OFS Capital Corp 10-K

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; • the impact of interest and inflation rates on our business prospects and the prospects of our portfolio companies; • 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 COVID-19 pandemic; • the percentage of investments that will bear interest on a floating rate or fixed rate basis; • interest rate volatility, including the transition from LIBOR to one or more alternative reference rate(s); • 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 pandemic; the effect of the COVID-19 pandemic on our business, financial condition, 74 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 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 effect of new or modified laws or regulations governing our operations; • ability to continue generating strong risk-adjusted net returns by assembling a diversified portfolio of investments across a broad range of industries; • the need and availability of additional capital on favorable terms to finance growth given our expectation to distribute substantially all of our net ordinary income and net realized capital gains to our shareholders; and • ability to secure financial maintenance covenants in the loans we invest. 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, 2021 December 31, 2020 Net asset value per common share $ 15.18 $ 11.85 Year Ended December 31, 2021 2020 2019 Net investment income per common share $ 1.00 $ 0.92 $ 1.43 Net increase in net assets resulting from operations per common share 4.24 0.28 0.71 Distributions paid per common share 0.91 0.86 1.36 Our NAV per common share increased 28% to $15.18 at December 31, 2021, from $11.85 at December 31, 2020, primarily due to net gains on our investment portfolio of $48.0 million, or $3.58 per common share. Strong net gains for the year ended December 31, 2021, primarily resulted from better than expected performance of our portfolio companies and the continued reversal of unrealized depreciation recognized during the three months ended March 31, 2020, due to market disruptions resulting from the COVID-19 pandemic. 75 Net investment income per share during the year ended December 31, 2021, increased $0.08 from the prior year due to an approximate $0.04 per share increase in net interest margin (total interest income less interest expense), as well as an approximate $0.22 per share increase in dividend and fee income. The increase in dividend and fee income was primarily due to a $1.0 million dividend from Pfanstiehl Holdings, Inc. and $1.4 million increase in syndication fees compared to the prior year. The increase in net interest margin was partially offset by increases in management and incentive fees of $2.3 million, or $0.17 per share, primarily due to a $1.9 million, or $0.14 per shar e, accrued Capital Gains Fee. GAAP requires recognition of capital gains incentive fees as incurred, which includes recognition of fees on aggregate unrealized appreciation on investments. However, fees on such unrealized capital appreciation fees are not contractually due under the terms of the Investment Advisory Agreement. Incentive fees on unrealized appreciation are subject to reversal should such unrealized appreciation diminish prior to realization. Excluding fees on aggregate unrealized capital appreciation, as of December 31, 2021, there is no capital gains incentive fee contractually due and currently payable under the terms of the Investment Advisory Agreement. As of December 31, 2021, the weighted average realized yield on interest-bearing investments increased to 9.7%, compared to 9.5% as of December 31, 2020. For the year ended December 31, 2021, our weighted-average debt interest costs decreased to 5.1% from 5.4% during the year ended December 31, 2020, primarily due to the issuance of $180.0 million in Unsecured Notes with a weighted-average effective yield of 5.4%, and the redemption of $177.9 million in Unsecured Notes with a weighted-average effective yield of 6.9%. As of December 31, 2021, approximately 71% of our debt was fixed rate and matures in 2025 and beyond. During the year ended December 31, 2021, our portfolio experienced net gains of $48.0 million, or $3.58 per share, primarily due to net gains of $49.6 million on our directly originated debt and equity investments, partially offset by net losses of $0.7 million in our Structured Finance Notes and Broadly Syndicated Loan investments. The net gain in our directly originated investments was primarily due to our common equity investment in Pfanstiehl Holdings, Inc., a global manufacturer of high-purity pharmaceutical ingredients, which appreciated $29.5 million due to strong operating results and expansion of the valuation multiple. Pfanstiehl Holdings, Inc. accounted for 13% of our portfolio at fair value and 32% of our consolidated net assets as of December 31, 2021. During the year ended December 31, 2021, we recognized net realized gains of $4.3 million on directly originated equity investments, including a realized gain of $5.8 million on the sale of our preferred equity in TTG Healthcare, LLC. As of December 31, 2021, our portfolio had two non-accrual loans with an aggregate fair value of $7.7 million, or 2.2% of our total debt portfolio at fair value, compared to four non-accrual loans with an aggregate fair value of $12.1 million, or 3.8% of our total debt portfolio at fair value at December 31, 2020. Additionally, during the year ended December 31, 2021, we recognized losses of $4.6 million on the early extinguishments of debt, or $0.34 per share. Early extinguishments of debt included the prepayment of $35.4 million of SBA debentures and the redemption of $177.9 million in the aggregate of Unsecured Notes Due September 2023, Unsecured Notes Due April 2025, Unsecured Notes Due October 2025 and Unsecured Notes Due October 2026. Since OFS Advisor implemented its business continuity plan in mid-March 2020, OFS Advisor’s entire team effectively transitioned to remote work and we are currently capable of maintaining our normal functionality to complete 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, 2021, we provided nine revolvers and twelve delayed draw commitments to support our portfolio companies during the COVID-19 pandemic. As of December 31, 2021, we have unfunded commitments of $43.7 million to fourteen portfolio companies. During the year ended December 31, 2021, we completed $238.5 million of Portfolio Company Investments and purchased $30.4 million of Structured Finance Notes. For details on our portfolio activity for the year ended December 31, 2021, 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 and impact of additional business and supply-chain disruptions, the extent to which the COVID-19 pandemic will 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 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. However, to the extent 76 our portfolio companies continue to be adversely impacted by the COVID-19 pandemic, our future net investment income, financial condition, results of operations and the fair value of our portfolio investments may be materially adversely impacted. 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, 2021, approximately $316 million (aggregate cost amount) of our debt investments bore interest at variable rates, which are generally LIBOR-based but will transition away from LIBOR to any one the various alternative reference rates, and many of which are subject to reference-rate floors. We have prepared and planned for the transition away from LIBOR, incorporating alternate reference rates to be used in our credit agreements and making other preparations, and believe the impact on us from the transition will be low. 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 or an alternative rate are not offset by a corresponding increase in the credit spread over LIBOR or an alternative rate 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 or an alternative rate. As of December 31, 2021, 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. However, there may be disputes between market participants regarding the interpretation and enforceability of provisions related to the economic floors in our LIBOR-based investments (or lack thereof), which may result in a loss or degradation of floor protection in the case of a transition from LIBOR to any one of the various alternative reference rates. See “Item 1A. Risk Factors — Risks Related to our Investments” for additional information. At December 31, 2021, our asset coverage ratio of 173% was within minimum asset coverage requirements under the 1940 Act, and we remained in compliance with all applicable financial covenants under our outstanding debt. As of December 31, 2021, we had an unused commitment of $25.0 million under our PWB Credit Facility, as well as an unused commitment of $50.0 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, 2021, we could access all unused commitments under our credit facilities and remain in compliance with our asset coverage requirements. We continue to believe that we have sufficient levels of liquidity to support our commitments to existing portfolio companies and will continue to selectively deploy capital in new investment opportunities. On March 1, 2022, the Board declared a distribution of $0.28 per share for the first quarter of 2022, payable on March 31, 2022, to stockholders of record as of March 24, 2022. 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. 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. Once determined, these allocations directly affect the discount/premium and yield on debt securities, the cost and net gains/losses on equity securities, and ICTI. These allocations require an understanding of the terms and conditions of the underlying agreements and requires significant management judgment. 77 PIK Income . Our recognition of PIK interest includes assessment of collectibility. In determining whether a loan should be on non-accrual status, management considers whether the in-kind securities received would be non-accretive to overall value of our 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 our net assets). Furthermore, the non-accrual of PIK interest does not preclude the recognition of cash interest received. Structured Finance Notes . Recognition of interest income on our subordinated note and mezzanine debt investments requires development of numerous assumptions regarding the performance and behavior of the underlying loans and portfolio companies, as well as assumptions 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 its cost or amortized cost. The 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 payments. 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 subordinated note and mezzanine debt investments 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 a 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 periodic 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, 2021, total investments representing approximately 89% 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. 78 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 on Portfolio Company Investments: 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 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. 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 and throughout 2021 in our quarterly and year-end assessments. We also adjusted the relative weighting of our Level 3 fair value models during much of 2020. 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 over-weighting 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. Our equal weighting of models remained in effect throughout 2021 as markets and market factors remained stable and correlated. 79 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, 2021, (in thousands): Fair Value at December 31, 2021 Range of Fair Value Investment Type Low-end High-end Debt investments: Senior Secured $ 262,634 $ 259,651 $ 265,596 Senior Secured (valued at Transaction Price) 64,070 64,070 64,070 Subordinated 17,943 17,584 18,303 Structured Finance Notes: Subordinated notes 63,922 61,791 66,053 Mezzanine bonds 2,779 2,737 2,823 Loan accumulation facility (valued at Transaction Price) 8,500 8,500 8,500 Equity investments: Preferred equity 3,765 3,381 4,102 Common equity, warrants and other 83,486 78,172 88,848 $ 507,099 $ 495,886 $ 518,295 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 the portion of its base management fee attributable to the portion of the OFSCC-FS Assets that caused our asset coverage ratio to fall below 200%. Specifically, under the reduction, we were required to pay 0.25% per quarter (1.00% annualized) on the average value of the portion of the OFSCC-FS Assets, at the end of the two most recently completed calendar quarters, that were financed using leverage and caused our statutory asset coverage ratio to fall below 200%. When calculating our statutory asset coverage ratio, we exclude our SBA guaranteed debentures from our total outstanding senior securities as permitted pursuant to exemptive relief granted by the SEC dated November 26, 2013. Additionally, effective from January 1, 2020, January 1, 2021 and January 1, 2022 through December 31, 2022, OFS Advisor agreed to continue the reduced base management fee attributable to all of the OFSCC-FS Assets, excluding cash commencing on January 1, 2022, without regard to our asset coverage. The agreement reduced the base management fee to 0.25% per quarter (1.00% annualized) of the average value of the OFSCC-FS Assets, excluding cash commencing January 1, 2022, at the end of the two most recently completed calendar quarters. OFS Advisor’s base management fee reduction is renewable on an annual basis and OFS Advisor is not entitled to recoup the amount of the base management fee reduced with respect to the OFSCC-FS Assets. This agreement was renewed for the 2022 calendar year on February 4, 2022. 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 80 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 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 the Order 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 with exemptive orders, 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 that are private funds even if such other funds had not previously invested in such existing portfolio company. Without this order, such Affiliated Funds that are private 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." 81 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, 2021, the fair value of our debt investment portfolio totaled $344.6 million in 58 portfolio companies, of which 95% and 5% were senior secured loans and subordinated loans, respectively, and our equity investments totaled $87.3 million in 5 portfolio companies in which we also held debt investments and 12 portfolio companies in which we solely held an equity investment. We had unfunded commitments of $43.7 million to fourteen portfolio companies at December 31, 2021. We also have 17 investments in Structured Finance Notes with a fair value of $75.2 million. Set forth in the tables and charts below is selected information with respect to our portfolio as of December 31, 2021 and 2020. The following table presents our investment portfolio by each wholly owned legal entity within the consolidated group as of December 31, 2021 and 2020 (in thousands): December 31, 2021 December 31, 2020 Amortized Cost Fair Value Amortized Cost Fair Value OFS Capital Corporation (Parent) $ 157,190 $ 150,254 $ 190,627 $ 172,249 SBIC I LP 125,584 183,524 191,192 190,573 OFSCC-FS 171,101 170,132 67,781 68,037 OFSCC-MB 3,437 3,189 11,423 11,464 Total investments $ 457,312 $ 507,099 $ 461,023 $ 442,323 Portfolio Yields : The following table presents weighted-average yields metrics for our portfolio: Year Ended December 31, 2021 2020 Weighted-average performing current yield (1) : Debt investments 8.7 % 9.4 % Structured Finance Notes 16.2 % 16.0 % Interest-bearing investments 10.0 % 10.0 % Weighted-average performing income yield (2) : Debt investments 9.5 % 9.8 % Structured Finance Notes 16.3 % 16.1 % Interest-bearing investments 10.6 % 10.3 % Weighted-average realized yield : Interest-bearing investments (3) 9.7 % 9.5 % Total portfolio (4) 9.1 % 8.8 % (1) Current yield is calculated as (a) the actual amount earned on performing investments, including interest and prepayment fees but excluding amortization of Net Loan Fees, divided by (b) the weighted-average of total performing investments amortized cost. (2) Income yield is calculated as (a) the actual amount earned on performing investments, including interest and prepayment fees and amortization of Net Loan Fees, divided by (b) the weighted-average of total performing investment amortized cost . (3) Realized yield computed as ( a) the actual amount earned on interest-bearing investments, including interest, prepayment fees and Net Loan Fees, divided by (b) the weighted-average of total interest-bearing investments amortized cost , in each case, including debt investments in non-accrual status and non-income producing Structured Finance Notes. (4) Realized yield computed as ( a) the actual amount earned on all investments including interest, dividends and prepayment fees, amortization of Net Loan Fees, and dividends received divided by (b) the weighted-average of total investments amortized cost or cost . 82 As of December 31, 2021 and 2020, floating rate loans at fair value were 92% and 96% of our debt investment portfolio, respectively, and fixed rate loans at fair value were 8% and 4% of our debt investment portfolio, respectively. Approximately 92% of our debt portfolio are variable-rate investments and a substantial amount have LIBOR floors. At December 31, 2021, the effective yield of our performing debt investment and Structured Finance Note portfolio was 9.6%. 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. Portfolio Company Investments . The following table summarizes the composition of our Portfolio Company Investments by type as of December 31, 2021 and 2020 (dollar amounts in thousands): December 31, 2021 December 31, 2020 Amortized Cost Fair Value Amortized Cost Fair Value Senior secured debt investments (1) $ 336,132 $ 326,704 $ 325,647 $ 306,304 Subordinated debt investments 22,071 17,943 45,409 15,067 Preferred equity 9,552 3,765 18,648 11,543 Common equity, warrants and other (2) 14,606 83,486 15,459 52,984 Total $ 382,361 $ 431,898 $ 405,163 $ 385,898 Number of portfolio companies 70 70 62 62 (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 $3.0 million and $3.0 million, respectively at December 31, 2021, and $55.8 million and $56.2 million, respectively at December 31, 2020. (2) As of December 31, 2021, other investments represent equity participation right investments with an aggregate cost and fair value of $4.7 million and $7.4 million, respectively. Approximately 76% 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, 2021, our common equity in Pfanstiehl Holdings, Inc. based on its fair value of $65.7 million,$65.5 million of which represents an unrealized gain, accounts for 13% of our total portfolio at fair value, or 32% of total net assets. Since December 31, 2020 and December 31, 2019, Pfanstiehl Holdings, Inc., a global manufacturer of high-purity pharmaceutical ingredients, has appreciated $29.5 million and $53.8 million, respectively, primarily due to strong operating results, as well as multiple expansion in the pharmaceutical industry. As of December 31, 2021, the three largest industries of our Portfolio Company Investments by fair value, were (1) Manufacturing (28.2%), (2) Professional, Scientific, and Technical Services (14.6%), and (3) Health Care and Social Assistance (12.9%), totaling approximately 55.7% 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. 83 The following table presents our ten largest debt and equity investments by portfolio company based on fair value as of December 31, 2021 (dollar amounts in thousands): Amortized Cost Fair Value % of Total Portfolio, at Fair Value Pfanstiehl Holdings, Inc. $ 217 $ 65,740 13.0 % All Star Auto Lights, Inc. 23,005 23,052 4.5 % Milrose Consultants, LLC 22,990 22,634 4.5 % Kreg LLC 20,330 20,330 4.0 % SourceHOV Tax, Inc. 19,631 19,927 3.9 % The Escape Game, LLC 16,287 16,396 3.2 % Inergex Holdings, LLC 15,017 15,260 3.0 % Tolemar Acquisition, Inc. 15,166 15,166 3.0 % SSJA Bariatric Management, LLC 13,401 13,491 2.7 % MTE Holding Corp 11,264 12,948 2.6 % Total $ 157,308 $ 224,944 44.4 % Structured Finance Notes . The following table summarizes our Structured Finance Notes as of December 31, 2021 and December 31, 2020, (dollar amounts in thousands): December 31, 2021 December 31, 2020 Amortized Cost Fair Value Amortized Cost Fair Value Subordinated notes $ 63,791 $ 63,922 $ 54,280 $ 54,724 Mezzanine bonds 2,660 2,779 1,580 1,701 Loan accumulation facility 8,500 8,500 — — Total Structured Finance Notes $ 74,951 $ 75,201 $ 55,860 $ 56,425 Number of Structured Finance Notes 17 17 12 12 The weighted average yield on Structured Finance Notes decreased to 15.8% at December 31, 2021 from 16.6% at Dece mber 31, 2020, partially due to new investments of $30.4 million in Structured Finance Notes with a weighted average annual effective yield of 15.2%. 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 85% of current subordinated note investments have reinvestment periods ending in 2023 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, 2021, 2020 and 2019 (dollar amounts in millions): Year Ended December 31, 2021 2020 2019 Investments in new portfolio companies $ 154.2 $ 49.0 $ 147.2 Investments in existing portfolio companies 84.3 47.9 51.6 Total investments in new and existing portfolio companies $ 238.5 $ 96.9 $ 198.8 Proceeds from principal payments $ 192.1 $ 129.6 $ 60.9 Proceeds from investments sold or redeemed 52.8 70.8 35.0 Total proceeds from principal payments, equity distributions and sales proceeds on Portfolio Company Investments $ 244.9 $ 200.4 $ 95.9 Year ended December 31, 2021 Notable investments in new portfolio companies during the year ended December 31, 2021 included Kreg LLC ($20.3 million senior secured loan), Tolemar Acquisition, Inc. ($14.9 million senior secured loan), Molded Devices, Inc. ($8.0 million 84 senior secured loan), Honor HN Buyer Inc. ($6.5 million senior secured loan), Electrical Components International, Inc. ($5.6 million senior secured loan) and One GI LLC ($5.4 million senior secured loan). During the year ended December 31, 2021, the weighted-average income yield of Portfolio Company Investments in new portfolio companies was 7.7%. During the year ended December 31, 2021, we also invested $30.4 million in Structured Finance Notes. Non-cash Investment Activity . On December 31, 2021, our debt and equity investments in Envocore Holdings, LLC were restructured, pursuant to which we converted our $17.2 million senior secured debt investment into two $6.4 million senior secured debt investments and preferred equity. Our Series B and Series C preferred equity investments in Envocore Holdings, LLC were subsequently cancelled in the restructuring; therefore, we recognized a realized loss of $0.3 million on the cancellation, of which $0.3 million was included as an unrealized loss as of December 31, 2020. Year ended December 31, 2020 Notable investments in new portfolio companies during the year ended December 31, 2020 included A&A Transfer Buyer, Inc. ($25.2 million senior secured loan) and SourceHOV Tax, Inc. ($19.7 million senior secured loan). 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%. Non-cash Investment Activity . On March 27, 2020, our debt investment in Constellis Holdings, LLC was restructured to convert 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. 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. 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, 2021 and 2020 (dollar amounts in thousands): As of December 31, 2021 2020 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) — — — — 3 (Average) 324,370 94.2 263,934 82.2 4 (Special Mention) 12,550 3.6 45,302 14.1 5 (Substandard) 7,027 2.0 11,684 3.6 6 (Doubtful) 699 0.2 451 0.1 7 (Loss) — — — — $ 344,646 100.0 % $ 321,371 100.0 % Due to continued improvement in borrower performance, the percentage of risk rated “3” investments increased from 82.2% of the debt portfolio at fair value as of December 31, 2020 to 94.2% of the debt portfolio as of December 31, 2021. Non-Accrual Loans At December 31, 2021, we had two loans on non-accrual status (Master Cutlery, LLC and 3rd Rock Gaming Holdings, LLC) with respect to all interest and Net Loan Fee amortization, with an aggregate amortized cost and fair value of $19.1 million and $7.7 million, respectively. 85 On April 5, 2021, we sold our subordinated debt investment in Community Intervention Services, Inc. for $0.1 million. We recognized a realized loss of $7.5 million on our investment in Community Intervention Services, Inc., of which $7.5 million was included as an unrealized loss as of December 31, 2020. On November 2, 2021, Online Tech Stores, LLC assets were liquidated resulting in $-0- proceeds to us. We wrote-off our subordinated debt investment in Online Tech Stores, LLC and recognized a realized loss of $16.1 million, of which $13.7 million was included as an unrealized loss as of December 31, 2020. 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. 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, 2021, we hold equity participation rights in Southern Technical Institute, LLC with a cost and fair value of $-0- and $7.4 million, 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. 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 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. Portfolio Yield : Portfolio yield is a key financial metric of our investment portfolio in order to obtain our investment objective of providing current income to shareholders. The effective yield of an investment is measured by adding its coupon rate plus the accretion of its Net Loan Fees, divided by the investments cost basis. 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. 86 Comparison of years ended December 31, 2021, 2020 and 2019. Consolidated operating results for the years ended December 31, 2021, 2020 and 2019 are as follows (in thousands): Years Ended December 31, 2021 2020 2019 Investment income Interest income: Cash interest income $ 28,321 $ 33,987 $ 44,649 PIK interest income 1,526 1,527 927 Net Loan Fee amortization 2,665 1,584 1,245 Accretion of interest income on subordinated notes 9,861 5,877 2,861 Other interest income 11 69 147 Total interest income 42,384 43,044 49,829 Dividend income: PIK dividends 143 505 898 Cash dividends 2,024 450 502 Total dividend income 2,167 955 1,400 Fee income: Management and syndication 2,235 745 773 Prepayment and other fees 977 731 519 Total fee income 3,212 1,476 1,292 Total investment income 47,763 45,475 52,521 Total expenses, net of incentive fee waivers 34,313 33,180 33,423 Net investment income 13,450 12,295 19,098 Net gain (loss) on investments 48,005 (6,704) (9,545) Loss on extinguishment of debt (4,591) (820) — Loss on impairment of goodwill — (1,077) — Net increase in net assets resulting from operations $ 56,864 $ 3,694 $ 9,553 Interest and PIK interest income by debt investment type for the years ended December 31, 2021, 2020 and 2019, are summarized below (in thousands): Years Ended December 31, 2021 2020 2019 Interest and PIK interest income: Senior secured debt investments $ 28,918 $ 33,186 $ 41,301 Subordinated debt investments 2,607 3,903 5,667 Structured Finance Notes 10,859 5,955 2,861 Total interest and PIK interest income 42,384 43,044 49,829 Less Net Loan Fees accelerations (1,640) (207) (280) Recurring interest income $ 40,744 $ 42,837 $ 49,549 Comparison of investment income for the years ended December 31, 2021 and 2020 . Total interest income decreased approximately $0.7 million during the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to a $35.9 million decrease in the average outstanding loan balance, partially offset by a 42 basis point increase in the weighted-average yield in our debt portfolio. Other than acceleration of Net Loan Fees recognized upon the repayment of a loan, we consider our interest income on debt investments and Structured Finance Notes to be recurring in nature. Acceleration of Net Loan Fees from the repayment of loans prior to their scheduled due dates of $1.6 million and $0.2 million were included in interest income for the years ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, accretion of interest income on Structured Finance Notes increased $4.0 million compared to the prior year primarily due to an increase in the weighted-average amount invested in subordinated notes from $35.0 million at December 31, 2020 to $59.1 million at December 31, 2021. During the year ended December 31, 2021, total PIK income decreased $0.4 million compared to the prior year and remained under 5% of total investment income. For the year ended December 31, 2021, cash and PIK interest of $1.7 million and $2.1 million, respectively, was not recognized in income due to reasonable doubt whether it will be collected. 87 During the year ended December 31, 2021, dividend income increased $1.2 million primarily due to a $1.0 million dividend from Pfanstiehl Holdings, Inc. Prepayment fees and syndication fees generally result from periodic transactions rather than from holding portfolio investments and are considered non-recurring. During the years ended December 31, 2021 and 2020, we recognized prepayment fees of $0.8 million and $0.6 million, respectively. We recognized syndication fees of $2.2 million and $0.7 million for the years ended December 31, 2021 and 2020, respectively, resulting from 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, 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 compared to $0.4 million 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. Expenses. Operating expenses for years ended December 31, 2021, 2020 and 2019, are presented below (in thousands): Years Ended December 31, 2021 2020 2019 Interest expense $ 17,515 $ 18,808 $ 15,829 Management fees 7,669 7,605 8,271 Income Incentive Fee, net of waivers 2,352 1,584 4,760 Capital Gains Fee 1,916 — — Professional fees 1,670 1,993 1,814 Administration fee 1,758 1,855 1,747 Other expenses 1,433 1,335 1,002 Total expenses, net of waivers $ 34,313 $ 33,180 $ 33,423 Comparison of expenses for the years ended December 31, 2021 and 2020 . Interest expense decreased by $1.3 million during the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to a decrease in the weighted-average interest costs from 5.4% to 5.1%. We reduced our weighted-average interest costs by redeeming Unsecured Notes with a weighted-average interest cost of 6.9% and issuing Unsecured Notes with a weighted-average interest cost of 5.4%. See "Item 8.–Financial Statements– Note 7 " for details. Management fee expense increased by $0.1 million due to an increase in our average total assets, primarily due to our investment portfolio at fair value increasing from $442.3 million at December 31, 2020 to $507.1 million at December 31, 2021. During the year ended December 31, 2021, the Income Incentive Fee expense increased $0.8 million, or $0.4 million prior to the waiver in the first quarter of 2020, compared to the year ended December 31, 2020 due to an increase in net investment income. During the year ended December 31, 2021, net investment income increased primarily due to additional dividend and syndication fee income, as well as a decrease in interest expense. 88 During the year ended December 31, 2021, the Capital Gains Fee increased $1.9 million compared to the prior year primarily due to net unrealized appreciation of $49.8 million on the investment portfolio at December 31, 2021, partially offset by cumulative net realized losses of $40.2 million. During the year ended December 31, 2021, professional fees decreased $0.3 million primarily due to a decrease in external valuation costs. 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 issued in 2019 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, Income 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. Net realized and unrealized gain (loss) on investments. Net realized and unrealized gain (loss) on investments, by investment type, for the years ended December 31, 2021, 2020 and 2019, are presented below (in thousands): Years Ended December 31, 2021 2020 2019 Senior secured debt 9,698 (16,134) $ (9,393) Subordinated debt 2,538 (16,388) (1,968) Preferred equity 5,202 (2,708) (89) Common equity, warrants and other 31,794 26,170 3,837 Structured Finance Notes (314) 2,081 (1,516) Income tax expense on net realized investment gains (1,027) — — Deferred income tax benefit (expense) 114 275 (416) Net gain (loss) on investments $ 48,005 $ (6,704) $ (9,545) Year ended December 31, 2021 During the year ended December 31, 2021, we recognized net gains of $9.7 million on senior secured debt, primarily as a result of an unrealized gain of $3.0 million on our senior secured debt investment in 3rd Rock Gaming Holding, LLC. During the year ended December 31, 2021, we recognized net gains of $2.5 million on subordinated debt, primarily as a result of an unrealized gain of $4.5 million on our subordinated debt investment in Eblens Holdings, Inc., offset by a realized loss of $16.1 million on the write-off on our investment in Online Tech Stores, LLC, of which $2.4 million was recognized as a loss during the year ended December 31, 2021. During the year ended December 31, 2021, we recognized net gains of $5.2 million on preferred equity investments, primarily as a result of realized gains of $3.9 million on the sale of investments. We recognized realized gains of $5.8 million and $1.5 million on the sale of our preferred equity investments in TTG Healthcare, LLC and Neosystems Corp, respectively, offset by a realized loss of $3.1 million on the write-off of our investments in My Alarm Center, LLC. During the year ended December 31, 2021, we recognized net gains of $31.8 million on common equity, warrants and other investments, primarily as a result of unrealized gains of $29.5 million and $3.1 million on our common equity investments in Pfanstiehl Holdings, Inc. and our equity participation rights in Southern Technical Institute, LLC, respectively. During the year ended December 31, 2021, we recognized an income tax provision from realized gains of $1.0 million relating to taxable net realized gains of $3.7 million on equity investments held in OFSCC-MB. 89 Year ended December 31, 2020 During the year ended December 31, 2020, we recognized net losses of $16.1 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 participation 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 $9.4 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. Loss on Impairment of Goodwill. Year ended December 31, 2020 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 traded 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 NAV 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. Year ended December 31, 2021 During the year ended December 31, 2021, we redeemed $35.4 million of SBA debentures that were contractually due September 1, 2022, September 1, 2024 and September 1, 2025. We recognized losses on extinguishment of debt of $0.3 million related to the charge-off of deferred borrowing costs on the prepaid debentures. 90 During the year ended December 31, 2021, we redeemed $177.9 million of Unsecured Notes that were contractually due in 2023, 2025 and 2026. We recognized losses on extinguishment of debt of $4.3 million related to the charge-off of deferred borrowing costs on the redeemed notes. Year ended December 31, 2020 During the year ended December 31, 2020, we redeemed $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. Non-GAAP Financial Measure – Adjusted Net Investment Income On a supplemental basis, we disclose adjusted net investment income (“Adjusted NII”) (including on a per share basis), which is a financial measure calculated and presented on basis other than in accordance with GAAP. Adjusted NII represents net investment income excluding the capital gains incentive fee in periods in which such expense occurs. GAAP requires recognition of a capital gains incentive fee in our financial statements if aggregate net realized and unrealized capital gains, if any, on a cumulative basis from the date of the election to be a BDC through the reporting date is positive. Such fees are subject to further conditions specified in the Investment Advisory Agreement, principally related to the realization of such net gains, before OFS Advisor is entitled to payment, and such recognized fees are subject to the risk of reversal should unrealized gains diminish to become losses. Management believes that Adjusted NII is a useful indicator of operations exclusive of any net capital gains incentive fee, as net investment income does not include the net gains, realized or unrealized, associated with the capital gains incentive fee. Management believes Adjusted NII facilitates analysis of our results of operations and provides greater transparency into the determination of incentive fees. Adjusted NII is not meant as a substitute for net investment income determined in accordance with GAAP and should be considered in the context of the entirety of our reported results of operations, financial position and cash flows determined in accordance with GAAP. The following table provides a reconciliation from net investment income (the most comparable GAAP measure) to Adjusted NII for the three months ended and years ended December 31, 2021 and December 31, 2020 (dollar amounts in thousands, except per share data): Three Months Ended December 31, Years Ended December 31, 2021 2020 2021 2020 (000's) Per Share (000's) Per Share (000's) Per Share (000's) Per Share Net investment income $ 4,430 $ 0.33 $ 3,004 $ 0.22 $ 13,450 $ 1.00 $ 12,295 $ 0.92 Capital Gains Fee 1,814 0.14 — — 1,916 0.14 — — Adjusted NII $ 6,244 $ 0.47 $ 3,004 $ 0.22 $ 15,366 $ 1.14 $ 12,295 $ 0.92 For the year ended December 31, 2021, the Capital Gains Fee of $1.9 million was primarily due to net unrealized appreciation of $49.8 million on the investment portfolio at December 31, 2021, partially offset by cumulative net realized losses of $40.2 million. Although these non-GAAP financial measures are intended to enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. 91 Comparison of the three months ended December 31, 2021 and September 30, 2021. Consolidated operating results for the three months ended December 31, 2021 and September 30, 2021, are as follows (in thousands): Three Months Ended December 31, 2021 September 30, 2021 Investment income Interest income: Cash interest income $ 7,739 $ 6,771 PIK interest income 283 406 Net Loan Fee amortization 913 322 Accretion of interest income on subordinated notes 2,547 2,645 Total interest income 11,482 10,144 Dividend income: PIK dividends — 37 Cash dividends 1,855 33 Total dividend income 1,855 70 Fee income: Management and syndication 1,455 124 Prepayment and other fees 475 251 Total fee income 1,930 375 Total investment income 15,267 10,589 Total expenses 10,837 7,354 Net investment income 4,430 3,235 Net gain on investments 14,722 10,154 Loss on extinguishment of debt (2,068) (224) Net increase in net assets resulting from operations $ 17,084 $ 13,165 Interest and PIK interest income by debt investment type for the three months ended December 31, 2021 and September 30, 2021 are summarized below (in thousands): Three Months Ended December 31, 2021 September 30, 2021 Interest and PIK interest income: Senior secured debt investments $ 7,965 $ 6,170 Subordinated debt investments 593 708 Structured Finance Notes 2,924 3,266 Total interest and PIK interest income 11,482 10,144 Less Net Loan Fees accelerations (628) (118) Recurring interest income $ 10,854 $ 10,026 During the three months ended December 31, 2021, total interest income increased $1.4 million compared to the three months ended September 30, 2021, primarily due to an increase in our weighted-average performing income yield to 11.1% from 9.9% in the prior quarter. The increase in the weighted-average performing income yield was primarily due to the acceleration of Net Loan Fees. During the three months ended December 31, 2021, dividend income increased $1.8 million compared to the prior quarter primarily due to a $1.0 million dividend from Pfanstiehl Holdings, Inc. and a $0.6 million dividend from Stancor, L.P. Fee income increased $1.6 million compared to the prior quarter primarily due to an increase in syndication fees. 92 Expenses. Operating expenses for the three months ended December 31, 2021 and September 30, 2021 are presented below (in thousands): Three Months Ended December 31, 2021 September 30, 2021 Interest expense $ 4,215 $ 4,234 Management fees 2,009 1,950 Income Incentive Fee 1,543 — Capital Gains Fee 1,814 102 Professional fees 440 354 Administration fees 416 335 Other expenses 400 379 Total expenses $ 10,837 $ 7,354 Total expenses increased $3.5 million during the three months ended December 31, 2021 compared to the three months ended September 30, 2021 primarily due to an increase in the Income Incentive Fee and Capital Gains Fee. Net realized and unrealized gain (loss) on investments. Net gain (loss) by investment type for the three months ended December 31, 2021 and September 30, 2021 were as follows (in thousands): Three Months Ended December 31, 2021 September 30, 2021 Senior secured debt $ 5,432 $ (460) Subordinated debt 335 145 Preferred equity 3,556 1,006 Common equity, warrants and other 6,870 9,094 Structured Finance Notes (658) 196 Income tax expense on net realized investment gains (1,027) — Deferred income tax benefit 214 173 Net gain on investments $ 14,722 $ 10,154 Net gain on investments for the three months ended December 31, 2021 During the three months ended December 31, 2021, net gain on investments of $14.7 million was primarily due to unrealized appreciation of $10.1 million on our common equity investment in Pfanstiehl Holdings, Inc. During the three months ended December 31, 2021, we sold our preferred equity investment in TTG Healthcare, LLC and realized a gain of $5.8 million, of which $4.6 million was recognized during the quarter. Net gain on investments for the three months ended September 30, 2021 Our portfolio experienced net gains of $10.2 million in the third quarter of 2021, principally due to a $8.9 million, or 3.2%, improvement in the fair values of our directly originated debt and equity investments. The net gains on our common equity investments were primarily attributable to the $6.4 million improvement in the fair value of Pfanstiehl Holdings, Inc. Net gains for the quarter included realized gains of $3.3 million primarily on the sale of our preferred equity in Neosystems Corp. and our common equity in Chemical Resources Holdings, Inc. Liquidity and Capital Resources At December 31, 2021, we held cash and cash equivalents of $43.0 million, which includes cash and cash equivalents of $11.3 million held by SBIC I LP, our wholly owned SBIC, and $3.7 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, 2021, the Parent received cash distributions of $10.0 million from SBIC I LP. During the year ended December 31, 2021, the Parent also received return of capital distributions of $31.6 million related to the prepayment of debentures. Distributions from OFSCC-FS to the Parent are restricted by the terms and conditions of the BNP Facility. During the year ended December 31, 2021, the Parent received $5.8 million in cash distributions from OFSCC-FS. At December 31, 93 2021, the Parent had $40.5 million of cash and cash equivalents available for general corporate activities, including approximately $12.4 million and $0 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, 2021. Additionally, at December 31, 2021, we had unused an unused commitment of $25.0 million under our PWB Credit Facility, as well as an unused commitment of $50.0 million under the BNP Facility, both subject to borrowing base requirements and other covenants. As of December 31, 2021, the aggregate amount outstanding of the senior securities issued by us was $349.9 million, for which our asset coverage was 173%. 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 capital at December 31, 2021, we could access all unused commitments under our credit facilities and remain in compliance with our asset coverage requirements. As of March 1, 2022, we had cash on hand of approximately $9.8 million. We continue to believe that we have sufficient levels of liquidity to support our existing portfolio companies, selectively deploy capital in new investment opportunities in this challenging environment and satisfy our long-term cash requirements. 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 accreted interest income on Structured Finance Notes, which may not coincide with cash distributions from these investments. 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, 2021 2020 2019 Cash from net investment income (1) $ 15,111 $ 11,694 $ 18,293 Net (purchases and originations) repayments of portfolio investments (1) (27,120) 68,931 (119,929) Net cash provided by (used in) operating activities (12,009) 80,625 (101,636) Proceeds from issuance of the Unsecured Notes, net of discounts 175,506 24,250 52,270 Redemptions of Unsecured Notes (177,850) — — Distributions paid to stockholders (12,071) (11,365) (17,949) Net borrowings (repayments) under revolving line of credits 67,950 (24,400) 44,450 Repayment of SBA debentures (35,350) (44,610) — Payment of debt issuance costs and other financing costs (836) (239) (1,860) Net cash provided (used) by financing activities 17,349 (56,364) 76,911 Net increase (decrease) in cash $ 5,340 $ 24,261 $ (24,725) (1) Net purchases and originations/repayments and sales of portfolio investments include purchase and origination of portfolio investments, proceeds from principal payments on portfolio investments, proceeds from sale or redemption of portfolio investments, changes in receivable for investments sold, payable form investments purchased as reported in our statements of cash flows, as well as the excess of proceeds from distributions received from Structured Finance Notes over accretion of interest income on Structured Finance Notes. Cash from net investment income includes all other cash flows from operating activities reported in our statements of cash flows. Certain amounts in the prior year have been reclassified to conform with the current year presentation. Comparison of the years ended December 31, 2021 and 2020. At December 31, 2021, we held cash and cash equivalents of $43.0 million, an increase of $5.3 million from December 31, 2020. 94 Cash from net investment income . Cash from net investment income increased $3.4 million for the year ended December 31, 2021 compared to the prior year. The increase to cash from net investment income was principally due a $1.7 million increase in the recurring interest income resulting from a 42 basis point increase in the weighted average yield in our debt portfolio. Net (purchases and originations) repayments of portfolio investments . During the year ended December 31, 2021, net purchases and repayments of portfolio investments decreased $96.1 million compared to the prior year, primarily due to an increase of $136.3 million in purchases of portfolio companies, offset by an increase of $44.2 million of principal payments, sale proceeds, and distributions from Structured Finance Notes. Proceeds from issuance of the Unsecured Notes, net of expenses . During the year ended December 31, 2021, we issued $178.0 million in Unsecured Notes, with net proceeds of $175.5 million after deducting underwriting discounts, which was a increase of $151.3 million in Unsecured Note issuances compared to the prior year. Cash distributions paid . Cash distributions increased $0.7 million for the year ended December 31, 2021 compared to the prior year, due to the increase in distributions declared of $0.05 per share from the prior year. Net borrowings (repayments) under revolving line of credits . During the year ended December 31, 2021, net borrowings under revolving lines of credit increased $92.4 million compared to the prior year, primarily due to the increase in the BNP Facility’s outstanding balance from $31.5 million at December 31, 2020 to $100.0 million at December 31, 2021. Payment of debt issuance costs and other financing costs . Payment of debt issuance costs increased $0.6 million for the year ended December 31, 2021 compared to the prior year, primarily due to the issuance of $178.0 million of Unsecured Notes. 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 $0.51 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 in 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. 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 95 outstanding SBA debentures payable as of December 31, 2021 and 2020 (in thousands): SBA debentures outstanding Pooling Date Maturity Date Fixed Interest Rate December 31, 2021 December 31, 2020 September 19, 2012 September 1, 2022 3.049 % $ — $ 14,000 September 24, 2014 September 1, 2024 3.370 — 2,765 March 25, 2015 March 1, 2025 2.872 65,920 65,920 September 23, 2015 September 1, 2025 3.184 4,000 22,585 SBA debentures outstanding 69,920 105,270 Unamortized debt issuance costs (555) (1,088) SBA debentures outstanding, net of unamortized debt issuance costs $ 69,365 $ 104,182 On a stand-alone basis, SBIC I LP held $195.5 million and $223.8 million in assets at December 31, 2021 and 2020, respectively, which accounted for approximately 34% 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. As such, we are not making new investments through SBIC I LP, other than follow-on investments . During the year ended December 31, 2021, we made $4.6 million of follow-on investments in two portfolio companies . 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, 2021, SBIC I LP prepaid $35.4 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 $0.3 million related to the charge-off of deferred borrowing costs on the prepaid debentures. The weighted-average fixed cash interest rate on the SBA debentures as of December 31, 2021 and 2020, was 2.89% and 2.98%, 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, 2021, the BLA contained customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, a minimum tangible NAV, 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, 2021, we were in compliance with the applicable covenants. As of December 31, 2021, 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 $25,000 4.00% Prime + 0.25% 0.50% February 28, 2023 As of December 31, 2021, availability under the PWB Credit Facility was $25.0 million, based on the stated advance rate of 50% under the borrowing base, and a $0 outstanding balance. 96 On February 17, 2021, we executed an amendment to the BLA with Pacific Western Bank. The amendment, among other things: (i) increased the maximum amount available under the PWB Credit Facility from $20.0 million to $25.0 million; (ii) decreased the interest rate floor from 5.25% per annum to 5.00% per annum; (iii) modified certain financial performance covenants; and (iv) extended the maturity date from February 28, 2021 to February 28, 2023. On November 15, 2021, we executed an amendment to the BLA with Pacific Western Bank to decrease the interest rate floor from 5.0% to 4.0%, effective as of November 1, 2021. 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, 2021, the BNP Facility had the following terms and balances (amounts in thousands): Principal Unused Commitment Effective Interest Rate (1) Maturity 2021 Interest Expense (2) BNP Facility $100,000 $50,000 4.20% June 20, 2024 $1,996 (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. Unsecured Notes . The Unsecured Notes totaled $180.0 million and $177.9 million in aggregate principal debt at December 31, 2021 and 2020, respectively. Issuances On February 10, 2021, we closed the public offering of $100.0 million aggregate principal amount of our Unsecured Notes Due February 2026, and on March 18, 2021, we closed an additional public offering of $25.0 million aggregate principal amount of our Unsecured Notes Due February 2026. The total net proceeds to us from the Unsecured Notes Due February 2026, after deducting underwriting discounts and offering expenses of $3.9 million, was approximately $121.1 million. On October 28, 2021 and November 1, 2021, we closed the public offering of $55.0 aggregate principal amount of our Unsecured Notes Due October 2028, which included a full exercise of the underwriters overallotment option. The total net proceeds to us, after deducting underwriting discounts and offering expenses of $1.4 million, was approximately $53.6 million. Redemptions On March 12, 2021, we redeemed all of our $50.0 million aggregate principal amount of Unsecured Notes Due April 2025 and $48.5 million aggregate principal amount of Unsecured Notes Due October 2025. On November 1, 2021, we redeemed all of our $25.0 million aggregate principal amount of Unsecured Notes Due September 2023. On November 22, 2021, we redeemed all of our $54.3 million aggregate principal amount of Unsecured Notes Due October 2026. During the year ended December 31, 2021, we recognized a loss on extinguishment of $4.3 million related to the charge-off of deferred borrowing costs on the redemption of Unsecured Notes. 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. 97 As of December 31, 2021, the Unsecured Notes had the following terms and balances (amounts in thousands): Unsecured Notes Principal Stated Interest Rate (1) Effective Interest Rate (2) (%) Maturity (3) Unsecured Notes Due February 2026 $ 125,000 4.75 % 5.38 % 2/10/2026 Unsecured Notes Due October 2028 55,000 4.95 % 5.29 % 10/31/2028 Total $ 180,000 (1) The weighted-average fixed cash interest rate on the Unsecured Notes as of December 31, 2021 was 4.81%. (2) The effective interest rate on the Unsecured Notes includes deferred debt issuance cost amortization. (3) 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. We may redeem the Unsecured Notes Due October 2028 in whole or in part at any time, or from time to time, at our option on or after October 31, 2023. The average dollar borrowings and average interest rate for all debt the years ended December 31, 2021, 2020 and 2019, were as follows: Year ended Average Dollar Borrowings Weighted Average Interest Rate December 31, 2021 $ 344,241 5.09 % December 31, 2020 347,229 5.42 December 31, 2019 307,826 4.99 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. 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 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 At December 31, 2021, we had $43.0 million of cash and cash equivalents, as well as $25.0 million and $50.0 million of unfunded commitments under our PWB Credit Facility and BNP Facility, respectively, to meet our short-term contractual obligations. Long-term contractual obligations, such as our BNP Facility that matures in 2024 and has $100.0 million outstanding at December 31, 2021, can be repaid by selling OFSCC-FS portfolio investments that have a fair value of $170.1 million at December 31, 2021. We cannot, however, be certain that this source of funds will be available and upon terms acceptable to us in sufficient amounts in the future. 98 At December 31, 2021, we have $69.9 million of outstanding SBA debentures that mature in 2025, which we may repay prior to their maturity dates by using proceeds from investment repayments. The SBIC I LP investment portfolio has a fair value of $183.5 million at December 31, 2021. 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 $43.7 million of total unfunded commitments to fourteen portfolio companies at December 31, 2021. 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 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, 2021, approximately $0.42 per share, $0.00 per share, and $0.49 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, 2021, 2020 and 2019, see "Item 8.–Financial Statements– Note 10 ." Recent Developments Appointment of New Director. On January 5, 2022, the Board, upon the recommendation of the Nominating and Corporate Governance Committee, voted to appoint Ashwin Ranganathan as a Class III director of the Board, chair of the Compensation Committee, a member of the Audit Committee and a member of the Nominating and Corporate Governance Committee, to fill the vacancy created by the retirement of Marc I. Abrams on January 4, 2022. Mr. Ranganathan was appointed to serve as a member of the Board until the 2024 annual meeting of stockholders, or until his successor is duly elected and qualified. The Board and the Nominating and Corporate Governance Committee determined that Mr. Ranganathan is not an “interested person” (as defined in Section 2(a)(19) of the 1940 Act) of the Company. Declaration of a Distribution. On March 1, 2022, our Board declared a distribution of $0.28 per share for the first quarter of 2022, payable on March 31, 2022 to stockholders of record as of March 24, 2022. Prepayment of SBA Debentures . On February 28, 2022, SBIC I LP prepaid $19.0 million of SBA debentures that were contractually due March 1, 2025 and September 1, 2025. 99