by a third party. 
 Net Gain (Loss) on Investments. Net gain (loss) on investments consists of the sum of: (a) realized gains and losses from the sale of debt or equity securities, or the redemption of equity securities; and (b) net unrealized appreciation or depreciation on debt and equity investments, net of applicable taxes to the extent the investments are held through taxable wholly owned subsidiaries. In the period in which a realized gain or loss is recognized, such gain or loss will generally be offset by the reversal of previously recognized unrealized appreciation or depreciation, and the net gain recognized in that period will 
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 generally be smaller. The unrealized appreciation or depreciation on debt securities is also reversed when those investments are redeemed or paid off prior to maturity. In such instances, the reversal of accumulated unrealized appreciation or depreciation will be reported as a net loss or gain, respectively, and may be partially offset by the acceleration of any premium or discount on the debt security, which is reported in interest income, and any prepayment fees on the debt security, which is reported in fee income. 
 Net Asset Value : Total assets less total liabilities (“NAV”) is a key performance metric that is monitored to ensure part of our investment objective of capital appreciation to stockholders is fulfilled. The net increase (decrease) in net assets resulting from operations can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, annual comparisons of net increase in net assets resulting from operations may not be meaningful. 
 We do not believe that our historical operating performance is necessarily indicative of our future results of operations that we expect to report in future periods. Our investment strategy is to maintain a leveraged credit investment portfolio, primarily focused on investments in middle-market companies in the United States, including debt investments and, to a lesser extent, equity investments, including warrants and other minority equity securities. Moreover, as a BDC and a RIC, we are also subject to certain constraints on our operations, including, but not limited to, limitations imposed by the 1940 Act and the Code. In addition, SBIC I LP is subject to regulation and oversight by the SBA. For the reasons described above, the results of operations described below may not necessarily be indicative of the results we expect to report in future periods. 
 Comparison of years ended December 31, 2020, 2019 and 2018. Consolidated operating results for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands): 
 
 Years Ended December 31, 
 2020 2019 2018 
 Investment income 
 Interest income: 
 Cash interest income $ 33,987 $ 44,649 $ 36,068 
 Net Loan Fee amortization 1,584 1,245 2,288 
 Accretion of interest income on Structured Finance Notes 5,877 2,861 — 
 Other interest income 69 147 251 
 Total interest income 41,517 48,902 38,607 
 PIK income: 
 PIK interest income 1,527 927 1,193 
 Preferred equity PIK dividends 505 898 906 
 Total PIK income 2,032 1,825 2,099 
 Dividend income: 
 Common equity dividends 450 502 315 
 Total dividend income 450 502 315 
 Fee income: 
 Management and syndication 745 773 922 
 Prepayment and other fees 731 519 891 
 Total fee income 1,476 1,292 1,813 
 Total investment income 45,475 52,521 42,834 
 Total expenses, net of incentive fee waivers 33,180 33,423 24,449 
 Net investment income 12,295 19,098 18,385 
 Net loss on investments (6,704) (9,545) (8,813) 
 Loss on extinguishment of debt (820) — — 
 Loss on impairment of goodwill (1,077) — — 
 Net increase in net assets resulting from operations $ 3,694 $ 9,553 $ 9,572 

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 Interest and PIK interest income by debt investment type for the years ended December 31, 2020, 2019 and 2018 are summarized below (in thousands): 
 
 Years Ended December 31, 
 2020 2019 2018 
 Interest and PIK interest income: 
 Senior secured debt investments $ 33,186 $ 41,300 $ 32,127 
 Subordinated debt investments 3,903 5,667 7,673 
 Structured Finance Notes 5,955 2,861 — 
 Total interest and PIK interest income $ 43,044 $ 49,828 $ 39,800 

 Comparison of investment income for the years ended December 31, 2020 and 2019 . Interest and PIK interest income decreased approximately $6.8 million during the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a $1.8 million decrease in interest income caused by a $16 million decrease in the average outstanding loan balance and a $5.0 million decrease in recurring interest income resulting from a 128 basis point decrease in the weighted average yield in our debt portfolio. Acceleration of Net Loan Fees from the repayment of loans prior to their scheduled due dates of $0.2 million and $0.3 million were included in interest income for the years ended December 31, 2020 and 2019, respectively. 
 Due to the COVID-19 pandemic and the impact to certain portfolio companies during 2020, we experienced a partial shift from cash interest to PIK interest resulting from concessions granted, such as increasing the PIK interest rate or converting cash interest to PIK interest granted, to support the borrowers' liquidity. Total PIK income on debt securities increased to $1.5 million during the year ended December 31, 2020, but still remained under 5% of total investment income. For the year ended December 31, 2020, cash and PIK interest of $1.2 million and $3.4 million, respectively, was not recognized in income due to reasonable doubt whether it will be collected. 
 Prepayment fees and syndication fees generally result from periodic transactions rather than from holding portfolio investments and are considered non-recurring. During the year ended December 31, 2020, we recognized prepayment fees of $0.6 million resulting from $38.4 million of unscheduled principal payments, compared to $0.4 million from $56.8 million of unscheduled principal payments during the year ended December 31, 2019. We recognized syndication fees of $0.7 million and $0.7 million for the years ended December 31, 2020 and 2019, respectively, resulting from approximately $46.8 million and $91.5 million in loan originations which OFS Advisor sourced, structured, and arranged the lending group, and for which we were additionally compensated. 
 Comparison of investment income for the years ended December 31, 2019 and 2018 . Interest and PIK interest income increased approximately $10.0 million during the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to a $12.7 million increase in recurring interest income caused by a $103 million increase in the average outstanding loan balance and a decrease of $1.8 million in recurring interest income resulting from a 43 basis point decrease in the weighted average yield in our debt portfolio. Acceleration of Net Loan Fees of $0.3 million and $1.1 million were included in interest income for the years ended December 31, 2019 and 2018, respectively, from the repayment of loans prior to their scheduled due dates. 
 During the year ended December 31, 2019, we recognized prepayment fees of $0.4 million resulting from $56.8 million of unscheduled principal payments, compared to $0.9 million from $50.0 million of unscheduled principal payments during the year ended December 31, 2018. We recognized syndication fees of $0.7 million and $0.7 million for the years ended December 31, 2019 and 2018, respectively, resulting from approximately $91.5 million and $64.0 million in loan originations which OFS Advisor sourced, structured, and arranged the lending group, and for which we were additionally compensated. 
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 Expenses. Operating expenses for years ended December 31, 2020, 2019 and 2018, are presented below (in thousands): 
 
 Years Ended December 31, 
 2020 2019 2018 
 
 Interest expense $ 18,808 $ 15,829 $ 9,232 
 Management fees 7,605 8,271 6,335 
 Incentive fee, net of waivers 1,584 4,760 4,387 
 Professional fees 1,993 1,814 1,245 
 Administration fee 1,855 1,747 1,601 
 General and administrative expenses 1,335 1,002 1,649 
 Total expenses, net of waivers $ 33,180 $ 33,423 $ 24,449 

 
 
 Comparison of expenses for the years ended December 31, 2020 and 2019 . Interest expense increased by $3.0 million during the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily due to an increase of $39.4 million in average outstanding borrowings, primarily due to a full year’s interest on the Unsecured Notes Due October 2026 and the issuance in September 2020 of the Unsecured Notes Due September 2023. See "Item 8.–Financial Statements–Note 7" for details. 
 Management fee expense decreased by $0.7 million due to a decrease in our average total assets, primarily due to the sale of debt investments in response to the uncertainty surrounding the COVID-19 pandemic. 
 During the year ended December 31, 2020, Incentive fee expense decreased by $3.2 million, or $3.6 million prior to the Income Incentive Fee waiver of $0.4 million, due to a decrease in net investment income. On May 4, 2020, OFS Advisor agreed to irrevocably waive $0.4 million in Income Incentive Fees related to net investment income, that it would otherwise be entitled to receive for the three months ended March 31, 2020. As a result of the voluntary fee waiver, we incurred Income Incentive Fee expense of $0.4 million for the three months ended March 31, 2020, which is equal to half the Income Incentive Fee expense we would have incurred for such period. 
 During the year ended December 31, 2020, professional fees increased $0.2 million primarily due to an increase in external audit costs, and general and administrative expenses increased $0.3 million primarily due to the write-off of deferred offering costs relating to our prior shelf registration. 
 Comparison of expenses for the years ended December 31, 2019 and 2018 . Interest expense increased by $6.6 million during the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to an increase of $100.9 million in the average amount of outstanding borrowings, primarily due to a full year’s interest on the Unsecured Notes Due October 2025, the establishment of the BNP Facility in June 2019, and the issuance in October 2019 of the Unsecured Notes Due 2026. See "Item 8.–Financial Statements–Note 7" for details. 
 During the year ended December 31, 2019, management fee expense increased by $2.0 million due to an increase in our average total assets, primarily due to an increase in net investment activity from employing leverage from the BNP Facility and Unsecured Notes Due 2026. Incentive fee expense for 2019 also increased by $0.4 million primarily due to a $0.7 million increase in net investment income relating to the increase in our leverage throughout the fiscal year. 
 During the year ended December 31, 2019, professional fees increased $0.6 million primarily due to the retention of third-party valuation services, as well as an increase in internal and external audit costs. 
 During the year ended December 31, 2019, general and administrative expenses decreased $0.6 million primarily due to non-recurring legal and other offering costs incurred during the first quarter of 2018 in connection with a foreign debt transaction that we elected not to pursue due to regulatory changes and market conditions. 
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 Net realized and unrealized gain (loss) on investments. Net realized and unrealized gain (loss) on investments for years ended December 31, 2020, 2019 and 2018, are presented below (in thousands): 
 
 Years Ended December 31, 
 2020 2019 2018 
 
 Senior secured debt (15,859) $ (9,809) $ (9,020) 
 Subordinated debt (16,388) (1,968) (3,308) 
 Preferred equity (2,708) (89) (1,993) 
 Common equity and warrants 26,170 3,837 5,508 
 Structured Finance Notes 2,081 (1,516) — 
 Net loss on investments $ (6,704) $ (9,545) $ (8,813) 

 Year ended December 31, 2020 
 During the year ended December 31, 2020, we recognized net losses of $15.9 million on senior secured debt, primarily as a result of unrealized losses of $9.2 million and $2.8 million on our senior secured debt investments in 3rd Rock Gaming Holding, LLC, and Envocore Holdings, LLC, respectively. 
 During the year ended December 31, 2020, we recognized net losses of $16.4 million on subordinated debt, primarily as a result of unrealized losses of $12.1 million and $4.7 million on our subordinated debt investments in Online Tech Stores, LLC and Eblens Holdings, Inc., respectively. 
 During the year ended December 31, 2020, we recognized net losses of $2.7 million on preferred equity investments, primarily as a result of unrealized losses of $3.2 million and $2.0 million in Contract Datascan Holdings, Inc. and My Alarm Center, LLC, respectively, offset by an unrealized gain of $1.7 million in TTG Healthcare, LLC. 
 During the year ended December 31, 2020, we recognized net gains of $26.2 million on common equity and warrant investments, primarily as a result of unrealized gains of $24.2 million and $4.3 million on our common equity investment in Pfanstiehl Holdings, Inc. and our equity appreciation rights in Southern Technical Institute, LLC, respectively, offset by a net unrealized loss of $1.2 million on our investment in Professional Pipe Holdings, LLC. 
 Year ended December 31, 2019 
 During the year ended December 31, 2019, we recognized net losses of $9.8 million on senior secured debt, primarily as a result of an unrealized loss of $9.0 million on our senior secured debt investment in Constellis Holdings, LLC, offset by unrealized gains of $2.2 million in our remaining senior secured debt investments. During the year ended December 31, 2019, we also recognized a realized loss of $2.9 million on the sale of MAI Holdings, LLC. 
 During the year ended December 31, 2019, we recognized net losses of $2.0 million on subordinated debt, primarily as a result of unrealized losses of $1.5 million and $0.6 million on our subordinated debt investments in Online Tech Stores, LLCand Master Cutlery, LLC, respectively, due to the negative impact of performance factors. 
 During the year ended December 31, 2019, we recognized net losses of $0.1 million on preferred equity investments, primarily as a result of a $2.3 million unrealized gain on TRS Services, LLC, offset by $2.3 million of unrealized losses on our remaining preferred equity investments. During the year ended December 31, 2019, we also recognized a realized loss of $0.1 million on the sale of Maverick Healthcare Equity, LLC. 
 During the year ended December 31, 2019, we recognized net gains of $3.8 million on common equity and warrant investments, as a result of unrealized gains of $3.6 million and $1.6 million on our common equity investments in Pfanstiehl Holdings, Inc. and Professional Pipe Holdings LLC, respectively, offset by a net unrealized loss of $1.4 million on our remaining common equity and warrant investments due to net negative impact of portfolio company-specific performance factors. 
 During the year ended December 31, 2019, we recognized net losses of $1.5 million on Structured Finance Notes primarily driven by a $0.9 million and $0.6 unrealized loss on Elevation CLO 2017-7, Ltd. and THL Credit Wind River 2019‐3 CLO Ltd., respectively. 
 Year ended December 31, 2018 
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 During the year ended December 31, 2018, we recognized net losses of $9.0 million on senior secured debt, primarily as a result of a realized loss of $3.5 million on our senior secured debt investment in Jobson recognized upon the sale in the second quarter of 2018, as well as by the negative net impact of mark-to-market adjustments in the fourth quarter relating to our Broadly Syndicated Loan investments resulting in an unrealized loss of $5.5 million. 
 During the year ended December 31, 2018, we recognized net losses of $3.3 million on subordinated debt, primarily as a result of a realized loss of $3.5 million on the restructuring of the Southern Technical Institute, LLC subordinated debt investment, of which $2.3 million was recognized as unrealized losses in prior years, and net unrealized depreciation of $2.1 from the negative impact of specific performance factors, principally related to Master Cutlery LLC. 
 During the year ended December 31, 2018, we recognized net losses of $2.0 million on preferred equity investments, primarily as a result of a $1.4 million unrealized loss on TRS Services, LLC, and other negative net impact of portfolio company-specific performance factors on other investments resulting in an additional unrealized loss of $0.6 million. 
 During the year ended December 31, 2018, we recognized net gains of $5.5 million on common equity and warrant investments, as a result of net realized gains of $3.7 million, primarily driven by a $4.1 million realized gain on the sale of All Metal Holdings, LLC, and the positive impact of portfolio company-specific performance factors resulting in unrealized appreciation of $1.8 million. 
 Loss on Impairment of Goodwill. On December 4, 2013, in connection with the acquisition of the remaining ownership interests in SBIC I LP and SBIC I GP, LLC, making SBIC I LP a wholly owned subsidiary, we recorded goodwill of $1.1 million. The decline in the price of our common stock and the level at which it continues to trade relative to the broader stock indices for the BDC industry, led us to conclude in the third quarter of 2020 that an impairment in the value of our goodwill was more likely than not. Moreover, due to the discount at which our stock traded to its net asset value we concluded it was appropriate that the impairment of goodwill equal the full amount of its carrying value of $1.1 million. The loss on impairment of goodwill did not impact our management or incentive fees. 
 Losses on Extinguishment of Debt. During the year ended December 31, 2020, we prepaid $44.6 million of SBA debentures that were contractually due September 1, 2023, March 1, 2024 and September 1, 2024. We recognized losses on extinguishment of debt of $0.7 million related to the charge-off of deferred borrowing costs on the prepaid debentures. 
 During the year ended December 31, 2020, the BLA with Pacific Western Bank was amended to reduce the total commitment under the PWB Credit Facility from $100.0 million to $20.0 million. We recognized a loss on extinguishment of debt of $0.1 million related to the charge-off of deferred borrowing costs on the commitment reduction. 
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 Comparison of the three months ended December 31, 2020 and September 30, 2020. Consolidated operating results for the three months ended December 31, 2020 and September 30, 2020, are as follows (in thousands): 
 
 Three Months Ended 
 December 31, 2020 September 30, 2020 
 Investment income 
 Interest income: 
 Cash interest income $ 7,423 $ 8,265 
 Net Loan Fee amortization 625 142 
 Accretion of interest income on Structured Finance Notes 1,735 1,516 
 Other interest income 15 — 
 Total interest income 9,798 9,923 
 PIK income: 
 PIK interest income 306 393 
 Preferred equity PIK dividends 116 45 
 Total PIK income 422 438 
 Dividend income: 
 Common equity dividends 350 — 
 Total dividend income 350 — 
 Fee income: 
 Management and syndication 278 89 
 Prepayment and other fees 289 37 
 Total fee income 567 126 
 Total investment income 11,137 10,487 
 Total expenses 8,133 7,775 
 Net investment income 3,004 2,712 
 Net gain on investments 8,915 15,313 
 Loss on extinguishment of debt (484) (187) 
 Loss on impairment of goodwill — (1,077) 
 Net increase in net assets resulting from operations $ 11,435 $ 16,761 

 Interest and PIK interest income by debt investment type for the three months ended December 31, 2020 and September 30, 2020 are summarized below (in thousands): 
 
 Three Months Ended 
 December 31, 2020 September 30, 2020 
 Interest and PIK interest income: 
 Senior secured debt investments $ 7,464 $ 7,583 
 Subordinated debt investments 863 1,181 
 Structured Finance Notes 1,777 1,553 
 Total interest and PIK interest income $ 10,104 $ 10,317 

 Total interest and PIK interest income decreased $0.2 million during the three months ended December 31, 2020, compared to the three months ended September 30, 2020, primarily due to a $0.3 million decrease in subordinated debt interest related to $11.8 million in payoffs. 
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 Expenses. Operating expenses for the three months ended December 31, 2020 and September 30, 2020 are presented below (in thousands): 
 
 Three Months Ended 
 December 31, 2020 September 30, 2020 
 Interest expense $ 4,507 $ 4,448 
 Management fees 1,846 1,871 
 Incentive fees 693 234 
 Professional fees 464 422 
 Administration fees 399 436 
 General and administrative expenses 224 364 
 Total expenses $ 8,133 $ 7,775 

 Total expenses increased $0.4 million during the three months ended December 31, 2020 compared to the three months ended September 30, 2020 primarily due to a $0.5 million increase in incentive fees. 
 Net realized and unrealized gain (loss) on investments. Net gain (loss) by investment type for the three months ended December 31, 2020 and September 30, 2020 were as follows (in thousands): 
 
 Three Months Ended 
 December 31, 2020 September 30, 2020 
 Senior secured debt 148 $ 7,066 
 Subordinated debt (4,803) (3,995) 
 Preferred equity (71) (88) 
 Common equity and warrants 9,347 10,837 
 Structured Finance Notes 4,294 1,495 
 Net gain on investments $ 8,915 $ 15,315 

 Net gain on investments decreased $6.4 million during the three months ended December 31, 2020 compared to the three months ended September 30, 2020 primarily due to a $6.9 million decrease in net gains on our senior secured debt. 
 Liquidity and Capital Resources 
 At December 31, 2020, we held cash and cash equivalents of $37.7 million, which includes cash and cash equivalents of $32.2 million held by SBIC I LP, our wholly owned SBIC, and $3.3 million held by OFSCC-FS. Our use of cash held by SBIC I LP is restricted by SBA regulation, including limitations on the amount of cash SBIC I LP can distribute to the Parent. Any such distributions to the Parent from SBIC I LP are generally restricted under SBA regulations to a statutory measure of undistributed accumulated earnings or regulatory capital of SBIC I LP, and require the prior approval of the SBA. During the year ended December 31, 2020, the Parent received cash distributions of $8.1 million from SBIC I LP. Distributions from OFSCC-FS to the Parent are restricted by the terms and conditions of the BNP Facility. During the year ended December 31, 2020, the Parent received $1.7 million in cash distributions from OFSCC-FS. At December 31, 2020, the Parent had $21.2 million of cash and cash equivalents available for general corporate activities, including approximately $18.3 million and $0.6 million held by SBIC I LP and OFSCC-FS, respectively, that was available for distribution to the Parent. The Parent may make unsecured loans to SBIC I LP, the aggregate of which cannot exceed $35 million at any given time, and no interest may be charged on the unpaid principal balance. There were no intercompany loans between the Parent and SBIC I LP at December 31, 2020. 
 Additionally, at December 31, 2020, we had unused an unused commitment of $19.4 million under our PWB Credit Facility, as well as an unused commitment of $118.6 million under the BNP Facility, both subject to borrowing base requirements and other covenants. 
 As of December 31, 2020, the aggregate amount outstanding of the senior securities issued by us was $209.9 million, for which our asset coverage was 176%. The SBA debentures are not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC effective November 26, 2013. The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by total senior securities representing indebtedness. Based on fair values and equity 
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 capital at December 31, 2020, we could access $111 million and under our credit facilities and remain in compliance with our asset coverage requirements. 
 As of March 1, 2021, we had cash on hand of approximately $131.5 million. We continue to believe that we have sufficient levels of liquidity to support our existing portfolio companies and selectively deploy capital in new investment opportunities in this challenging environment. 
 Sources and Uses of Cash and Cash Equivalents. We generate cash through operations from net investment income and the net liquidation of portfolio investments, and use cash in our operations in the net purchase of portfolio investments. Significant variations may exist between net investment income and cash from net investment income, primarily due to the recognition of non-cash investment income, including Net Loan Fee amortization, PIK interest, and PIK dividends, which generally will not be fully realized in cash until we exit the investment, as well as variation between the constant yield recognized on our Structured Finance Notes and the cash distributions received thereon. As discussed in "Item 8. Financial Statements—Note 3", we pay OFS Advisor a quarterly incentive fee with respect to our pre-incentive fee net investment income, which includes investment income that has not been received in cash. In addition, we must distribute substantially all our taxable income, which approximates, but will not always equal, the cash we generate from net investment income to maintain our RIC tax treatment. Historically, our distributions have been in excess of taxable income and we have limited history of net taxable gains. We also obtain cash to fund investments or general corporate activities from the issuance of securities and our revolving lines of credit. These principal sources and uses of cash and liquidity are presented below (in thousands): 
 
 Years Ended December 31, 
 2020 2019 2018 
 Cash from net investment income 5,817 $ 15,432 $ 18,782 
 Net (purchases and originations) repayments of portfolio investments 74,808 (117,068) (119,870) 
 Net cash provided by (used in) operating activities 80,625 (101,636) (101,088) 
 Proceeds from issuance of the Unsecured Notes, net of discounts 24,250 52,270 95,446 
 Distributions paid to stockholders (11,365) (17,949) (22,895) 
 Net borrowings (repayments) under revolving line of credits (24,400) 44,450 (5,600) 
 Repayment of SBA debentures (44,610) — — 
 Payment of debt issuance costs and other financing costs (239) (1,860) (643) 
 Net cash provided (used) by financing activities (56,364) 76,911 66,308 
 Net increase (decrease) in cash $ 24,261 $ (24,725) $ (34,780) 

 Comparison of the years ended December 31, 2020 and 2019. At December 31, 2020, we held cash and cash equivalents of $37.7 million, an increase of $24.3 million from December 31, 2019. 
 Cash from net investment income . Cash from net investment income decreased $9.6 million for the year ended December 31, 2020 compared to the prior year. The decrease to cash from net investment income was principally due a $16.0 million decrease in the average outstanding loan balance as well a 128 basis point decrease in the weighted average yield in our debt portfolio. 
 Net (purchases and originations) repayments of portfolio investments . During the year ended December 31, 2020, net purchases and repayments of portfolio investments increased $191.9 million compared to the prior year, primarily due to an increase of $108.1 million of principal payments, sale proceeds, and distributions from Structured Finance Notes, and a decrease of $83.8 million in purchases of portfolio companies. 
 Proceeds from issuance of the Unsecured Notes, net of expenses . During the year ended December 31, 2020, we issued $25.0 million in Unsecured Notes, with net proceeds of $24.0 million after deducting underwriting discounts and offering costs, which was a decrease of $28.0 million in Unsecured Note issuances compared to the prior year. 
 Cash distributions paid . Cash distributions decreased $6.6 million for the year ended December 31, 2020 compared to the prior year, due to the decrease in distributions declared of $0.50 per share from the prior year. 
 Net borrowings (repayments) under revolving line of credits . During the year ended December 31, 2020, net borrowings under revolving lines of credit decreased $68.9 million compared to the prior year, primarily due to the sale of debt investments response to the uncertainty surrounding the COVID-19 pandemic. 
 Payment of debt issuance costs and other financing costs . Payment of debt issuance costs decreased $1.6 million for the year ended December 31, 2020 compared to the prior year, primarily due to $1.3 million of costs associated with the closing of the BNP Facility in 2019. 
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 Comparison of the years ended December 31, 2019 and 2018. At December 31, 2019, we held cash and cash equivalents of $13.4 million, a decrease of $24.7 million from December 31, 2018. 
 Cash from net investment income . Cash from net investment income decreased $3.3 million for the year ended December 31, 2019 compared to the prior year. The decrease to cash from net investment income was principally due the decrease in net interest margin. 
 Net (purchases and originations) repayments of portfolio investments . During the year ended December 31, 2019, net purchases and repayments of portfolio investments increased approximately $2.8 million compared to the prior year, primarily due to a decrease of $49.2 million of principal payments, sale proceeds and distributions received from Structured Finance Notes, offset by a increase $51.9 million in purchases of portfolio companies. 
 Proceeds from issuance of the Unsecured Notes, net of expenses . During the year ended December 31, 2019, we issued $54.3 million in Unsecured Notes, with net proceeds of $52.3 million after deducting underwriting discounts and offering costs, which was a decrease of $43.2 million in Unsecured Note issuances compared to the prior year. 
 Cash distributions paid . Cash distributions decreased $4.9 million for the year ended December 31, 2019 compared to the prior year, due to the $4.9 million special dividend paid in the first quarter of 2018 for an undistributed net long-term capital gains realized by the Company in 2017. 
 Net borrowings (repayments) under revolving line of credits . During the year ended December 31, 2019, net borrowings under revolving lines of credit increased $50.1 million compared to the prior year, primarily due to the establishment of the BNP Facility to purchase additional first lien senior secured loans. As of December 31, 2019, aggregate borrowings under the BNP Facility were $56.5 million. 
 Payment of debt issuance costs and other financing costs . Payment of debt issuance costs increased $1.2 million for the year ended December 31, 2019 compared to the prior year, primarily due to $1.3 million of costs associated with the closing of the BNP Facility. 
 Borrowings 
 SBA Debentures . SBIC I LP has a SBIC license that allowed it to obtain leverage by issuing SBA-guaranteed debentures. These debentures are non-recourse to us, and bear interest payable semi-annually. The following table shows our outstanding SBA debentures payable as of December 31, 2020 and 2019 (in thousands): 
 
 SBA debentures outstanding 
 Pooling Date Maturity Date Fixed Interest Rate December 31, 2020 December 31, 2019 
 September 19, 2012 September 1, 2022 3.049 % $ 14,000 $ 14,000 
 September 25, 2013 September 1, 2023 4.448 — 7,000 
 March 26, 2014 March 1, 2024 3.995 — 5,000 
 September 24, 2014 September 1, 2024 3.819 — 4,110 
 September 24, 2014 September 1, 2024 3.370 2,765 31,265 
 March 25, 2015 March 1, 2025 2.872 65,920 65,920 
 September 23, 2015 September 1, 2025 3.184 22,585 22,585 
 SBA debentures outstanding 105,270 149,880 
 Unamortized debt issuance costs (1,088) (1,904) 
 SBA debentures outstanding, net of unamortized debt issuance costs $ 104,182 $ 147,976 

 
 On a stand-alone basis, SBIC I LP held $223.8 million and $249.6 million in assets at December 31, 2020 and 2019, respectively, which accounted for approximately 46% and 46% of the Company’s total consolidated assets, respectively. 
 As part of our plans to focus on lower-yielding, first lien senior secured loans to larger borrowers, which we believe will improve our overall risk profile, SBIC I LP is repaying over time its outstanding SBA debentures prior to their scheduled maturity dates. We do not expect to make new investments through SBIC I LP, other than follow-on investments. We believe that investing in more senior loans to larger borrowers is consistent with our view of the private loan market and will reduce our overall leverage on a consolidated basis. During the year ended December 31, 2020, SBIC I LP prepaid $44,610 of SBA debentures that were contractually due September 1, 2023, March 1, 2024 and September 1, 2024. We recognized losses on extinguishment of debt of $678 related to the charge-off of deferred borrowing costs on the prepaid debentures. 
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 The weighted-average fixed cash interest rate on the SBA debentures as of December 31, 2020 and 2019, was 2.98% and 3.18%, respectively. 
 SBIC I LP is periodically examined and audited by the SBA’s staff to determine its compliance with SBA regulations. If SBIC I LP fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit SBIC I LP’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit SBIC I LP from making new investments. In addition, SBIC I LP may also be limited in its ability to make distributions to the Company if it does not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would in turn, negatively affect the Company. 
 PWB Credit Facility . We are party to a BLA with Pacific Western Bank, as lender, to provide us with a senior secured revolving credit facility, or PWB Credit Facility. The PWB Credit Facility is available for general corporate purposes including investment funding. The maximum availability of the PWB Credit Facility is equal to 50% of the aggregate outstanding principal amount of eligible loans included in the borrowing base, which excludes subordinated loan investments (as defined in the BLA) and as otherwise specified in the BLA. The PWB Credit Facility is guaranteed by OFSCC-MB and secured by all of our current and future assets excluding assets held by SBIC I LP, OFSCC-FS, and the Company’s partnership interests in SBIC I LP and SBIC I GP. 
 At December 31, 2020, the BLA contained customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, a minimum tangible net asset value, a minimum quarterly net investment income after incentive fees, and a maximum debt/worth ratio. The BLA also contained customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change in investment advisor, and the occurrence of a material adverse change in our financial condition. As of December 31, 2020, we were in compliance with the applicable covenants. 
 As of December 31, 2020, the terms of the PWB Credit Facility were as follows (amounts in thousands): 
 
 Maximum Availability Floor Rate Interest Rate Unused Fee Maturity Date 
 PWB Credit Facility $ 20,000 5.25 % Prime + 0.25% 0.50 % February 28, 2021 

 
 As of December 31, 2020, availability under the PWB Credit Facility was $19.4 million, based on the stated advance rate of 50% under the borrowing base, and a $0.6 million outstanding balance. 
 On February 17, 2021, we executed an amendment (the “Secured Revolver Amendment”) to the BLA with Pacific Western Bank. The Secured Revolver Amendment, among other things: (i) increases the maximum amount available under the PWB Credit Facility from $20.0 million to $25.0 million; (ii) decreases the interest rate floor from 5.25% per annum to 5.00% per annum; (iii) modify certain financial performance covenants; and (iv) extends the maturity date from February 28, 2021 to February 28, 2023. 
 BNP Facility . On June 20, 2019, we entered into the a revolving credit and security agreement by and among OFSCC-FS, the lenders from time to time parties thereto, BNP Paribas, as administrative agent, OFSCC-FS Holdings, LLC, a wholly owned subsidiary of the Company, as equityholder, the Company, as servicer, Citibank, N.A., as collateral agent and Virtus Group, LP, as collateral administrator, which provides for borrowings in an aggregate principal amount up to $150.0 million. Borrowings under the BNP Facility bear interest of LIBOR plus an applicable spread, which is determined on the basis of industry-recognized portfolio company metrics at the time of funding. The BNP Facility will mature on the earlier of June 20, 2024 or upon certain other events defined in the credit agreement which result in accelerated maturity. The BNP Facility also contains customary events of default, including, without limitation, nonpayment, failure to maintain valid ownership interest in all of the collateral and bankruptcy. Borrowings under the BNP Facility are secured by substantially all of the assets held by OFSCC-FS. OFSCC-FS incurred fees to the lenders as well as legal costs of approximately $1.3 million to establish the BNP Facility, which are amortized over the life of the facility. 
 As of December 31, 2020, the BNP Facility had the following terms and balances (amounts in thousands): 
 
 Principal Unused Commitment Effective Interest Rate (1) 
 Maturity 2020 Interest Expense (2) 
 
 BNP Facility $ 31,450 $ 118,550 5.53% June 20, 2024 $ 2,168 

 (1) The effective interest rate includes deferred debt issuance cost amortization and unused commitment fees. 
 (2) Interest expense includes deferred issuance costs amortization and unused commitment fees. 
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 Unsecured Notes . In April 2018, we publicly offered the Unsecured Notes Due April 2025 with aggregate principal of $50.0 million. The total net proceeds to us from the Unsecured Notes Due April 2025, after deducting underwriting discounts and offering costs of $1.8 million were $48.2 million. In October and November 2018, we publicly offered the Unsecured Notes Due October 2025 with aggregate principal of $48.5 million. The total net proceeds to us from the Unsecured Notes Due October 2025, after deducting underwriting discounts and offering expenses of $1.7 million, were $46.8 million. In October and November 2019, we publicly offered the Unsecured Notes Due October 2026 with an aggregate principal of $54.3 million. The total net proceeds to us from the Unsecured Notes Due October 2026, after deducting underwriting discounts and offering costs of $2.0 million were $52.3 million. In September 2020, we publicly offered the Unsecured Notes Due September 2023 with an aggregate principal of $25.0 million. The total net proceeds to us from the Unsecured Notes Due September 2023, after deducting underwriting discounts and offering costs of $1.0 million, were $24.0 million. The Unsecured Notes totaled $177.9 million in aggregate principal debt, with net proceeds of $171.4 million to us. 
 The Unsecured Notes are direct unsecured obligations and rank equal in right of payment with all of our current and future unsecured indebtedness. Because the Unsecured Notes are not secured by any of our assets, they are effectively subordinated to all existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest), to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under the PWB Credit Facility and BNP Facility. 
 As of December 31, 2020, the Unsecured Notes had the following terms and balances (amounts in thousands): 
 
 Unsecured Notes (6) 
 Principal Stated Interest Rate (1) 
 Effective Interest Rate (2) (%) 
 Maturity (3) 
 2020 Interest Expense (4) 
 
 Unsecured Notes Due September 2023 25,000 6.25 % 7.56 % 9/30/2023 $ 550 
 Unsecured Notes Due April 2025 (5) 
 50,000 6.375 % 6.88 % 4/30/2025 3,444 
 Unsecured Notes Due October 2025 (5) 
 48,525 6.50 % 7.01 % 10/31/2025 3,410 
 Unsecured Notes Due October 2026 54,325 5.95 % 6.49 % 10/31/2026 3,548 
 Total $ 177,850 $ 10,952 

 (1) The weighted-average fixed cash interest rate on the Unsecured Notes as of December 31, 2020 was 6.26%. 
 (2) The effective interest rate on the Unsecured Notes includes deferred debt issuance cost amortization. 
 (3) The Unsecured Notes Due April 2025 may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after April 30, 2020. The Unsecured Notes Due October 2025 may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after October 31, 2020. The Unsecured Notes Due October 2026 may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after October 31, 2021. The Unsecured Notes Due September 2023 may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after September 30, 2021. 
 (4) Interest expense includes deferred issuance costs amortization of $0.9 million for the year ended December 31, 2020. 
 (5) On February 10, 2021, we issued a redemption notice. See Recent Developments for additional information. 
 (6) On February 10, 2021, we issued the Unsecured Notes Due February 2026. See Recent Developments for additional information. 
 The average dollar borrowings and average interest rate for all debt the years ended December 31, 2020, 2019 and 2018, were as follows: 
 
 Year ended Average Dollar Borrowings Weighted Average Interest Rate 
 December 31, 2020 $ 347,229 5.32 % 
 December 31, 2019 307,826 4.99 
 December 31, 2018 206,936 4.37 

 
 
 Other Liquidity Matters. We expect to fund the growth of our investment portfolio utilizing future equity offerings, and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act. We cannot assure stockholders that our plans to raise capital will be successful. In addition, we intend to distribute to our stockholders substantially all of our taxable income in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments or make additional investments in our portfolio companies. The illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value. 
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 A BDC generally is not permitted to incur indebtedness unless immediately after such borrowing it has an asset coverage ratio for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, Section 61(a)(2) of the 1940 Act provides that a BDC may reduce its asset coverage ratio, provided that certain conditions are met. Specifically, Section 61(a)(2) provides that in order for a BDC whose common stock is traded on a national securities exchange to be subject to 150% asset coverage, the BDC must either obtain: (i) approval of the required majority of its non-interested directors who have no financial interest in the proposal, which would become effective one year after the date of such approval, or (ii) obtain stockholder approval (of more than 50% of the votes cast for the proposal at a meeting in which quorum is present), which would become effective on the first day after the date of such stockholder approval. 
 On May 3, 2018, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of Section 61(a)(2) of the 1940 Act and, as a result, the asset coverage ratio test applicable to us was decreased from 200% to 150%, effective May 3, 2019. See "Item 1A. Risk Factors — Risks Related to our Business and Structure — Because we have received the approval of our Board, we are subject to 150% Asset Coverage effective May 3, 2019." Additionally, we received exemptive relief from the SEC effective November 26, 2013, which allows us to exclude our SBA guaranteed debentures from the definition of senior securities in the statutory asset coverage ratio under the 1940 Act. 
 This requirement limits the amount that we may borrow. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all. 
 Contractual Obligations and Off-Balance Sheet Arrangements 
 The following table shows our contractual obligations as of December 31, 2020 (in thousands): 
 
 Principal and Interest Payments due by period (2) 
 
 Contractual Obligations (1) 
 Total Less than 1
year 1-3 years 3-5 years After
5 years 
 PWB Credit Facility (3) 
 $ 605 $ 605 $ — $ — $ — 
 BNP Facility 37,537 1,739 3,478 32,320 — 
 SBA Debentures (4) 
 120,476 3,132 19,065 98,279 
 Unsecured Notes 230,059 11,136 46,882 115,022 57,019 
 Total $ 388,677 $ 16,612 $ 69,425 $ 245,621 $ 57,019 

 (1) Excludes commitments to extend credit to our portfolio companies. 
 (2) The PWB Credit Facility is scheduled to mature on February 28, 2021. On February 17, 2021, the maturity date of the PWB Credit Facility was extended from February 28, 2021 to February 28, 2023. The BNP Facility is scheduled to mature on June 20, 2024. The SBA debentures are scheduled to mature between September 2022 and 2025. The Unsecured Notes are scheduled to mature between September 2023 and October 2026. 
 (3) Contractual interest is based on LIBOR at December 31, 2020 and assumes no interim additional borrowings or repayments under the credit facilities between December 31, 2020 and maturity. 
 (4) SBIC I LP is repaying over time its outstanding SBA debentures prior to the scheduled maturity date of its debentures. SBIC I LP does not expect to make new investments, other than follow-on investments. 
 We have entered into contracts with affiliates under which we will incur material future commitments—the Investment Advisory Agreement, pursuant to which OFS Advisor has agreed to serve as our investment adviser, and the Administration Agreement, pursuant to which OFS Services has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations. 
 We may become a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. We had $5.8 million of total unfunded commitments to four portfolio companies at December 31, 2020. See Note 6 for details. 
 Distributions 
 We are taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its stockholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, and taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains 
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 using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest and dividends or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation, and amortization expense. 
 Our Board maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount not less than 90-100% of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, we may also pay an additional special dividend, or fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was earned, while maintaining the option to spill over our excess taxable income to a following year. Each year, a statement on Form 1099-DIV identifying the source of the distribution is mailed to the Company’s stockholders. For the year ended December 31, 2020, approximately $0.86 per share, $0.00 per share, and $0.00 per share of the Company’s distributions represented ordinary income, long-term capital gain, and a return of capital to its stockholders, respectively. 
 For a detailed description of our distributions paid for the years ended December 31, 2019, 2018, and 2017, see "Item 8.–Financial Statements–Note 10." 
 Recent Developments 
 Prepayment of SBA Debentures. On January 5, 2021, SBIC I LP prepaid $9.8 million of SBA debentures that were contractually due September 1, 2022 and September 1, 2024. 
 Appointment of New Director. On January 8, 2021, the Board, upon the recommendation of the Nominating and Corporate Governance Committee, voted to appoint Romita Shetty as a Class II director of the Board, chair of the Nominating and Corporate Governance Committee, a member of the Audit Committee and a member of the Compensation Committee, to fill the vacancy created by the untimely death of Robert J. Cresci on December 22, 2020. Ms. Shetty was appointed to serve as a member of the Board until the 2023 annual meeting of stockholders, or until her successor is duly elected and qualified. The Board and the Nominating and Corporate Governance Committee determined that Ms. Shetty is not an “interested person” (as defined in Section 2(a)(19) of the 1940 Act) of the Company. 
 Issuance of Unsecured Notes Due February 2026 and Redemption of Notes due 2025. On February 10, 2021, we issued the Unsecured Notes Due February 2026. The Unsecured Notes Due February 2026 will mature on February 10, 2026, and we may redeem the Unsecured Notes Due February 2026 in whole or in part at any time, or from time to time, at our option at par plus a “make-whole” premium, if applicable. The Unsecured Notes Due February 2026 bear interest at a rate of 4.75% per year payable semi-annually in arrears on February 10 and August 10 of each year, commencing on August 10, 2021. 
 The net proceeds we received from the sale of the Unsecured Notes Due February 2026 was approximately $96.6 million based on a public offering price of of 98.906% of the aggregate principal amount of the Unsecured Notes Due February 2026, after deducting the underwriting discount and commissions payable by us and estimated offering expenses payable by us. 
 In connection with, and using the proceeds from the issuance of the Unsecured Notes Due February 2026, on February 10, 2021, we caused notices to be issued to the holders of the Unsecured Notes Due April 2025 and the holders of the Unsecured Notes Due October 2025 regarding our exercise of our option to redeem all of the issued and outstanding Unsecured Notes Due April 2025 and Unsecured Notes Due October 2025. We will redeem all $50.0 million in aggregate principal amount of the Unsecured Notes Due April 2025 and all $48.5 million in aggregate principal amount of the Unsecured Notes Due October 2025 on March 12, 2021 (the "Redemption Date"). The Unsecured Notes Due April 2025 and the Unsecured Notes Due October 2025 will be redeemed at 100% of their principal amount ($25 per Note), plus the accrued and unpaid interest thereon from January 31, 2021, through, but excluding, the Redemption Date. 
 Amendment to PWB Credit Facility. On February 17, 2021 we executed the Secured Revolver Amendment to the BLA with Pacific Western Bank. The Secured Revolver Amendment, among other things: (i) increases the maximum amount available under the PWB Credit Facility from $20.0 million to $25.0 million; (ii) decreases the interest rate floor from 5.25% per annum to 5.00% per annum; (iii) revises the covenant restricting net losses, such that on each quarterly testing period, commencing on December 31, 2020, we shall not have incurred quarterly net losses (income after adjustments to the investment portfolio for gains and losses, realized and unrealized, also shown as net increase (decrease) in net assets resulting from operations) in excess of $1,000,000, in three of the trailing four quarters; and (iv) extends the maturity date from February 28, 2021 to February 28, 2023. 
 Declaration of a Distribution. On March 2, 2021, our Board declared a distribution of $0.20 per share for the first quarter of 2021, payable on March 31, 2021 to stockholders of record as of March 24, 2021. 
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OFS Capital Corp 10-K

Item 7. Management’s Discussion and Analysis
