OXFORD SQUARE CAPITAL CORP. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
CAUTION REGARDING 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
Oxford Square Capital Corp., our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as "anticipates," "expects," "intends," "plans," "will," "may," "continue," "believes," "seeks," "estimates," "would," "could," "should," "targets," "projects," and variations of these words and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this Annual Report on Form 10-K involve risks and uncertainties, including statements as to:
• our future operating results, including our ability to achieve our objectives due to the current COVID-19 pandemic;
• our business prospects and the prospects of our portfolio companies;
• the impact of the investments we plan to make;
• our contractual agreements and relationships with third parties;
• the dependence of our future success on the general economy and its impact on the industries in which we invest and the impact of the COVID-19 pandemic thereon;
• the ability of our portfolio companies and CLO investments to achieve their objectives, including following the COVID-19 pandemic;
• the valuation of our investments in portfolio companies and CLOs, particularly those that do not have a liquid trading market, and the impact of the COVID-19 pandemic on them;
• market conditions and our ability to access other debt markets and additional debt and equity capital, as well as the impact of the COVID-19 pandemic on such markets;
• our expected financings and investments; • the adequacy of our cash resources and working capital; • the timing of cash flows, if any, from the operations of our portfolio companies and CLO investments and the impact of the COVID-19 pandemic thereon; and
• the ability of our investment adviser to find suitable investments for us and to monitor and administer our investments and the impact of the COVID-19 pandemic on them.
These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
• an economic downturn, including as a result of the current COVID-19 pandemic, could impair the ability of our portfolio companies and CLO investments to continue to operate, which could result in the loss of all or part our investments in such portfolio companies and CLO investments;
• the impact of the elimination of the London Interbank Offered Rate (“LIBOR”) and the introduction of alternatives to LIBOR on our results of operations;
• a contraction of available credit and/or an inability to access the equity markets, including as a result of the current COVID-19 pandemic, could impair our lending and investment activities;
• interest rate volatility could have an adverse effect on our results, in particular because we use leverage as part of our investment strategy;
• high levels of inflation and its impact on our investment activities and the sectors in which we invest;
• currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currencies rather than in
• the impact of IT system failures, data security breaches, data privacy compliance, network disruptions and cybersecurity attacks; and
• the risks, uncertainties and other factors we identify in Item 1A. - Risk Factors and elsewhere in this Annual Report on Form 10-K and in our filings with the
SEC. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this 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 those described or identified in Item 1A. - Risk Factors and elsewhere in this annual report on Form 10- K. Youshould not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report on Form 10-K.
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and accompanying notes contained elsewhere in this Form 10-K.
Our investment objective is to maximize our portfolio's total return. Our primary focus is to seek an attractive risk-adjusted total return by investing primarily in corporate debt securities and in collateralized loan obligations ("CLO"), which are structured finance investments that own corporate debt securities. CLO investments may also include warehouse facilities, which are early-stage CLO vehicles intended to aggregate loans that may be used to form the basis of a traditional CLO vehicle. We operate as a closed-end, non-diversified management investment company and have elected to be regulated as a BDC under the 1940 Act. We have elected to be treated for tax purposes as a RIC, under the Code. Our investment activities are managed by
Oxford Square Management, LLC("Oxford Square Management"), a registered investment adviser under the Investment Advisers Act of 1940, as amended. Oxford Square Management is owned by Oxford Funds, LLC("Oxford Funds"), its managing member, and a related party, Charles M. Royce, a member of our Board who holds a minority, non-controlling interest in Oxford Square Management. Jonathan H. Cohen, our Chief Executive Officer, and Saul B. Rosenthal, our President, are the controlling members of Oxford Funds. Under an investment advisory agreement (the "Investment Advisory Agreement"), we have agreed to pay Oxford Square Management an annual Base Fee calculated on gross assets, and an incentive fee based upon our performance. Under an amended and restated administration agreement (the "Administration Agreement"), we have agreed to pay or reimburse Oxford Funds, as administrator, for certain expenses incurred in operating the Company. Our executive officers and directors, and the executive officers of Oxford Square Management and Oxford Funds, serve or may serve as officers and directors of entities that operate in a line of business similar to our own. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. We generally expect to invest between $5 millionand $50 millionin each of our portfolio companies, although this investment size may vary proportionately as the size of our capital base changes and market conditions warrant. We expect that our investment portfolio will be diversified among a large number of investments with few investments, if any, exceeding 5.0% of the total portfolio. As of December 31, 2021, our debt investments had stated interest rates of between 3.85% and 10.50% and maturity dates of between 3 and 91 months. In addition, our total portfolio had a weighted average annualized yield on debt investments of approximately 7.70%. The weighted average annualized yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our fees and expenses. The weighted average annualized yield was computed using the effective interest rates as of December 31, 2021, including accretion of original issue discount ("OID") and excluding any debt investments on non-accrual status. There can be no assurance that the weighted average annualized yield will remain at its current level. We have historically borrowed funds to make investments and may continue to borrow funds to make investments. As a result, we are exposed to the risks of leverage, which may be considered a speculative investment technique. Borrowings, also known as leverage, magnify the potential for gain and loss
on amounts invested and 65 therefore increase the risks associated with investing in our securities. In addition, the costs associated with our borrowings, including any increase in the management fee payable to Oxford Square Management, will be borne by our common stockholders. In addition, as a BDC under the 1940 Act, we are required to make available significant managerial assistance, for which we may receive fees, to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. These fees would be generally non-recurring, however in some instances they may have a recurring component. We have received no fee income for managerial assistance to date. To the extent possible, we will generally seek to invest in loans that are collateralized by a security interest in the borrower's assets or guaranteed by a principal to the transaction. Interest payments, if not deferred, are normally payable quarterly with most debt investments having scheduled principal payments on a monthly or quarterly basis. When we receive a warrant to purchase stock in a portfolio company, the warrant will typically have a nominal strike price, and will entitle us to purchase a modest percentage of the borrower's stock.
PORTFOLIO COMPOSITION AND INVESTMENT ACTIVITY
The total fair value of our investment portfolio was approximately
$420.8 millionand $294.7 millionas of December 31, 2021and December 31, 2020, respectively. The increase in the value of investments during the year ended December 31, 2021was due primarily to a net change in unrealized appreciation on our investment portfolio of approximately $38.5 million(which incorporates reductions to CLO equity cost value of $37.5 million), repayments of principal and sales of securities totaling approximately $39.5 million, partially offset by purchases of investments of approximately $178.9 million. Refer to the table below, which reconciles the investment portfolio for the year ended December 31, 2021and the year ended December 31, 2020. A reconciliation of the investment portfolio for the years ended December 31, 2021and 2020 follows: December 31, December 31, ($ in millions) 2021 2020
Beginning investment portfolio
Portfolio investments acquired 178.9
93.8 Repayments of principal (24.3 ) (80.4 ) Sales of securities (15.2 ) (54.2 )
Reductions to CLO equity cost value(1) (37.5 ) (13.0 ) Non-cash interest income due to PIK -
Accretion of discounts on investments 0.7
Net change in unrealized appreciation/(depreciation) on investments 38.5 (9.8 ) Net realized loss on investments (15.0 )
(8.2 ) Ending investment portfolio
$ 420.8 $ 294.7____________
(1) For the year ended
December 31, 2021, the reduction to cost value on our CLO equity investments of approximately $37.5 millionrepresented the difference between distributions received, or entitled to be received, on our investments held in CLO equity subordinated notes and fee notes, for the year ended December 31, 2021, of approximately $55.8 millionand the effective yield interest income recognized on our CLO equity subordinated notes and the amortized cost adjusted income on our CLO equity fee notes of approximately $18.3 million. For the year ended December 31, 2020, the reduction to cost value on our CLO equity investments of approximately $13.0 millionrepresented the difference between distributions received, or entitled to be received, on our investments held in CLO equity subordinated notes and fee notes, for the year ended December 31, 2020, of approximately $28.4 millionand the effective yield interest income recognized on our CLO equity subordinated notes and the amortized cost adjusted income on our CLO equity fee notes of approximately $15.4 million. During the year ended December 31, 2021, we purchased approximately $178.9 millionin portfolio investments, including additional investments of approximately $65.4 millionin existing portfolio companies and approximately $113.5 millionin new portfolio companies. During the year ended December 31, 2020, we purchased approximately $93.8 millionin portfolio investments, including additional investments of approximately $22.1 millionin existing portfolio companies and approximately $71.8 millionin new portfolio companies. 66 In certain instances, we receive payments based on scheduled amortization of the outstanding balances. In addition, we receive principal repayments of some of our investments prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period.
For the years ended
were as follows (in millions of dollars):
Cambium Learning Group, Inc.$
Convergint Technologies, LLC
Affinion Insurance Solutions, Inc. (f/k/a AIS Intermediate, LLC) 1.4 Net all others 1.5 Total repayments
Portfolio activity also reflects sales of securities for amounts of approximately
Portfolio CompanySales Verifone Systems, Inc. $ 6.9 Octagon Investment Partners37, Ltd. 3.0
BMC Software, Inc.(f/k/a Boxer Parent Company Inc.) 1.5 Total sales(1) $ 15.2____________
(1) Totals may not add due to rounding.
December 31, 2021, we had investments in debt securities of, or loans to, 20 portfolio companies, with a fair value of approximately $264.5 million, and CLO equity investments of approximately $155.6 million. As of December 31, 2020, we had investments in debt securities of, or loans to, 16 portfolio companies, with a fair value of approximately $172.2 million, and equity investments of approximately $122.5 million. Our debt and preferred stock investments made during 2020 included approximately $0.3 millionin PIK interest/dividends, which, as described in "- Overview" above, is added to the carrying value of our investments, reduced by repayments of principal.
The following table shows quarterly portfolio investment activity for the years ended
Reductions to Purchases of Repayments of Sales of CLO Equity ($ in millions) Investments Principal Investments Cost(1) Quarter ended December 31, 2021
$ 23.3$ 1.6 $ 10.3$ 7.4 September 30, 2021 23.1 5.7 - 8.6 June 30, 2021 99.5 0.6 3.0 15.5 March 31, 2021 32.9 16.4 1.8 6.0 Total(2) $ 178.9$ 24.3 $ 15.2$ 37.5 December 31, 2020 $ 46.9$ 51.1 $ 25.4$ 6.4 September 30, 2020 18.3 0.6 8.3 2.0 June 30, 2020 21.3 16.7 9.5 2.6 March 31, 2020 7.4 12.0 11.1 2.0 Total(2) $ 93.8$ 80.4 $ 54.2$ 13.0 ____________
(1) Represents reductions in the value of the CLO’s cost of equity (representing distributions received or likely to be received, in excess of interest income over effective yield and CLO expense report income adjusted to amortized cost). (2) Totals may not add due to rounding.
The following table shows the fair value of our investment portfolio by asset class as at
December 31, 2021
Investments at Percentage of Investments at Percentage of ($ in millions) Fair Value Total Portfolio Fair Value Total Portfolio Senior Secured Notes $ 264.5 62.8 % $ 172.2 58.4 % CLO Debt - 0.0 % - 0.0 % CLO Equity 155.6 37.0 % 122.5 41.6 %
Equity and Other Investments 0.8 0.2 %
- 0.0 % Total(1) $ 420.8 100.0 % $ 294.7 100.0 % ____________
(1) Totals may not add due to rounding.
Qualifying assets must represent at least 70% of the Company's total assets at the time of acquisition of any additional non-qualifying assets. As of
December 31, 2021and 2020, we held qualifying assets that represented 64.1% and 63.3%, respectively, of the total assets. No additional non-qualifying assets were acquired during the periods, if any, when qualifying assets were less than 70% of the total assets.
The following table presents our investment portfolio by industry at fair value, in millions, at
December 31, 2021
Investments at Percentage of Investments at Percentage of Fair Value Fair Value Fair Value Fair Value ($ in millions) ($ in millions) Structured finance(1) $ 155.6 36.9 % $ 122.5 41.6 % Business services 88.7 21.0 % 60.4 20.5 % Healthcare 63.0 15.0 % 41.7 14.1 % Software 50.9 12.1 % 13.3 4.5 % Diversified insurance 25.9 6.2 % 10.8 3.7 %
Telecommunication services 15.8 3.8 %
11.8 4.0 % Plastics Manufacturing 12.7 3.0 % 7.0 2.4 % Utilities 7.5 1.8 % 7.2 2.4 % IT consulting 0.8 0.2 % - - % Aerospace and defense - - % 5.4 1.8 % Education - - % 14.6 5.0 % Total(2) $ 420.8 100.0 % $ 294.7 100.0 % ____________
(1) Reflects our equity investments in CLOs at
68 The following tables present the top ten industries (based upon Moody's industry classifications) of the aggregate holdings of the CLOs included in our portfolio, based on par value, as of
December 31, 2021and December 31, 2020. Top Ten Industries December 31, 2021Healthcare & Pharmaceuticals 9.9 % Banking, Finance, Insurance & Real Estate 9.7 % High Tech Industries9.5 % Business Services 8.4 % Hotels, Gaming & Leisure 5.2 % Media: Broadcasting & Subscription 5.0 % Telecommunications 4.6 % Chemicals, Plastics & Rubber 4.1 % Beverage, Food & Tobacco 3.8 % Construction & Building 3.6 % Total 63.8 % Top Ten Industries December 31, 2020Banking, Finance, Insurance & Real Estate 9.5 % Healthcare & Pharmaceuticals 9.4 % High Tech Industries8.7 % Business Services 8.5 % Media: Broadcasting & Subscription 5.8 % Hotels, Gaming & Leisure 5.6 % Telecommunications 5.0 % Chemicals, Plastics & Rubber 4.3 % Beverage, Food & Tobacco 3.7 % Construction & Building 3.3 % Total 63.8 % PORTFOLIO GRADING
We have adopted a credit rating system to monitor the quality of our bond investment portfolio. Equity securities are not rated. From
and 2020, our portfolio had a weighted average rating of 2.1 and 2.1, respectively, based on the fair value of the debt securities in the portfolio.
Principal Percentage of Portfolio at Percentage of Grade Summary Description Value Debt Portfolio
Debt portfolio at fair value
1 Company is ahead of expectations and/or outperforming financial covenant requirements of the specific tranche and such trend is expected to continue. $ - - % $ - - % 2 Full repayment of the outstanding amount of OXSQ's cost basis and interest is expected for the specific tranche. 256.3 86.1 % 249.2 94.2 % 3 Closer monitoring is required. Full repayment of the outstanding amount of OXSQ's cost basis and interest is expected for the specific tranche. 14.7 4.9 % 13.9 5.3 % 4 A loss of interest income has occurred or is expected to occur and, in most cases, the investment is placed on non-accrual status. Full repayment of the outstanding amount of OXSQ's cost basis is expected for the specific tranche. - - % - - % 5 Full repayment of the outstanding amount of OXSQ's cost basis is not expected for the specific tranche and the investment is placed on non-accrual status. 26.9 9.0 % 1.3 0.5 % Total(1)
$ 297.8100.0 % $ 264.5100.0 % ____________ (1) Totals may not sum due to rounding. ($ in millions) December
Principal Percentage of Portfolio at Percentage of Grade Summary Description Value Debt Portfolio
Debt portfolio at fair value
1 Company is ahead of expectations and/or outperforming financial covenant requirements of the specific tranche and such trend is expected to continue. $ - - % $ - - % 2 Full repayment of the outstanding amount of OXSQ's cost basis and interest is expected for the specific tranche. 167.9 80.5 % 156.1 90.7 % 3 Closer monitoring is required. Full repayment of the outstanding amount of OXSQ's cost basis and interest is expected for the specific tranche. 14.3 6.8 % 11.8 6.9 % 4 A loss of interest income has occurred or is expected to occur and, in most cases, the investment is placed on non-accrual status. Full repayment of the outstanding amount of OXSQ's cost basis is expected for the specific tranche. - - % - - % 5 Full repayment of the outstanding amount of OXSQ's cost basis is not expected for the specific tranche and the investment is placed on non-accrual status. 26.4 12.7 % 4.2 2.5 % Total(1)
$ 208.5100.0 % $ 172.2100.0 % ____________
(1) Totals may not add due to rounding.
We expect that a portion of our investments will be in the Grades 3, 4 or 5 categories from time to time, and, as such, we will be required to work with troubled portfolio companies to improve their business and protect our investment. The number and amount of investments included in Grade 3, 4 or
5 may fluctuate from year to year. 70 RESULTS OF OPERATIONS
Set forth below is a comparison of our results of operations for the years ended
December 31, 2021and 2020. For information regarding results of operations for the year ended December 31, 2019, refer to Part II Item 7 in our Form 10-K for the year ended December 31, 2020, as filed with the SECon March 22, 2021, which is incorporated by reference herein.
The following table shows the components of investment income for the years ended
December 31, December 31, 2021 2020 Interest Income Stated interest income
$ 16,142,294 $ 17,374,998
Original issue discount and market discount income 740,731
PIK interest income -
Discounting income from unscheduled payments at par 557,204
Total interest income 17,440,229
Income from securitization vehicles and investments 18,691,631
Other income Fee letters 405,010
Loan prepayment and bond call fees 300,000
200,000 All other fees 338,143 107,219 Total other income 1,043,153 676,450 Total investment income
$ 37,175,013 $ 35,942,505The increase in total investment income for the year ended December 31, 2021compared to the year ended December 31, 2020was largely due to an increase of income from securitization vehicles and investments (approximately $3.7 million) resulting from higher weighted average effective yields in 2021 compared to 2020. That increase was partially offset by: decreased stated interest income due to lower average yields on senior secured loan investments; lower original issue discount and market discount income resulting from lower average discounts on our investments across our senior secured loan portfolio; and decreased discount income derived from unscheduled remittances at par. The total principal outstanding on income producing debt investments as of December 31, 2021and December 31, 2020was approximately $297.8 millionand $182.2 million, respectively. As of December 31, 2021, our debt investments had stated interest rates of between 3.85% and 10.50% and maturity dates of between 3 and 91 months. As of December 31, 2020, our debt investments had stated interest rates of between 3.90% and 10.25% and maturity dates of between 22 and 87 months. In addition, our total portfolio had a weighted average yield on debt investments of approximately 7.70% as of December 31, 2021, compared to a weighted average yield on debt investments of 8.03% as of December 31, 2020. 71 Operating Expenses
The following table shows the components of operating expenses for the years ended
December 31, December 31, 2021 2020 Interest expense
$ 10,495,897 $ 7,878,906Base Fee 6,287,173 4,525,034 Professional fees 1,910,390 1,545,279 Compensation expense 723,931 708,350 Director's fees 490,500 441,500 Insurance 422,805 330,746
Transfer agent and custodian fees 222,581 206,686 General and administrative 521,541 591,512 Net Investment Income Incentive Fees - - Total operating expenses
$ 21,074,818 $ 16,228,013Total operating expenses for the year ended December 31, 2021increased by approximately $4.8 millioncompared to the year ended December 31, 2020. The increase in 2021 is attributable primarily to higher interest expense and Base Fee. Interest expense increased by approximately $2.6 millionin 2021 compared to 2020. The increase in 2021 was a result of the additional interest expense paid in connection with the issuance of 5.50% Unsecured Notes on May 20, 2021. The aggregate accrued interest which remained payable as of December 31, 2021and 2020 was approximately $1.2 millionand $0.5 million, respectively. The calculation of the Base Fee increased approximately $1.8 millionin 2021 compared to 2020 due to higher average adjusted gross assets in 2021. The Base Fee which remained payable to Oxford Square Management as of December 31, 2021and 2020 was approximately $1.7 millionand $1.2 million, respectively. Professional fees, largely consisting of legal, valuation, consulting, audit and tax fees increased by approximately $0.4 millionin 2021 compared to 2020 primarily due to increased legal fees incurred during the year ended December 31, 2021. Compensation expense reflects the allocation of compensation expenses for the services of our Chief Financial Officer, accounting personnel, and other administrative support staff. The increase in 2021 was largely the result of staffing changes during these periods. As of December 31, 2021and 2020, no compensation expenses remained payable for each respective date.
General and administrative expenses primarily include registration fees, office supplies, facilities and other miscellaneous expenses, less approximately
The calculation of the Net Investment Income Incentive Fee had no change in 2021 compared to 2020. There was no Net Investment Income Incentive Fee in 2021, nor in 2020, primarily as a result of the Net Investment Income Incentive Fee being reduced as the result of the Total Return Requirement. The Net Investment Income Incentive Fee is calculated and payable quarterly in arrears based on the amount by which (x) the "Pre-Incentive Fee Net Investment Income" for the immediately preceding calendar quarter exceeds (y) the "Preferred Return Amount" for the calendar quarter. For this purpose, "Pre-Incentive Fee Net Investment Income" means interest income, dividend income and any other income accrued during the calendar quarter minus our operating expenses for the quarter (including the Base Fee, expenses payable under the Administration Agreement with Oxford Funds, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Refer to "Note 7. Related Party Transactions" in the notes to our financial statements. 72 The expense attributable to the capital gains incentive fee, as reported under GAAP, is calculated as if the Company's entire portfolio had been liquidated at period end, and therefore is calculated on the basis of net realized and unrealized gains and losses at the end of each period. That expense (or the reversal of such an expense) related to that hypothetical liquidation of the portfolio (and assuming no other changes in realized or unrealized gains and losses) would only become payable to our investment adviser in the event of a complete liquidation of our portfolio as of period end and the termination of the Investment Advisory Agreement on such date. For the years ended
December 31, 2021and 2020, no accrual was required as a result of the impact of accumulated net unrealized depreciation and net realized losses on our portfolio. The amount of the Capital Gains Incentive Fee which will actually be payable is determined in accordance with the terms of the Investment Advisory Agreement and is calculated as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). The terms of the Investment Advisory Agreement state that the Capital Gains Incentive Fee calculation is based on net realized gains, if any, offset by gross unrealized depreciation for the calendar year. No effect is given to gross unrealized appreciation in this calculation.
Realized and unrealized gains/losses on investments
For the year ended
For the year ended
December 31, 2021, our net change in unrealized appreciation was approximately $38.5 million, composed of approximately $40.0 millionin gross unrealized appreciation, approximately $20.4 millionin gross unrealized depreciation and approximately $18.9 millionrelating to the reversal of prior period net unrealized depreciation as investment gains and losses were realized. This includes net unrealized appreciation of approximately $37.5 millionresulting from reductions to the cost value of our CLO equity investments representing the difference between distributions received, or entitled to be received, on our investments held in CLO equity subordinated notes and fee notes, of approximately $55.8 millionand the effective yield interest income recognized on our CLO equity subordinated notes and the amortized cost adjusted income on our CLO equity fee notes of approximately $18.3 million.
Components of the net change in unrealized capital gain/loss during the year ended
Changes in unrealized appreciation/
Print Solutions, Inc.$
Sound Point CLO XVI, Ltd.7.4 Vibrant CLO V, Ltd.5.8 Global Tel Link Corp.4.0 Telos CLO 2014-5, Ltd. 3.7 Cedar Funding II CLO, Ltd.3.0 Zais CLO 6, Ltd. 2.1 Nassau2019- I Ltd.2.0
Carlyle Global Market Strategies CLO 2021-6, Ltd. (2.4 )
Premiere Global Services, Inc.
(14.6 ) Net all other 13.9 Total(1)
(1) Totals may not add due to rounding.
For the year ended
For the year ended
December 31, 2020, our net change in unrealized depreciation was approximately $9.8 million, composed of approximately $11.9 millionin gross unrealized appreciation, approximately 73 $30.9 millionin gross unrealized depreciation and approximately $9.2 millionrelating to the reversal of prior period net unrealized depreciation as investment gains and losses were realized. This includes net unrealized appreciation of approximately $13.0 millionas a result of reductions to the cost value of our CLO equity investments representing the difference between distributions received, or entitled to be received, on our investments held in CLO equity subordinated notes and fee notes, of approximately $28.4 millionand effective yield interest income recognized on our CLO equity subordinated notes and the amortized cost adjusted income on our CLO equity fee notes of approximately $15.4 million.
Components of the net change in unrealized capital gain/loss during the year ended
Changes in unrealized appreciation/
Premiere Global Services, Inc.$
AMMC CLO XII, Ltd.
Ivy Hill Middle Market Credit Fund VII, Ltd.
Madison Park Funding XVIII, Ltd.
1.6 Telos CLO 2013-3, Ltd. (1.5 ) Zais CLO 6, Ltd. (1.6 ) Global Tel Link Corp. (2.7 ) Unitek Global Services, Inc. (2.8 ) Nassau 2019-I, Ltd. (3.1 ) Telos CLO 2014-5, Ltd. (6.9 ) Net all other (2.0 ) Total $ (9.8 )
Net increase in net assets resulting from net investment income
Net investment income for the year ended
December 31, 2021was approximately $16.1 million, compared to $19.7 millionfor the year ended December 31, 2020. The change was primary the result of higher operating expenses, offset by an increase in investment income, as discussed above. For the year ended December 31, 2021, the net increase in net assets resulting from net investment income per common share was $0.32(basic and diluted), compared to $0.40(basic and diluted) for the year ended December 31, 2020, based on the weighted average common shares outstanding for the respective period.
Net increase in net assets from operations
Net increase in net assets resulting from operations for the year ended
December 31, 2021was approximately $39.6 million, compared to a net increase of $1.7 millionfor year ended December 31, 2020. These changes were largely due to a net change in unrealized appreciation, as discussed above. For the year ended December 31, 2021, the net increase in net assets resulting from operations per common share was $0.80(basic and diluted), compared to a net increase in net assets per common share of $0.03(basic and diluted) for the year ended December 31, 2020, based on the weighted average common shares outstanding for the respective periods.
CASH AND CAPITAL RESOURCES
During the year ended
December 31, 2021, cash and cash equivalents decreased from approximately $59.1 millionat the beginning of the period to approximately $9.0 millionat the end of the period. Net cash used in operating activities for the year ended December 31, 2021, consisting primarily of the items described in "- Results of Operations," was approximately $107.4 million, largely reflecting purchases of new investments of approximately $202.0 million, partially offset by repayments of principal of approximately $24.3 millionand proceeds from the sale of investments of approximately $16.1 million. During the year ended December 31, 2021, net cash provided by financing activities was approximately $57.3 million, reflecting the proceeds from issuance of 5.50% Unsecured Notes of approximately $80.5 million, partially offset by payment of distributions of approximately $20.4 million. 74 Contractual Obligations We have certain obligations with respect to the investment advisory and administration services we receive. Refer to "- Overview". We incurred approximately $6.3 millionfor the Base Fee and approximately $500,000for administrative services for the year ended December 31, 2021. There were no Net Investment Income Incentive Fees incurred during the year ended December 31, 2021. Refer to "Note 7. Related Party Transactions" in the notes to our financial statements. A summary of our significant contractual payment obligations is as follows as of December 31, 2021. Refer to "Note 5. Borrowings" in the notes to our financial statements. Payments Due by Period Principal Less than More than
Contractual obligations (in millions) Amount 1 year 1 - 3 years 3 - 5 years 5 years Long-term debt obligations: 6.50% Unsecured Notes
$ 64.4$ - $ 64.4$ - $ - 6.25% Unsecured Notes 44.8 - - 44.8 - 5.50% Unsecured Notes 80.5 - - - 80.5 $ 189.7$ - $ 64.4 $ 44.8 $ 80.5
Off-balance sheet arrangements
October 18, 2019, we entered into a $10 millionrepurchase transaction facility (the "Repo Facility") with Nomura Securities International, Inc.("Nomura"). Pursuant to the Master Repurchase Agreement ("MRA") and a transaction facility confirmation, the Company may sell securities to Nomura from time to time with a corresponding repurchase obligation at an agreed-upon price 30 to 60 days after the sale date ("Reverse Repo"). The Repo Facility had a funding cost of 1-month LIBOR plus 2.05% per annum for each Reverse Repo transaction and was subject to a facility fee of 0.85% per annum on the full $10 millionfacility amount. The Company accounts for these Reverse Repo transactions as secured financings for financial reporting purposes in accordance with GAAP. As of December 31, 2021and 2020, there was no outstanding principal, or securities sold under the Repo Facility, as the Repo Facility expired on October 18, 2020.
Share issue and buyback programs
August 1, 2019, we entered into an Equity Distribution Agreement with Ladenburg Thalmann & Co.through which we offered for sale, from time to time, up to $150.0 millionof the Company's common stock through an At-the-Market ("ATM") offering. We did not sell any shares of common stock under the ATM program during the year ended December 31, 2021. During the year ended December 31, 2020, we sold approximately 1.1 million shares of common stock under the ATM program, which raised net proceeds of approximately $5.8 million.
In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, is at least 150% immediately after such borrowing. As of
December 31, 2021, our asset coverage for borrowed amounts was approximately 227%. As of December 31, 2020, our asset coverage for borrowed amounts was approximately 304%. The following are our outstanding principal amounts, carrying values and fair values of our borrowings as of December 31, 2021and December 31, 2020. The fair value of the 6.50% Unsecured Notes, 6.25% Unsecured Notes and 5.50% Unsecured Notes are based upon the closing price on the last day of the period. The 6.50% Unsecured Notes, 6.25% Unsecured Notes and 5.50% Unsecured Notes are listed on the NASDAQ Global Select Market (trading symbol "OXSQL","OXSQZ" and "OXSQG", respectively). 75 As of December 31, 2021 December 31, 2020 Principal Fair Principal Fair ($ in millions) Amount Carrying Value Value
Amount Carrying Value Value 6.50% Unsecured Notes
$ 64.4$ 63.6 $ 65.1 $ 64.4$ 63.3 $ 64.36.25% Unsecured Notes 44.8 43.8 45.5 44.8 43.5 45.1 5.50% Unsecured Notes 80.5 78.0 80.7 - - - Total(1) $ 189.7$ 185.4 $ 191.3 $ 109.2$ 106.9 $ 109.4____________
(1) Totals may not add due to rounding.
The weighted average stated interest rate and weighted average maturity on all our debt outstanding as of
December 31, 2021were 6.02% and 4.6 years, respectively, and as of December 31, 2020were 6.40% and 4.1 years, respectively. The aggregate accrued interest which remained payable as of December 31, 2021and 2020, was approximately $1.2 millionand $0.5 million, respectively.
The tables below summarize the components of interest expense for the years ended
Year Ended December 31, 2021 Amortization of Stated Interest Deferred Debt ($ in thousands) Expense Issuance Costs Total 6.50% Unsecured Notes
$ 4,184.1$ 324.7 $ 4,508.86.25% Unsecured Notes 2,799.4 233.2 3,032.6 5.50% Unsecured Notes 2,718.0 236.6 2,954.5 Total(1) $ 9,701.5$ 794.4 $ 10,495.9____________
(1) Totals may not add due to rounding.
Year Ended December 31, 2020 Amortization of Stated Interest Deferred Debt ($ in thousands) Expense Issuance Costs Total 6.50% Unsecured Notes $ 4,184.1 $ 325.6
$ 4,509.76.25% Unsecured Notes 2,799.4 233.8 3,033.2 Credit Facility 262.2 4.8 267.0 Repo Facility 68.9 - 68.9 Total(1) $ 7,314.6 $ 564.2 $ 7,878.9____________
(1) Totals may not add due to rounding.
In order to qualify for tax treatment as a RIC, we are required under sub-chapter M of the Code to distribute at least 90% of our ordinary income and net short-term capital gains realized in excess of realized net long-term capital losses. to our shareholders on an annual basis.
A written statement identifying the nature of these distributions for tax reporting purposes was posted on our website. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable regulated investment company tax treatment. We cannot assure stockholders that they will receive any distributions.
To the extent that our taxable profits are less than the total amount of our distributions for that year, a portion of those distributions may be considered a return of capital to our shareholders. Thus, the source of a distribution to our shareholders may be the initial capital invested by the shareholder rather than our ordinary taxable income.
or capital gains. Shareholders should carefully read any written statement accompanying a distribution payment and should not assume that the source of any distribution is ordinary taxable income or capital gains. The final determination of the nature of our distributions can only be made when we file our income tax return. We have up to
federal income tax return for the year ended
The following table reflects the cash distributions, including distributions reinvested, if any, per share that we have paid on our common stock since the beginning of the 2019 fiscal year through 2021: Distributions in excess of/ (less than) GAAP net GAAP net Total investment investment Date Declared Record Date Payment Date Distributions income income Fiscal 2021 July 22, 2021 December 17, 2021 December 31, 2021
$ 0.035$ N/A $ - July 22, 2021 November 16, 2021 November 30, 2021 0.035 N/A - July 22, 2021 October 15, 2021 October 29, 2021 0.035 N/A - Total (Fourth Quarter 2021) 0.105 0.09 0.02 April 22, 2021 September 16, 2021 September 30, 2021 0.035 N/A - April 22, 2021 August 17, 2021 August 31, 2021 0.035 N/A - April 22, 2021 July 16, 2021 July 30, 2021 0.035 N/A - Total (Third Quarter 2021) 0.105 0.08 0.02 February 23, 2021 June 16, 2021 June 30, 2021 0.035 N/A - February 23, 2021 May 14, 2021 May 28, 2021 0.035 N/A - February 23, 2021 April 16, 2021 April 30, 2021 0.035 N/A - Total (Second Quarter 2021) 0.105 0.06 0.05 October 22, 2020 March 17, 2021 March 31, 2021 0.035 N/A - October 22, 2020 February 12, 2021 February 26, 2021 0.035 N/A - October 22, 2020 January 15, 2021 January 29, 2021 0.035 N/A - Total (First Quarter 2021) 0.105 0.10 - Total (2021) $ 0.420(1) $ 0.32(5) $ 0.10(5) Fiscal 2020 September 11, 2020 December 16, 2020 December 31, 2020 $ 0.035$ N/A $ - September 11, 2020 November 13, 2020 November 30, 2020 0.035 N/A - September 11, 2020 October 16, 2020 October 30, 2020 0.035 N/A - Total (Fourth Quarter 2020) 0.105 0.10 - June 1, 2020 September 16, 2020 September 30, 2020 0.035 N/A - June 1, 2020 August 17, 2020 August 31, 2020 0.035 N/A - June 1, 2020 July 17, 2020 July 31, 2020 0.035 N/A - Total (Third Quarter 2020) 0.105 0.09 0.01 February 24, 2020 June 15, 2020 June 30, 2020 0.067 N/A - February 24, 2020 May 14, 2020 May 29, 2020 0.067 N/A - February 24, 2020 April 15, 2020 April 30, 2020 0.067 N/A - Total (Second Quarter 2020) 0.201 0.09 0.11 October 25, 2019 March 17, 2020 March 31, 2020 0.067 N/A - October 25, 2019 February 14, 2020 February 28, 2020 0.067 N/A - October 25, 2019 January 17, 2020 January 31, 2020 0.067 N/A - Total (First Quarter 2020) 0.201 0.13 0.07 Total (2020) $ 0.612(2) $ 0.40(5) $ 0.21(5) 77 Distributions in excess of/ (less than) GAAP net GAAP net Total investment investment Date Declared Record Date Payment Date Distributions income income Fiscal 2019(4) July 25, 2019 December 18, 2019 December 31, 2019 $ 0.067$ N/A $ - July 25, 2019 November 15, 2019 November 29, 2019 0.067 N/A - July 25, 2019 October 21, 2019 October 31, 2019 0.067 N/A - Total (Fourth Quarter 2019) 0.201 0.18 0.02 April 23, 2019 September 23, 2019 September 30, 2019 0.067 N/A - April 23, 2019 August 23, 2019 August 30, 2019 0.067 N/A - April 23, 2019 July 24, 2019 July 31, 2019 0.067 N/A - Total (Third Quarter 2019) 0.201 0.19 0.01 February 22, 2019 June 21, 2019 June 28, 2019 0.067 N/A - February 22, 2019 May 24, 2019 May 31, 2019 0.067 N/A - February 22, 2019 April 23, 2019 April 30, 2019 0.067 N/A - Total (Second Quarter 2019) 0.201 0.27 (0.07 ) February 22, 2019 March 15, 2019 March 29, 2019 0.200 0.18 0.02 Total (First Quarter 2019) 0.200 0.18 0.02 Total (2019) $ 0.803(3) $ 0.81(5) $ (0.01 )(5) ____________ (1) The tax characterization of cash distributions for the year ended December 31, 2021 will not be known until the tax return for such year is finalized. For the year ended December 31, 2021, the amounts and sources of distributions reported are only estimates and are not being provided for U.S.tax reporting purposes. The final determination of the source of all distributions in 2021 will be made after year-end and the amounts represented may be materially different from the amounts disclosed in the final Form 1099-DIV notice. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Company's investment performance and may be subject to change based on tax regulations. (2) Cash distributions for the year ended December 31, 2020 include a tax return of capital of approximately $0.38per share. (3) Cash distributions for the year ended December 31, 2019 include a tax return of capital of approximately $0.11per share for tax purposes. (4) Beginning February 22, 2019, the Board began to declare monthly distributions in lieu of quarterly distributions. (5) Totals may not sum due to rounding.
We have a number of business relationships with affiliated or related parties, including the following:
• We have entered into the Investment Advisory Agreement with Oxford Square Management. Oxford Square Management is controlled by Oxford Funds, its managing member. In addition to Oxford Funds, Oxford Square Management is owned by
Charles M. Royce, a member of our Board, who holds a minority, non-controlling interest in Oxford Square Management as the non-managing member. Oxford Funds, as the managing member of Oxford Square Management, manages the business and internal affairs of Oxford Square Management. In addition, Oxford Funds provides us with office facilities and administrative services pursuant to the Administration Agreement. • Messrs. Cohen and Rosenthal also currently serve as Chief Executive Officer and President, respectively, at Oxford Gate Management, LLC, the investment adviser to the Oxford Gate Fundsand Oxford Bridge II, LLC. Oxford Funds is the managing member of Oxford Gate Management, LLC. In addition, Bruce L. Rubinserves as the Chief Financial Officer and Secretary, and Gerald Cumminsserves as the Chief Compliance Officer, respectively, of Oxford Gate Management, LLC. 78 • Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and President, respectively, of Oxford Lane Capital Corp., a non-diversified closed-end management investment company that invests primarily in equity and junior debt tranches of CLO vehicles, and its investment adviser, Oxford Lane Management, LLC. Oxford Funds provides Oxford Lane Capital Corp. with office facilities and administrative services pursuant to an administration agreement and also serves as the managing member of Oxford Lane Management, LLC. In addition, Bruce L. Rubinserves as the Chief Financial Officer, Treasurer and Corporate Secretary of Oxford Lane Capital Corp. and Chief Financial Officer and Treasurer of Oxford Lane Management, LLC, and Mr. Cumminsserves as the Chief Compliance Officer of Oxford Lane Capital Corp. and Oxford Lane Management, LLC. As a result, certain conflicts of interest may arise with respect to the management of our portfolio by Messrs. Cohen and Rosenthal on the one hand, and the obligations of Messrs. Cohen and Rosenthal to manage Oxford Lane Capital Corp., Oxford Bridge II, LLCand the Oxford Gate Funds, respectively, on the other hand. Oxford Square Management, Oxford Lane Management, LLCand Oxford Gate Management, LLCare subject to a written policy with respect to the allocation of investment opportunities among the Company, Oxford Lane Capital Corp., Oxford Bridge II, LLCand the Oxford Gate Funds. Where investments are suitable for more than one entity, the allocation policy generally provides that, depending on size and subject to current and anticipated cash availability, the absolute size of the investment as well as its relative size compared to the total assets of each entity, current and anticipated weighted average costs of capital, among other factors, an investment amount will be determined by the adviser to each entity. If the investment opportunity is sufficient for each entity to receive its investment amount, then each entity receives the investment amount; otherwise, the investment amount is reduced pro rata. On June 14, 2017, the Securities and Exchange Commissionissued an order permitting the Company and certain of its affiliates to complete negotiated co-investment transactions in portfolio companies, subject to certain conditions (the "Order"). Subject to satisfaction of certain conditions to the Order, the Company and certain of its affiliates are now permitted, together with any future BDCs, registered closed-end funds and certain private funds, each of whose investment adviser is the Company's investment adviser or an investment adviser controlling, controlled by, or under common control with the Company's investment adviser, to co-invest in negotiated investment opportunities where doing so would otherwise be prohibited under the 1940 Act, providing the Company's stockholders with access to a broader array of investment opportunities. Pursuant to the Order, we are permitted to co-invest in such investment opportunities with our affiliates if a "required majority" (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including, but not limited to, that (1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned, and (2) the potential co-investment transaction is consistent with the interests of our stockholders and is consistent with our then-current investment objective and strategies. In the ordinary course of business, we may enter into transactions with portfolio companies that may be considered related party transactions. In order to ensure that we do not engage in any prohibited transactions with any persons affiliated with us, we have implemented certain policies and procedures whereby our executive officers screen each of our transactions for any possible affiliations between the proposed portfolio investment, us, companies controlled by us and our employees and directors. We will not enter into any agreements unless and until we are satisfied that doing so will not raise concerns under the 1940 Act or, if such concerns exist, we have taken appropriate actions to seek board review and approval or exemptive relief for such transaction. Our Board reviews these procedures on an annual basis. We have also adopted a Code of Business Conduct and Ethics which applies to our senior officers, including our Chief Executive Officer and Chief Financial Officer, as well as all of our officers, directors and employees. Our Code of Business Conduct and Ethics requires that all employees and directors avoid any conflict, or the appearance of a conflict, between an individual's personal interests and our interests. Pursuant to our Code of Business Conduct and Ethics, each employee and director must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict. Our Audit Committee is charged with approving any waivers under our Code of Business Conduct and Ethics. As required by the NASDAQ Global Select Market corporate governance listing standards, the Audit Committee of our Board is also required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K). Information concerning related party transactions is included in the financial statements and related notes, appearing elsewhere in this annual report on
Form 10-K. 79
CRITICAL ACCOUNTING METHODS
The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in
the United States("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of 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. We have identified investment valuation and investment income as critical accounting policies.
We fair value our investment portfolio in accordance with the provisions of ASC 820, Fair Value Measurement and Disclosure ("ASC 820"). Estimates made in the preparation of our financial statements include the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. We believe that there is no single definitive method for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. ASC 820-10 clarified the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities in markets that are not active; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. We consider the attributes of current market conditions on an on-going basis and have determined that due to the general illiquidity of the market for its investment portfolio, whereby little or no market data exists, substantially all of our fair valued investments are measured based upon Level 3 inputs as of
December 31, 2021and 2020. Our Board determines the value of our investment portfolio each quarter. In connection with that determination, members of Oxford Square Management's portfolio management team prepare a quarterly analysis of each portfolio investment using the most recent portfolio company financial statements, forecasts and other relevant financial and operational information. We also engage third-party valuation firms to provide assistance in valuing certain of its syndicated loans and bilateral investments, including related equity investments, although our Board ultimately determines the appropriate valuation of each such investment. Changes in fair value, as described above, are recorded in the statement of operations as net change in unrealized appreciation/depreciation. Good Faith Determinations of Fair Value ("Rule 2a-5") under the 1940 Act was adopted by the SECin December 2020and establishes requirements for determining fair value in good faith for purposes of the 1940 Act. The Company is evaluating the impact of adopting Rule 2a-5 on the financial statements and intends to comply with the new rule's requirements on or before the compliance date in September 2022.
Syndicated loans (including senior secured notes)
In accordance with ASC 820-10, our valuation procedures specifically provide for the review of indicative quotes supplied by the large agent banks that make a market for each security. However, the marketplace from which we obtain indicative bid quotes for purposes of determining the fair value of our syndicated loan investments has shown attributes of illiquidity as described by ASC-820-10. During such periods of illiquidity, when we believe that the non-binding indicative bids received from agent banks for certain syndicated investments that we own may not be determinative of their fair value or when no market indicative quote is available, we may engage third-party valuation firms to provide assistance in valuing certain syndicated investments that we own. The third-party valuation firms may use the income or market approach in arriving at a valuation. Unobservable inputs utilized could include discount rates derived from estimated credit spreads and earnings before interest, taxes, depreciation, and amortization multiples. In addition, Oxford Square Management analyzes each syndicated loan by reviewing the company's financial statements, covenant compliance and recent trading activity in the security (if known), and other business developments related to the portfolio company. All available information, including non-binding indicative bids which may not be determinative of fair value, is presented to the Valuation Committee to consider in its determination of fair value. In some instances, there may be limited trading activity in a security even though the market for the security is considered not active. In such cases the Valuation Committee will consider
the number of 80 trades, the size and timing of each trade, and other circumstances around such trades, to the extent such information is available, in its determination of fair value. The Valuation Committee will evaluate the impact of such additional information, and factor it into its consideration of the fair value that is indicated by the analysis provided by third-party valuation firms, if any.
Secured Loan Obligations – Debt and Equity
We have acquired a number of debt and equity positions in CLO investment vehicles and CLO warehouse investments. These investments are special purpose financing vehicles. In valuing such investments, we consider the indicative prices provided by a recognized industry pricing service as a primary source, and the implied yield of such prices, supplemented by actual trades executed in the market at or around period-end, as well as the indicative prices provided by the broker who arranges transactions in such investment vehicles. We also consider those instances in which the record date for an equity distribution payment falls on the last day of the period, and the likelihood that a prospective purchaser would require a downward adjustment to the indicative price representing substantially all of the pending distribution. Additional factors include any available information on other relevant transactions including firm bids and offers in the market and information resulting from bids-wanted-in-competition. In addition, we consider the operating metrics of the specific investment vehicle, including compliance with collateralization tests, defaulted and restructured securities, and payment defaults, if any. Oxford Square Management or the Valuation Committee may request an additional analysis by a third-party firm to assist in the valuation process of CLO investment vehicles. All information is presented to our
Boardfor its determination of fair value of these investments.
Bilateral investments (including stocks)
Bilateral investments (as defined below) for which market quotations are readily available are valued by an independent pricing agent or market maker. If such market quotations are not readily available, under the valuation procedures approved by our Board upon the recommendation of the Valuation Committee, a third-party valuation firm will prepare valuations for each of our bilateral investments that, when combined with all other investments in the same portfolio company, (i) have a value as of the previous quarter of greater than or equal to 2.5% of its total assets as of the previous quarter, and (ii) have a value as of the current quarter of greater than or equal to 2.5% of its total assets as of the previous quarter, after taking into account any repayment of principal during the current quarter. In addition, in those instances where a third-party valuation is prepared for a portfolio investment which meets the parameters noted in (i) and (ii) above, the frequency of those third-party valuations is based upon the grade assigned to each such security under its credit grading system as follows: Grade 1, at least annually; Grade 2, at least semi-annually; Grades 3, 4, and 5, at least quarterly. Bilateral investments which do not meet the parameters in (i) and (ii) above are not required to have a third-party valuation and, in those instances, a valuation analysis will be prepared by Oxford Square Management. Oxford Square Management also retains the authority to seek, on our behalf, additional third party valuations with respect to both our bilateral portfolio securities and our syndicated loan investments. Our Board retains ultimate authority as to the third-party review cycle as well as the appropriate valuation of each investment.
The term “Bilateral Investments” means debt and equity investments directly negotiated between the Company and a holding company, but excludes syndicated loans (i.e. corporate loans arranged by an agent on behalf of a company, parts of which are owned by several investors in addition to OXSQ).
See “Note 3. Fair value” in the notes to our financial statements for more information on investment valuation and our investment portfolio.
Interest income is recorded on an accrual basis using the contractual rate applicable to each debt investment and includes the accretion of market discounts and/or original issue discount ("OID") and amortization of market premiums. Discounts from and premiums to par value on securities purchased are accreted/amortized into interest income over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums, if any. Generally, when interest and/or principal payments on a loan become past due, or if we otherwise do not expect the borrower to be able to service its debt and other obligations, we will place the loan on non-accrual status and will generally cease recognizing interest income on that loan for financial reporting purposes until all principal 81 and interest have been brought current through payment or due to restructuring such that the interest income is deemed to be collectible. We generally restore non-accrual loans to accrual status when past due principal and interest is paid and, in our judgment, is likely to remain current. As of
December 31, 2021and 2020, we had three and two debt investments that were on non-accrual status, respectively. Interest income also includes a payment-in-kind ("PIK") component on certain investments in our portfolio. Refer to the section below, "Payment-In-Kind," for a description of PIK income and its impact on interest income.
Payment in kind
We have debt and preferred stock investments in our portfolio that contain contractual PIK provisions. PIK interest and preferred stock dividends are computed at their contractual rates and are accrued into income and added to the principal balances on the capitalization dates. Upon capitalization, the PIK portions of the investments are valued at their respective fair values. If we believe that a PIK is not fully expected to be realized, the PIK investment would be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest or dividends would be reversed from the related receivable through interest or dividend income, respectively. PIK investments on non-accrual status are restored to accrual status once it becomes probable that such PIK will be ultimately collectible in cash. For the years ended
December 31, 2021and 2020, no PIK preferred stock dividends were recognized as dividend income. For the year ended December 31, 2021, no PIK interest was recognized as interest income. For the year ended December 31, 2020, approximately $0.3 millionof PIK interest was recognized as interest income.
Income from securitization vehicles and equity investments
Income from investments in the equity class securities of CLO vehicles (typically income notes or subordinated notes) is recorded using the effective yield method in accordance with the provisions of ASC 325-40, based upon estimated cash flows, amounts and timing including those CLO equity investments that have not made their inaugural distribution for the relevant period end. We monitor the expected residual payments, and effective yield is determined and updated periodically, as needed. Accordingly, investment income recognized on CLO equity securities in the GAAP statement of operations differs from both the tax-basis investment income and from the cash distributions actually received by us during the period. We also record income on our investments in certain securitization vehicles (or "CLO warehouse facilities") based on a stated rate per the underlying note purchase agreement or, if there is no stated rate, then an estimated rate is calculated using a base case model projecting the timing of the ramp-up of the CLO warehouse facility. As of
December 31, 2021and 2020, we had no investments in CLO warehouse facilities.
Other income includes prepayment, amendment, and other fees earned by our loan investments, distributions from fee letters and success fees associated with portfolio investments. Distributions from fee letters are an enhancement to the return on a CLO equity investment and are based upon a percentage of the collateral manager's fees above the amortized cost, and are recorded as other income when earned. We may also earn success fees associated with our investments in certain securitization vehicles or CLO warehouse facilities, which are contingent upon a repayment of the warehouse by a permanent CLO structure; such fees are earned and recognized when the repayment is completed.
Recently issued accounting standards
See "Note 15. Recent Accounting Pronouncements" to our financial statements for a description of recent accounting pronouncements, including the impact on
our financial statements. RECENT DEVELOPMENTS On
March 1, 2022, the Board of Directors approved the Fourth Amended and Restated Bylaws (the "Fourth Amended and Restated Bylaws"), to be effective as of March 1, 2022. The Fourth Amended and Restated Bylaws (i) provide that a plurality of all the votes cast at a meeting of our stockholders duly called and at which a quorum is present will be sufficient to elect a director to the Board of Directors and (ii) removes the provision that requires incumbent directors that are not re-elected to tender their resignation to the Board of Directors. All of the other provisions of our bylaws shall remain in full force and effect. 82
The following distributions payable to shareholders are shown below:
Per Share Distribution Date Declared Record Dates Payable Dates Amount Declared October 22, 2021 January 17, 2022 January 31, 2022
$0.035October 22, 2021 February 14, 2022 February 28, 2022 $0.035October 22, 2021 March 17, 2022 March 31, 2022 $0.035March 1, 2022 April 15, 2022 April 29, 2022 $0.035March 1, 2022 May 17, 2022 May 31, 2022 $0.035March 1, 2022 June 16, 2022 June 30, 2022 $0.035
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