10-K 1 s123257_10k.htm FORM 10-K

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

_______________________________

FORM 10-K

_______________________________

S    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019

OR

£    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM          TO         

COMMISSION FILE NUMBER: 814-00638

_______________________________

OXFORD SQUARE CAPITAL CORP.

(Exact name of registrant as specified in its charter)

_______________________________

Maryland

 

20-0188736

(State of Incorporation)

 

(I.R.S. Employer Identification Number)

8 Sound Shore Drive, Suite 255
Greenwich, CT 06830
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange On Which
Registered

Common Stock, par value $0.01 per share

 

OXSQ

 

NASDAQ Global Select Market LLC

6.50% Notes due 2024

 

OXSQL

 

NASDAQ Global Select Market LLC

6.25% Notes due 2026

 

OXSQZ

 

NASDAQ Global Select Market LLC

Securities registered pursuant to Section 12(g) of the Act:
None

_______________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes £ No S.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes £ No S.

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes £ No £

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

 

Large accelerated filer £

 

Accelerated filer S

   

Non-accelerated filer £

 

Smaller reporting company £

       

Emerging growth company £

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

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

The aggregate market value of common stock held by non-affiliates of the Registrant on June 28, 2019, based on the closing price on that date of $6.40 on the NASDAQ Global Select Market, was $279,229,691. For the purposes of calculating this amount only, all directors and executive officers of the Registrant have been treated as affiliates. There were 48,990,575 shares of the Registrant’s common stock outstanding as of February 25, 2020.

 

OXFORD SQUARE CAPITAL CORP.
FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 201
9

TABLE OF CONTENTS

     

Page

PART I

       

ITEM 1.

 

BUSINESS

 

1

ITEM 1A.

 

RISK FACTORS

 

24

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

 

51

ITEM 2.

 

PROPERTIES

 

51

ITEM 3.

 

LEGAL PROCEEDINGS

 

51

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

51

         

PART II

       

ITEM 5.

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

52

ITEM 6.

 

SELECTED FINANCIAL AND OTHER DATA

 

54

ITEM 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

55

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

74

ITEM 8.

 

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

75

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

76

ITEM 9A.

 

CONTROLS AND PROCEDURES

 

76

ITEM 9B.

 

OTHER INFORMATION

 

76

         

PART III

       

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

77

ITEM 11.

 

EXECUTIVE COMPENSATION

 

80

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

81

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

83

ITEM 14.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

85

         

PART IV

       

ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

86

ITEM 16.

 

FORM 10-K SUMMARY

 

90

SIGNATURES

 

91

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PART I

Item 1. Business

Oxford Square Capital Corp. (“OXSQ,” “Company,” “we,” “us,” or “our”) is a closed-end, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). We have elected to be treated for tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) beginning with our 2003 taxable year. Our investment objective is to maximize our portfolio’s total return. Our primary current focus is to seek an attractive risk-adjusted total return by investing primarily in corporate debt securities and collateralized loan obligation (“CLO”) 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 may also invest in publicly traded debt and/or equity securities. As a BDC, we may not acquire any asset other than “qualifying assets” unless, at the time we make the acquisition, the value of our qualifying assets represents at least 70% of the value of our total assets.

Our capital is generally used by our corporate borrowers to finance organic growth, acquisitions, recapitalizations and working capital. Our investment decisions are based on extensive analysis of potential portfolio companies’ business operations supported by an in-depth understanding of the quality of their recurring revenues and cash flow, variability of costs and the inherent value of their assets, including proprietary intangible assets and intellectual property. In making our CLO investments, we consider the indenture structure for that vehicle, its operating characteristics and compliance with its various indenture provisions, as well as its corporate loan-based collateral pool.

We generally expect to invest between $5.0 million and $50.0 million in each of our portfolio investments, although this investment size may vary as the size of our capital base changes and market conditions warrant. We invest in both fixed and variable interest rate structures. We expect that our investment portfolio will be diversified among a large number of investments with few investments, if any, exceeding 5% of the total portfolio.

The structures of our investments will vary and we seek to invest across a wide range of different industries. We seek to invest in entities that, as a general matter, have been operating for at least one year prior to the date of our investment and that will, at the time of our investment, have employees and revenues, and which are cash flow positive. Many of these companies are expected to have financial backing provided by other financial or strategic sponsors at the time we make an investment. The portfolio companies in which we invest, however, will generally be considered below investment grade, and their debt securities may in turn be referred to as “junk.” A portion of our investment portfolio may consist of debt investments for which issuers are not required to make significant principal payments until the maturity of the senior loans, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity. In addition, many of the debt securities we hold typically contain interest reset provisions that may make it more difficult for a borrower to repay the loan, heightening the risk that we may lose all or part of our investment.

We also purchase portions of equity and junior debt tranches of CLO vehicles. Substantially all of the CLO vehicles in which we may invest would be deemed to be investment companies under the 1940 Act but for the exceptions set forth in section 3(c)(1) or section 3(c)(7). Other than CLO vehicles, we do not intend to invest, and we would be limited to 15% of our net assets if we did invest, in any types of entities that rely on the exceptions set forth in section 3(c)(1) or section 3(c)(7) of the 1940 Act. Structurally, CLO vehicles are entities that are formed to originate and manage a portfolio of loans. The loans within the CLO vehicle are limited to loans which meet established credit criteria and are subject to concentration limitations in order to limit a CLO vehicle’s exposure to a single credit. A CLO vehicle is formed by raising various classes or “tranches” of debt (with the most senior tranches being rated “AAA” to the most junior tranches typically being rated “BB” or “B”) and equity. The tranches of CLO vehicles rated “BB” or “B” may be referred to as “junk.” The equity of a CLO vehicle is generally required to absorb the CLO’s losses before any of the CLO’s other tranches, yet it also has the lowest level of payment priority among the CLO’s tranches; therefore, the equity is typically the riskiest of CLO investments which, if it were rated, may also be referred to as “junk.” We primarily focus on investing in the junior tranches and the equity of CLO vehicles.

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The CLO vehicles which we focus on are collateralized primarily by senior secured loans made to companies whose debt is unrated or is rated below investment grade, and generally have very little or no direct exposure to real estate, mortgage loans or to pools of consumer-based debt, such as credit card receivables or auto loans. However, there can be no assurance that the collateral securing such senior secured loans would satisfy all of the unpaid principal and interest of our investment in the CLO vehicle in the event of default and the junior tranches, especially the equity tranches, of CLO vehicles are the last tranches to be paid, if at all, in the event of a default. Our investment strategy 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 have historically borrowed funds to make investments and may continue to do so. As a result, we are exposed to the risks of leverage, which may be considered a speculative investment technique. Borrowings, also known as leverage, magnify the potential for gain and loss on amounts invested and therefore increase the risks associated with investing in our securities. In addition, the costs associated with our borrowings, including any increase in the management fee payable to our investment adviser, Oxford Square Management, LLC (“Oxford Square Management”), will be borne by our common stockholders.

6.50% Unsecured Notes

On April 12, 2017, we completed an underwritten public offering of approximately $64.4 million in aggregate principal amount of our 6.50% unsecured notes due 2024, or the “6.50% Unsecured Notes.” The 6.50% Unsecured Notes will mature on March 30, 2024, and may be redeemed in whole or in part at any time or from time to time at our option on or after March 30, 2020. The 6.50% Unsecured Notes bear interest at a rate of 6.50% per year payable quarterly on March 30, June 30, September 30, and December 30 of each year. The 6.50% Unsecured Notes are listed on the NASDAQ Global Select Market under the trading symbol “OXSQL.”

OXSQ Facility

On June 21, 2018, Oxford Square Funding 2018, LLC (“OXSQ Funding”), a special purpose vehicle that is our wholly-owned subsidiary, entered into a credit facility (the “OXSQ Facility”) with Citibank, N.A. On October 12, 2018, OXSQ Funding amended the OXSQ Facility to provide for additional borrowings under the OXSQ Facility. Pursuant to the terms of the OXSQ Facility, as amended, OXSQ Funding may borrow up to $125.0 million. As of December 31, 2019, the total principal outstanding was approximately $28.1 million. Subject to certain exceptions, pricing under the OXSQ Facility is based on the London interbank offered rate for an interest period equal to three months plus a spread of 2.25% per annum. Interest on the outstanding principal amount owing under the OXSQ Facility is payable quarterly in arrears. The OXSQ Facility will mature, and all outstanding principal and accrued and unpaid interest thereunder will be due and payable, on June 21, 2020, and is subject to periodic repayment prior to such date from collections on OXSQ Funding’s loan assets and certain other mandatory payment requirements.

6.25% Unsecured Notes

On April 3, 2019, we completed an underwritten public offering of approximately $44.8 million in aggregate principal amount of our 6.25% unsecured notes due 2026, or the “6.25% Unsecured Notes.” The 6.25% Unsecured Notes will mature on April 30, 2026, and may be redeemed in whole or in part at any time or from time to time at our option on or after April 30, 2022. The 6.25% Unsecured Notes bear interest at a rate of 6.25% per year payable quarterly on January 31, April 30, July 31, and October 31 of each year. The 6.25% Unsecured Notes are listed on the NASDAQ Global Select Market under the trading symbol “OXSQZ.”

ATM Offering

On August 1, 2019, we entered into an Equity Distribution Agreement with Ladenburg Thalmann & Co. through which we may offer for sale, from time to time, up to $150.0 million of our common stock through an At-the-Market (“ATM”) offering. We sold a total of 774,803 shares of common stock pursuant to the ATM during the year ended December 31, 2019. The total amount of capital raised under the ATM during the year ended December 31, 2019 was approximately $4.4 million.

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Organizational and Regulatory Structure

Our investment activities are managed by Oxford Square Management. Oxford Square Management is an investment adviser registered under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Oxford Square Management is owned by Oxford Funds, LLC (“Oxford Funds”), its managing member, and Charles M. Royce, a member of our Board of Directors who holds a minority, non-controlling interest in Oxford Square Management. Jonathan H. Cohen, our Chief Executive Officer, and Saul B. Rosenthal, our President and Chief Operating Officer, directly or indirectly own or control all of the outstanding equity interests of Oxford Funds. Under the investment advisory agreement, we have agreed to pay Oxford Square Management an annual base management fee based on our gross assets as well as an incentive fee based on our performance. Refer to “— Investment Advisory Agreement”.

We were founded in July 2003 and completed an initial public offering of shares of our common stock in November 2003. We are a Maryland corporation and a closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to meet certain regulatory tests, including the requirement to invest at least 70% of our total assets in eligible portfolio companies. Refer to “— Regulation as a Business Development Company.” In addition, we have elected to be treated for U.S. federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

Set forth below is a chart detailing our organizational structure.

Our headquarters are located at 8 Sound Shore Drive, Suite 255, Greenwich, Connecticut and our telephone number is (203) 983-5275.

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). This information is available on our website at http://oxfordsquarecapital.com/. The information we file with the SEC is available free of charge by contacting us at 8 Sound Shore Drive, Suite 255, Greenwich, CT 06830 or by telephone at (203) 983-5275. The SEC also maintains a website that contains reports, proxy statements and other information regarding registrants, including us, that file such information electronically with the SEC. The address of the SEC’s website is http://www.sec.gov. Information contained on our website or on the SEC’s website about us is not incorporated into this report and you should not consider information contained on our website or on the SEC’s website to be part of this report.

MARKET OVERVIEW AND OPPORTUNITY

The broader corporate loan and CLO equity market exhibited strength during the first quarter of 2019 followed by modest volatility during the remainder of the year. During the first quarter of 2019, the S&P / LSTA Leveraged Loan Index increased from a price of 93.84% at the end of December 2018 to 96.41% by the end of March 2019 and ended the year at a price of 96.72%. However, returns during 2019 differed substantially by credit ratings category, with lower credit quality loans significantly underperforming higher credit quality loans. During the year, BB rated loan prices increased 4.6%, B rated loan prices increased 3.2%, and CCC rated loan prices decreased 3.1%. We believe the increase in higher quality U.S. loan prices during 2019 was in part

3

driven by strong U.S. CLO issuance and a flight to quality, partly offset by continued outflows out of U.S. loan mutual funds and ETFs. Furthermore, we believe that the decrease in lower quality loan prices was primarily driven by credit rating agency downgrades and the resultant selling of these loans by CLOs to appropriately manage Weighted Average Rating Factor indenture requirements. We believe that while the fundamentals across the U.S. loan market continue to be generally stable, conditions have weakened versus the end of 2018 as exhibited by an increase in default rates to 1.5% at the end of 2019 versus 1.2% at the end of 2018 and the dispersion in performance by ratings category. This environment may allow corporate loan and CLO managers to buy performing loan assets in the secondary market at discounts to par, which may build CLO asset value and spread over time, ultimately accruing to the benefit of CLO equity. Moreover, as we execute our corporate loan strategy of focusing primarily on smaller broadly-syndicated loans, narrowly syndicated loans and private deals, through purchases in both the primary and secondary markets, we remain mindful of maintaining overall portfolio liquidity. We believe this strategy allows us to maintain corporate debt investments which have sufficient liquidity in order to take advantage of market opportunities.

We continue to view our mandate as maximizing the risk-adjusted return on our stockholders’ investment in OXSQ. We view the market opportunity currently available to us as strong and, as a permanent capital vehicle, we have historically been able to take a longer-term view towards our investments. We believe this perspective served us well in 2019.

COMPETITIVE ADVANTAGES

We believe that we are well positioned to provide financing to corporate borrowers and structured finance vehicles that, in turn, provide capital to corporate borrowers for the following reasons:

•        Expertise in credit analysis and monitoring investments; and

•        Established transaction sourcing network.

Expertise in credit analysis and monitoring investments

While our investment focus is on middle-market companies, we have invested, and in the future will likely continue to invest, in larger and smaller companies and in other investment structures on an opportunistic basis, including CLO investment vehicles. We believe our experience in analyzing middle-market companies and CLO investment structures, as detailed in the biographies of Oxford Square Management’s senior investment professionals, affords us a sustainable competitive advantage over lenders with limited experience in investing in these markets. In particular, we have expertise in evaluating the investment merits of middle-market companies as well as the structural features of CLO investments, and monitoring the credit risk of such investments after closing until full repayment.

•        Jonathan H. Cohen, our Chief Executive Officer, has more than 25 years of experience in debt and equity research and investment. Mr. Cohen has also served as Chief Executive Officer and a Director of Oxford Lane Capital Corp. (NasdaqGS: OXLC), a registered closed-end fund, and as Chief Executive Officer of its investment adviser, Oxford Lane Management, LLC, or “Oxford Lane Management,” since 2010. Since 2015 and 2018, respectively, Mr. Cohen has also served as Chief Executive Officer of Oxford Bridge Management, LLC, or “Oxford Bridge Management,” the investment adviser to Oxford Bridge, LLC and Oxford Bridge II, LLC (collectively, the “Oxford Bridge Funds”), and Oxford Gate Management, LLC, or “Oxford Gate Management,” the investment adviser to Oxford Gate Master Fund, LLC, Oxford Gate, LLC and Oxford Gate (Bermuda), LLC (collectively, the “Oxford Gate Funds”). The Oxford Bridge Funds and the Oxford Gate Funds are private investment funds. Previously, Mr. Cohen managed technology equity research groups at Wit Capital, Merrill Lynch, UBS and Smith Barney. Mr. Cohen is a member of the Board of Trustees of Connecticut College. Mr. Cohen received a B.A. in Economics from Connecticut College and an M.B.A. from Columbia University.

•        Saul B. Rosenthal, our President and Chief Operating Officer, has more than 20 years of experience in the capital markets, with a focus on middle-market transactions. In addition, Mr. Rosenthal has served as President and a Director of Oxford Lane Capital Corp. (NasdaqGS: OXLC), a registered closed-end

4

fund, and as President of Oxford Lane Management, since 2010. Mr. Rosenthal has also served as President of Oxford Bridge Management, the investment adviser to the Oxford Bridge Funds and Oxford Gate Management, the investment adviser to the Oxford Gate Funds, since 2015 and 2018, respectively. Mr. Rosenthal was previously an attorney at the law firm of Shearman & Sterling LLP. Mr. Rosenthal serves on the board of the National Museum of Mathematics. Mr. Rosenthal received a B.S., magna cum laude, from the Wharton School of the University of Pennsylvania, a J.D. from Columbia University Law School, where he was a Harlan Fiske Stone Scholar, and a LL.M. (Taxation) from New York University School of Law.

•        Darryl Monasebian is the Executive Vice President and head of risk and portfolio management of Oxford Square Management, and also holds those same positions at Oxford Lane Management, the investment adviser to Oxford Lane Capital Corp., Oxford Bridge Management, the investment adviser to the Oxford Bridge Funds and Oxford Gate Management, the investment adviser to the Oxford Gate Funds. Prior to joining Oxford Square Management, Mr. Monasebian was a director in the Merchant Banking Group at BNP Paribas, and prior to that he was a director at Swiss Bank Corporation and a senior account officer at Citibank. He began his business career at Metropolitan Life Insurance Company as an investment analyst in the Corporate Investments Department. Mr. Monasebian received a B.S. in Management Science/Operations Research from Case Western Reserve University and a Masters of Business Administration from Boston University’s Graduate School of Management.

•        Debdeep Maji is a Senior Managing Director of Oxford Square Management, and also holds the same position at Oxford Lane Management, the investment adviser to Oxford Lane Capital Corp., at Oxford Bridge Management, the investment adviser to the Oxford Bridge Funds and Oxford Gate Management, the investment adviser to the Oxford Gate Funds. Mr. Maji graduated from the Jerome Fisher Program in Management and Technology at the University of Pennsylvania where he received a Bachelor of Science degree in Economics from the Wharton School (and was designated a Joseph Wharton Scholar) and a Bachelor of Applied Science from the School of Engineering.

•        Kevin Yonon is a Managing Director of Oxford Square Management, and also holds the same position at Oxford Lane Management, the investment adviser to Oxford Lane Capital Corp., at Oxford Bridge Management, the investment adviser to the Oxford Bridge Funds and Oxford Gate Management, the investment adviser to the Oxford Gate Funds. Previously, Mr. Yonon was an Associate at Deutsche Bank Securities and prior to that he was an Analyst at Blackstone Mezzanine Partners. Before joining Blackstone, he worked as an Analyst at Merrill Lynch in the Mergers & Acquisitions group. Mr. Yonon received a B.S. in Economics with concentrations in Finance and Accounting from the Wharton School at the University of Pennsylvania, where he graduated magna cum laude, and an M.B.A. from the Harvard Business School.

Established deal sourcing network

Through the investment professionals of Oxford Square Management, we have extensive contacts and sources from which to generate investment opportunities. These contacts and sources include private equity funds, companies, brokers and bankers. We believe that senior professionals of Oxford Square Management have developed strong relationships within the investment community over their years within the banking, investment management and equity research fields.

INVESTMENT PROCESS

Identification

We identify opportunities in the CLO market through our network of brokers, dealers, agent banks, collateral mangers and sponsors that we have worked with for several years. The CLO vehicles which we focus on are collateralized primarily by senior secured loans made to companies whose debt is unrated or is rated below investment grade, and generally have very little or no direct exposure to real estate, mortgage loans or to pools of consumer-based debt, such as credit card receivables or auto loans.

5

We identify and source new prospective corporate debt investments through brokers, investment banks and direct company relationships. We have identified several criteria that we believe are important in seeking our investment objective. These criteria provide general guidelines for our investment decisions; however, we do not require each prospective investment to meet all or any specific number of these criteria.

•        Experienced management.    We generally require that our portfolio companies have an experienced management team. We also prefer the portfolio companies to have in place proper incentives to induce management to succeed and to act in concert with our interests as investors, including having significant equity interests.

•        Significant financial or strategic sponsor and/or strategic partner.    We prefer to invest in companies in which established private equity or venture capital funds or other financial or strategic sponsors have previously invested and are willing to make an ongoing contribution to the management of the business, including participation as board members or as business advisers.

•        Strong competitive position in industry.    We seek to invest in companies that have developed a competitive position within their respective sector or niche of a specific industry.

•        Profitable on a cash flow basis.    We focus on companies that are profitable or nearly profitable on an operating cash flow basis. Typically, we would not expect to invest in start-up companies.

•        Clearly defined exit strategy.    Prior to making a direct corporate equity investment and/or an investment in a debt security that is accompanied by an equity-based security in a portfolio company, we analyze the potential for that company to increase the liquidity of its common equity through a future event that would enable us to realize appreciation, if any, in the value of our equity interest. Liquidity events may include an initial public offering, a merger or an acquisition of the company, a private sale of our equity interest to a third party, or a purchase of our equity position by the company or one of its stockholders.

•        Liquidation value of assets.    Although we do not operate as an asset-based lender, the prospective liquidation value of the assets, if any, collateralizing the debt securities that we hold is a consideration in our credit analysis. We consider both tangible assets, such as accounts receivable, inventory and equipment, and intangible assets, such as intellectual property, software code, customer lists, networks and databases.

Due Diligence

Our due diligence process generally includes some or all of the following elements:

Corporate Loans

Management team and financial sponsor

•        management assessment including a review of management’s track record with respect to product development, sales and marketing, mergers and acquisitions, alliances, collaborations, research and development outsourcing and other strategic activities; and

•        financial sponsor reputation, track record, experience and knowledge (where a financial sponsor is present in a transaction).

Business

•        industry and competitive analysis;

•        assessment of likely exit strategies; and

•        potential regulatory/legal issues.

Financial condition

•        detailed review of the historical financial performance and the quality of earnings;

•        development of detailed pro forma financial projections; and

•        review of assets and liabilities, including contingent liabilities.

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Structured Finance Vehicles

•        review of indenture structures;

•        review of underlying collateral loans;

•        analysis of projected future cash flows; and

•        analysis of compliance with covenants.

Contemporaneous with our due diligence process, the investment team presents the investment proposal to our Investment Committee, which currently consists of Messrs. Cohen, Rosenthal and Monasebian. Our Investment Committee reviews and approves each of our portfolio investments.

Investment Characteristics

In identifying corporate debt investments, we seek to ascertain the asset quality as well as the earnings quality of our prospective portfolio companies. Frequently, we obtain a senior secured position and thus receive a perfected, first or second priority security interest in substantially all of our portfolio companies’ assets, which entitles us to a preferred position on payments in the event of liquidation. It should be noted, however, that because we are not primarily an asset-based lender, in the current economic environment, the value of collateral and security interests may dissipate rapidly. In addition, in certain investments we seek loan covenants or to participate in syndicated loans that incorporate loan covenants that assist in the early identification of risk. Our loan documents may include affirmative covenants that require the portfolio company to take specific actions such as: periodic financial reporting; notification of material events and compliance with laws; restrictive covenants that prevent portfolio companies from taking a range of significant actions such as incurring additional indebtedness or making acquisitions without our consent; covenants requiring the portfolio company to maintain or achieve specified financial ratios such as debt to cash flow and interest coverage; and operating covenants requiring them to maintain certain operational benchmarks such as minimum revenue or minimum cash flow. Our loan documents also provide protection against customary events of default such as non-payment, breach of covenant, insolvency and change of control.

In identifying CLO investments, we seek to ascertain the asset quality of the underlying collateral pool, the structural integrity of the CLO liability capital structure, the expected return profile of the CLO equity or debt tranche we are investing in as well as the quality of the prospective collateral manager. The underlying portfolio of each CLO investment is typically diversified across approximately 100 to 250 broadly syndicated loans which are predominantly 1st lien senior secured term loans to U.S. corporations. Additionally, these collateral pools typically do not have direct exposure to real estate, mortgages, or consumer-based credit assets. Our investment focus is generally agnostic between the primary and secondary CLO markets. In both markets, we pursue opportunities which we view to have attractive optionality with regards to the ability to refinance or “reset” the CLO liability capital structure at some point in the future. A CLO “reset” typically includes an extension of the CLO’s reinvestment period in addition to the refinancing of the CLO liabilities. We continue to prefer CLO equity investments which have longer reinvestment periods which may give CLO managers additional time to rebuild collateral value from potential credit losses as well as take advantage of a potential disruption in the broader credit markets.

MONITORING RELATIONSHIPS WITH PORTFOLIO COMPANIES

Monitoring

We monitor the financial trends of each portfolio company to assess the appropriate course of action for each investment and to evaluate overall portfolio quality. We closely monitor the status and performance of each individual company on at least a quarterly and, in some cases, a monthly basis.

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We have several methods of evaluating and monitoring the performance of our investments, including but not limited to the following:

•        assessment of business development success, and the portfolio company’s overall adherence to its business plan; and

•        review of monthly and/or quarterly financial statements and financial projections for portfolio companies.

In addition, we may from time to time identify investments that require closer monitoring or become workout assets. In such cases, we will develop a strategy for workout assets and periodically gauge our progress against that strategy. As a private debt holder, we may incur losses from our investing activities from time to time; however, we attempt, where possible, to work with troubled portfolio companies in order to recover as much of our investments as is practicable.

Portfolio Grading

We have developed a credit grading system to monitor the quality of our debt investment portfolio. We use an investment rating scale of 1 to 5. The following table provides a description of the conditions associated with each debt investment. Equity securities, including CLO equity tranches, are not graded.

Grade

 

Summary Description

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.

     

3

 

Closer monitoring is required. Full repayment of the outstanding amount of OXSQ’s cost basis and interest is expected for the specific tranche.

     

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.

Significant Managerial Assistance

As a BDC, we are required to offer significant managerial assistance to portfolio companies. This assistance, were it to be accepted, would typically involve monitoring the operations of portfolio companies, participating in their board and management meetings, consulting with and advising their officers and providing other organizational and financial guidance.

Portfolio Overview

We seek to create a portfolio that includes primarily CLO investments, senior secured loans, senior subordinated and junior subordinated debt investments, as well as warrants and other equity instruments we may receive in connection with such debt investments. We generally expect to invest between $5 million and $50 million in each of our portfolio companies. We expect that our investment portfolio will be diversified among a large number of investments with few investments, if any, exceeding 5% of the total portfolio.

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The following is a representative list of the industries in which we have invested:

 

•   Structured Finance

 

•   IT Consulting

   

•   Business Services

 

•   Logistics

   

•   Software

 

•   Utilities

   

•   Healthcare

 

•   Aerospace and Defense

   

•   Telecommunication Services

 

•   Education

   

•   Financial Intermediaries

 

•   Printing and Publishing

   

•   Diversified Insurance

   

During the fiscal year ended December 31, 2019, we purchased approximately $54.8 million of investments, comprised of approximately $28.9 million in senior secured notes and $25.8 million in CLO equity. As of December 31, 2019, our portfolio was invested in approximately 65.9% in senior secured notes, 33.1% in CLO equity, 0.2% in CLO debt and 0.8% in equity and other investments.

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TEN LARGEST PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 2019

Our ten largest portfolio company investments as of December 31, 2019, based on the combined fair value of the debt and equity securities (including CLO side letter related investments) we hold in each portfolio company, were as follows:

         

December 31, 2019

           

($ in millions)

Portfolio Company

 

Industry

 

Cost

 

Fair
Value

 

Fair Value
Percentage of
Total Portfolio

Sound Point CLO XVI, Ltd

 

Structured Finance

 

$

41.8

 

$

23.7

 

6.5

%

Quest Software, Inc.

 

Software

 

 

20.8

 

 

20.6

 

5.6

%

Nassau 2019-I Ltd.

 

Structured Finance

 

 

20.5

 

 

17.3

 

4.7

%

Keystone Acquisition Corp.

 

Healthcare

 

 

20.3

 

 

19.9

 

5.5

%

Shift4 Payments, LLC (f/k/a Lighthouse Network, LLC)

 

Financial Intermediaries

 

 

19.8

 

 

19.7

 

5.4

%

ECI Software Solutions, Inc.

 

Software

 

 

19.8

 

 

19.7

 

5.4

%

OMNIA Partners, Inc.

 

Business Services

 

 

19.9

 

 

19.6

 

5.4

%

Access CIG, LLC

 

Business Services

 

 

17.3

 

 

17.1

 

4.7

%

Healthport Technologies, LLC

 

Healthcare

 

 

15.0

 

 

15.6

 

4.3

%

Global Tel Link Corp.

 

Telecommunication Services

 

 

16.7

 

 

14.5

 

4.0

%

       

$

211.9

 

$

187.7

 

51.5

%

For a description of the factors relevant to the changes in the value of the above portfolio investments for the year ended December 31, 2019, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Portfolio Grading.”

Set forth below are descriptions of the ten largest portfolio investments as of December 31, 2019:

Sound Point CLO XVI, Ltd.

Sound Point CLO XVI, Ltd. is a collateralized loan obligation investing primarily in U.S.-based senior secured loans. As of December 31, 2019, approximately $45.5 million remained outstanding on our investment.

Quest Software, Inc.

Quest Software, Inc. is an infrastructure software provider. They have five main product/service offerings: Platform Management, Information Management, Identity Management, Data Protection, and Endpoint Management. As of December 31, 2019, approximately $5.9 million and $15.0 million remained outstanding on our investment in the first lien notes and second lien notes, respectively.

Nassau 2019-I Ltd.

Nassau 2019-I Ltd. is a collateralized loan obligation investing primarily in U.S.-based senior secured loans. As of December 31, 2019, approximately $23.5 million remained outstanding on our investment.

Keystone Acquisition Corp.

Keystone Acquisition Corp. is a Quality Improvement Organization that is involved in healthcare management, quality assurance, and cost containment services for providers of physical and behavioral health services. As of December 31, 2019, approximately $7.5 million and $13.0 million remained outstanding on our investment in the first lien notes and second lien notes, respectively.

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Shift4 Payments, LLC (f/k/a Lighthouse Network, LLC)

Shift4 Payments, LLC is a non-bank merchant acquirer and integrated point-of-sale service provider that focuses on the small and medium-sized business segment in the U.S. As of December 31, 2019, approximately $3.4 million and $16.5 million remained outstanding on our investment in the first lien notes and second lien notes, respectively.

ECI Software Solutions, Inc.

ECI Software Solutions, Inc. is a global end-to-end provider of enterprise resource planning software to small- and medium-sized businesses primarily across four end-market verticals (i.e., manufacturing, distribution, field services, and building & construction). As of December 31, 2019, approximately $4.9 million and $15.0 million remained outstanding on our investment in the first lien notes and second lien notes, respectively.

OMNIA Partners, Inc.

OMNIA Partners, Inc. is a group purchasing organization operating through both the public and private sectors. As of December 31, 2019, approximately $5.9 million and $14.0 million remained outstanding on our investment in the first lien notes and second lien notes, respectively.

Access CIG, LLC

Access CIG, LLC is a records and documents storage firm. As of December 31, 2019, approximately $0.5 million and $16.8 million remained outstanding on our investment in the first lien incremental notes and second lien notes, respectively.

Healthport Technologies, LLC

Healthport Technologies, LLC. is a provider of release of information services, the process by which healthcare providers release patient health records to external parties such as attorneys, government agencies and insurance companies. As of December 31, 2019, approximately $16.6 million remained outstanding on our investment in the first lien notes.

Global Tel Link Corp.

Global Tel Link Corp. is a provider of telecom and technology products and services used by inmates, investigators and administrators in the corrections industry. As of December 31, 2019, approximately $17.0 million remained outstanding on our investment in the second lien notes.

INVESTMENT ADVISORY AGREEMENT

Management Services

Oxford Square Management serves as our investment adviser. Oxford Square Management is registered as an investment adviser under the Advisers Act. Subject to the overall supervision of our Board of Directors, Oxford Square Management manages our day-to-day operations and provides investment advisory services to us. Under the terms of our Investment Advisory Agreement with Oxford Square Management (the “Investment Advisory Agreement”), Oxford Square Management:

•        determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;

•        identifies, evaluates and negotiates the structure of the investments we make;

•        closes, monitors and services the investments we make; and

•        determines what securities we will purchase, retain or sell.

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Oxford Square Management’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired. Oxford Square Management has agreed that, during the term of its Investment Advisory Agreement with us, it will not serve as investment adviser to any other public or private entity that utilizes a principal investment strategy of providing debt financing to middle-market companies similar to those we target.

Management Fee

We pay Oxford Square Management a fee for its services under the Investment Advisory Agreement consisting of two components — a base management fee (the “Base Fee”) and an incentive fee. The cost of both the Base Fee payable to Oxford Square Management and any incentive fees earned by Oxford Square Management are ultimately borne by our common stockholders.

Through March 31, 2016, the Base Fee was calculated at an annual rate of 2.00%. Effective April 1, 2016, the Base Fee is currently calculated at an annual rate of 1.50%. The Base Fee is payable quarterly in arrears, and is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any equity or debt capital raises, repurchases or redemptions during the current calendar quarter (however, no Base Fee will be payable on the cash proceeds received by us in connection with any share or debt issuances until such proceeds have been invested in accordance with our investment objective). Accordingly, the Base Fee will be payable regardless of whether the value of our gross assets has decreased during the quarter. The Base Fee for any partial quarter will be appropriately prorated.

The incentive fee has two parts: the “Net Investment Income Incentive Fee” and the “Capital Gains Incentive Fee”. 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 (including any accrued income that we have not yet received in cash and any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses accrued the calendar quarter (including the Base Fee, expenses payable under a separate agreement with Oxford Funds (the “Administration Agreement”) and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). “Pre-Incentive Fee Net Investment Income” includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind (“PIK”) interest and zero coupon securities), accrued income that we have not yet received in cash. Oxford Square Management will not be under any obligation to reimburse us for any part of the incentive fee it received that was based on accrued income that we never receive as a result of a default by an entity on the obligation that resulted in the accrual of such income. “Pre-Incentive Fee Net Investment Income” does not include any realized gains, realized losses or unrealized appreciation or depreciation. Given that this portion of the incentive fee is payable without regard to any gain, loss or unrealized depreciation that may occur during the quarter, this portion of Oxford Square Management’s incentive fee may be payable notwithstanding a decline in net asset value that quarter.

From January 1, 2005 through March 31, 2016, the “Pre-Incentive Fee Net Investment Income,” which was expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, was compared to one-fourth of an annual hurdle rate that was determined as of the immediately preceding December 31 by adding 5.00% to the interest rate then payable on the most recently issued five-year U.S. Treasury Notes, up to a maximum annual hurdle rate of 10.00%. The annual hurdle used to calculate the “Pre-Incentive Fee Net Investment Income” for the quarter ended March 31, 2016 was 6.76%.

Effective April 1, 2016, a “Preferred Return Amount” is calculated on a quarterly basis by multiplying 1.75% by the Company’s net asset value at the end of the immediately preceding calendar quarter. The Net Investment Income Incentive Fee is then calculated as follows: (a) no Net Investment Income Incentive Fee is payable to Oxford Square Management in any calendar quarter in which the “Pre-Incentive Fee Net Investment Income” does not exceed the “Preferred Return Amount”; (b) 100% of the “Pre-Incentive Fee Net Investment Income” for such quarter, if any, that exceeds the “Preferred Return Amount” but is less than or equal to a “Catch-Up Amount” determined on a quarterly basis by multiplying 2.1875% by OXSQ’s net asset value at the end of such calendar quarter; and (c) for any quarter in which the “Pre-Incentive Fee Net Investment Income” exceeds the

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“Catch-Up Amount,” the Net Investment Income Incentive Fee will be 20% of the amount of the “Pre-Incentive Fee Net Investment Income” for such quarter. There is no accumulation of amounts from quarter to quarter for the “Preferred Return Amount,” and accordingly there is no claw back of amounts previously paid to Oxford Square Management if the “Pre-Incentive Fee Net Investment Income” for subsequent quarters is below the quarterly “Preferred Return Amount,” and there is no delay of payment of incentive fees to Oxford Square Management if the “Pre-Incentive Fee Net Investment Income” for prior quarters is below the quarterly “Preferred Return Amount” for the quarter for which the calculation is being made.

In addition, effective April 1, 2016, the calculation of the Company’s Net Investment Income Incentive Fee is subject to a total return requirement (the “Total Return Requirement”), which provides that a Net Investment Income Incentive Fee will not be payable to Oxford Square Management except to the extent 20% of the “cumulative net increase in net assets resulting from operations” (which is the amount, if positive, of the sum of the “Pre-Incentive Fee Net Investment Income,” realized gains and losses and unrealized appreciation and depreciation) during the calendar quarter for which such fees are being calculated and the eleven (11) preceding quarters (or if shorter, the number of quarters since April 1, 2016) exceeds the cumulative Net Investment Income Incentive Fees accrued and/or paid for such eleven (11) preceding quarters (or if shorter, the number of quarters since April 1, 2016). Under the revised fee structure, under no circumstances will the aggregate fees earned from April 1, 2016 by Oxford Square Management in any quarterly period be higher than the aggregate fees that would have been earned prior to the adoption of these changes.

The capital gains part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20% of our “Incentive Fee Capital Gains,” which consists of our realized capital gains for each calendar year, computed net of all realized capital losses and unrealized capital depreciation for that calendar year. For accounting purposes under U.S. generally accepted accounting principles (“GAAP”), the Capital Gains Incentive Fee calculated is based on a hypothetical liquidation of the Company. In such a calculation, in order to reflect the theoretical Capital Gains Incentive Fee that would be payable for a given period as if all unrealized gains were realized, we will accrue a Capital Gains Incentive Fee based upon net realized gains and unrealized depreciation for that calendar year (in accordance with the terms of the Investment Advisory Agreement), plus unrealized appreciation on investments held at the end of the period. It should be noted that a fee so calculated and accrued would not necessarily be payable under the Investment Advisory Agreement, and may never be paid based upon the computation of Capital Gains Incentive Fees in subsequent periods. Amounts paid under the Investment Advisory Agreement will be consistent with the formula reflected in the Investment Advisory Agreement.

Example 1: Net Investment Income Portion of Incentive Fee for Each Calendar Quarter

Alternative 1

Assumptions

Investment income (including interest, dividends, fees, etc.) = 1.25%

Quarterly Hurdle rate = 1.75%

Management fee(1) = 0.375%

Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2%

Pre-Incentive Fee Net Investment Income (investment income – (management fee + other expenses)) = 0.675%

Pre-Incentive Fee Net Investment Income does not exceed hurdle rate, therefore there is no income-related incentive fee.

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Alternative 2

Assumptions

Quarterly Investment income (including interest, dividends, fees, etc.) = 2.50%

Quarterly Hurdle rate = 1.75%

Management fee(1) = 0.375%

Quarterly Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2%

Pre-Incentive Fee Net Investment Income (investment income – (management fee + other expenses)) = 1.925%

The Total Return Requirement is met (no Net Investment Income Incentive Fee would be payable if the Total Return Requirement were not met).

The aggregate fees that would have been earned prior to the adoption of the April 1, 2016 changes, as described above, exceed the current aggregate fees.

Incentive fee = 100%* Pre-Incentive Fee Net Investment Income in excess of the hurdle rate but less than 2.1875% and 20% of any Pre-Incentive Fee Net Investment Income thereafter.

= 100%* (1.925% – 1.75%)

= 100%* 0.175%

= 0.175%

Pre-Incentive Fee Net Investment Income exceeds the hurdle rate but is less than 2.1875%. Therefore the income-related incentive fee is 0.175%.

Alternative 3

Assumptions

Quarterly Investment income (including interest, dividends, fees, etc.) = 4.00%

Quarterly Hurdle rate = 1.75%

Management fee(1) = 0.375%

Quarterly Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2%

Pre-Incentive Fee Net Investment Income (investment income – (management fee + other expenses)) = 3.425%

The Total Return Requirement is met (no Net Investment Income Incentive Fee would be payable if the Total Return Requirement were not met).

The aggregate fees that would have been earned prior to the adoption of the April 1, 2016 changes, as described above, exceed the current aggregate fees.

Incentive fee = 100% * Pre-Incentive Fee Net Investment Income in excess of the hurdle rate but less than 2.1875% and 20% of any Pre-Incentive Fee Net Investment Income thereafter.

= 100%* (2.1875% – 1.75%) + 20%* (3.425% – 2.1875%)

= 100%* 0.4375% + 20%* 1.2375%

= 0.4375% + 0.2475%

= 0.685%

Pre-Incentive Fee Net Investment Income exceeds the hurdle rate and 2.1875%. Therefore the income-related incentive fee is 0.685%.

____________

(1)      Represents 1.50% annualized management fee.

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Example 2: Capital Gains Portion of Incentive Fee(*)

Capital Gains Incentive Fee = 20% × Incentive Fee Capital Gains (i.e., our realized capital gains for each calendar year, computed net of all realized capital losses and unrealized capital depreciation for that calendar year)

Assumptions:

•        Year 1 = no realized capital gains or losses

•        Year 2 = 9% realized capital gains, 0% realized capital losses, 1% unrealized depreciation and 0% unrealized appreciation

•        Year 3 = 12% realized capital gains, 0% realized capital losses, 2% unrealized depreciation and 2% unrealized appreciation

Year 1 incentive fee

 

•     Total Incentive Fee Capital Gains = 0

   

•     No Capital Gains Incentive Fee paid to Oxford Square Management in Year 1

     

Year 2 incentive fee

 

•     Total Incentive Fee Capital Gains = 8%

   

(9% realized capital gains less 1% unrealized depreciation)

   

•     Total Capital Gains Incentive Fee paid to Oxford Square Management in Year 2

   

= 20% × 8%

   

= 1.6%

     

Year 3 incentive fee

 

•     Total Incentive Fee Capital Gains = 10%

   

(12% realized capital gains less 2% unrealized depreciation; unrealized appreciation has no effect)

   

•     Total Capital Gains Incentive Fee paid to Oxford Square Management in Year 3

   

= 20% × 10%

   

= 2%

____________

(*)      The hypothetical amount of returns shown are based on a percentage of our total net assets and assumes no leverage. There is no guarantee that positive returns will be realized and actual returns may vary from those shown in this example.

Payment of our Expenses

Our primary operating expenses are the payment of the Base Fee and any incentive fees under the Investment Advisory Agreement and the allocable portion of overhead and other expenses incurred by Oxford Funds in performing its obligations under the Administration Agreement. Our investment management fee compensates Oxford Square Management for its work in identifying, evaluating, negotiating, executing and servicing our investments. We bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:

•        expenses of offering our debt and equity securities;

•        the investigation and monitoring of our investments, including expenses and travel fees incurred in connection with investment due diligence and on-site visits;

•        the cost of calculating our net asset value (“NAV”);

•        the cost of effecting sales and repurchases of shares of our common stock and other securities;

•        management and incentive fees payable pursuant to the Investment Advisory Agreement;

•        fees payable to third parties relating to, or associated with, making investments and valuing investments (including third-party valuation firms);

•        transfer agent, trustee and custodial fees;

15

•        interest payments and other costs related to our borrowings;

•        fees and expenses associated with our website, public relations and marketing efforts (including attendance at industry and investor conferences and similar events);

•        federal and state registration fees;

•        any exchange listing fees;

•        federal, state and local taxes;

•        independent directors’ fees and expenses, including travel expenses, and other costs of Board of Directors’ meetings and other costs associated with the performance of independent directors’ responsibilities;

•        brokerage commissions;

•        costs of preparing and mailing proxy statements, stockholders’ reports and notices, including annual proxy solicitations and shareholder meetings;

•        costs of preparing government filings, including periodic and current reports with the SEC;

•        fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums; and

•        direct costs such as printing, mailing, long distance telephone, staff, rent, independent audits and outside legal costs and all other expenses incurred by either Oxford Funds or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion of overhead and other expenses incurred by Oxford Funds in performing its obligations under the Administration Agreement, including a portion of the rent and the compensation and related expenses of our Chief Financial Officer, our accounting support staff and other administrative support personnel. Related expenses include but are not limited to employee benefit costs, payroll taxes and travel and training expenses. The costs associated with the functions performed by our Chief Compliance Officer are paid directly by us pursuant to the terms of an agreement between the Company and Alaric Compliance Services, LLC.

All of these expenses are ultimately borne by our common stockholders.

All personnel of our investment adviser when and to the extent engaged in providing investment advisory services, and the compensation and related expenses of such personnel allocable to such services, will be provided and paid for by Oxford Funds, the investment adviser’s managing member.

Duration and Termination

Unless earlier terminated as described below, the Investment Advisory Agreement will remain in effect if approved annually by our Board of Directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. The Investment Advisory Agreement will automatically terminate in the event of its assignment. The Investment Advisory Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other. Refer to “Item 1A. Risk Factors — Risks relating to our business and structure — We are dependent upon Oxford Square Management’s key management personnel for our future success, particularly Jonathan H. Cohen and Saul B. Rosenthal.”

Indemnification

The Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, Oxford Square Management and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with it, including without limitation Oxford Funds, are entitled to

16

indemnification from OXSQ for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Oxford Square Management’s services under the Investment Advisory Agreement or otherwise as an investment adviser of OXSQ.

Organization of the Investment Adviser

Oxford Square Management is a Delaware limited liability company that is registered as an investment adviser under the Advisers Act. Oxford Funds, a Delaware limited liability company, is Oxford Square Management’s managing member and provides it with all personnel necessary to manage our day-to-day operations and provide the services under the Investment Advisory Agreement. The principal address of Oxford Square Management and of Oxford Funds is 8 Sound Shore Drive, Suite 255, Greenwich, Connecticut 06830.

Oxford Funds is the managing member of Oxford Square Management. Charles M. Royce, a member of our Board of Directors, has a minority, non-controlling interest in Oxford Square Management.

ADMINISTRATION AGREEMENT

Pursuant to a separate Administration Agreement, Oxford Funds furnishes us with office facilities, together with equipment and clerical, bookkeeping and record keeping services at such facilities. Under the Administration Agreement, Oxford Funds also performs, or oversees the performance of, our required administrative services, which includes being responsible for the financial records which we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, Oxford Funds assists us in determining and publishing our net asset value, overseeing the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. Payments under the Administration Agreement are based upon our allocable portion of overhead and other expenses incurred by Oxford Funds in performing its obligations under the Administration Agreement, including a portion of the rent and the compensation of our Chief Financial Officer, our accounting support staff and other administrative support personnel. The Administration Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party.

The Administration Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, Oxford Funds and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from OXSQ for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Oxford Funds’ services under the Administration Agreement or otherwise as administrator for OXSQ.

COMPETITION

Our primary competitors to provide financing to primarily non-public companies include private equity and venture capital funds, other equity and non-equity based investment funds, including other BDCs, and investment banks and other sources of financing, including traditional financial services companies such as commercial banks and specialty finance companies. Many of these entities may have greater financial and managerial resources than we have. For additional information concerning the competitive risks we face, refer to “Item 1A. Risk Factors — Risks Relating to Our Business and Structure — We operate in a highly competitive market for investment opportunities.”

EMPLOYEES

We have no employees. Our day-to-day investment operations are managed by Oxford Square Management. In addition, we reimburse Oxford Funds for an allocable portion of expenses incurred by it in performing its obligations under the Administration Agreement, including a portion of the rent and the compensation of our Chief Financial Officer, accounting staff and other administrative support personnel. We will also pay the costs associated with the functions performed by our Chief Compliance Officer under the terms of an agreement between the Company and Alaric Compliance Services.

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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS

As a BDC, we have elected to be treated, and intend to qualify annually, as a RIC under Subchapter M of the Code, beginning with our 2003 taxable year. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To continue to qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to qualify for RIC tax treatment we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses (the “Annual Distribution Requirement”).

Taxation as a RIC

If we qualify as a RIC; and satisfy the Annual Distribution Requirement, then we will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net capital gain (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) we distribute to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) to our stockholders.

We will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, and on which we paid no corporate-level U.S. federal income tax, in preceding years (the “Excise Tax Avoidance Requirement”). We generally will endeavor in each taxable year to make sufficient distributions to our stockholders to satisfy the Excise Tax Avoidance Requirement.

In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:

•        at all times during each taxable year, be registered under the 1940 Act as a management company or unit investment trust, or have in effect an election under the 1940 Act to be treated as a BDC;

•        derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to loans of certain securities, gains from the sale of stock or other securities, net income from certain “qualified publicly traded partnerships,” or other income derived with respect to our business of investing in such stock or securities (the “90% Income Test”); and

•        diversify our holdings so that at the end of each quarter of the taxable year:

•        at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and

•        no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships” (the “Diversification Tests”).

We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, increasing interest rates or issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as PIK interest and deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order

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to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount. In addition, we may be required to accrue for U.S. federal income tax purposes amounts attributable to our investment in CLOs that may differ from the distributions received in respect of such investments. Although we do not presently expect to do so, we are authorized to borrow funds, to sell assets and to make taxable distributions of our stock and debt securities in order to satisfy distribution requirements. Our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous. If we are unable to obtain cash from other sources to satisfy the Annual Distribution Requirement, we may fail to qualify for tax treatment as a RIC and become subject to tax as an ordinary corporation.

Under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. If we are prohibited to make distributions, we may fail to qualify for tax treatment as a RIC and become subject to tax as an ordinary corporation.

We have purchased and may in the future purchase residual or subordinated interests in CLOs that are treated for U.S. federal income tax purposes as shares in a “passive foreign investment company” or a PFIC. We may be subject to U.S. federal income tax on our allocable share of a portion of any “excess distribution” received on, or any gain from the disposition of, such shares, even if our allocable share of such income is distributed as a taxable distribution to the PFIC’s stockholders. Additional charges, in the nature of interest, generally will be imposed on us in respect of deferred taxes arising from any such excess distribution or gain. If we elect to treat a PFIC as a “qualified electing fund” under the Code (a “QEF”), in lieu of the foregoing requirements, we will be required to include in income each year our proportionate share of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed by the QEF. Alternatively, we may be able to elect to mark-to-market at the end of each taxable year our shares in a PFIC; in this case, we will recognize as ordinary income our allocable share of any increase in the value of such shares, and as ordinary loss our allocable share of any decrease in such value to the extent that any such decrease does not exceed prior increases included in our income. Under either election, we may be required to recognize in a year income in excess of distributions from PFICs and proceeds from dispositions of PFIC shares during that year, and such income will nevertheless be subject to the Annual Distribution Requirement and will be taken into account for purposes of the Excise Tax Avoidance Requirement.

If we hold more than 10% of the shares in a foreign corporation that is treated as a controlled foreign corporation or a CFC (including equity tranche investments in a CLO treated as a CFC), we may be treated as receiving a deemed distribution (taxable as ordinary income) each year from such foreign corporation in an amount equal to our pro rata share of the corporation’s income for the tax year (including both ordinary earnings and capital gains), whether or not the corporation makes an actual distribution during such year. This deemed distribution is required to be included in the income of a U.S. Stockholder (as defined below) of a CFC regardless of whether the stockholder has made a QEF election with respect to such CFC. In general, a foreign corporation will be classified as a CFC if more than 50% of the shares of the corporation, measured by reference to combined voting power or value, is owned (directly, indirectly or by attribution) by U.S. Stockholders. A “U.S. Stockholder,” for this purpose, is any U.S. person that possesses (actually or constructively) 10% or more of the combined voting power or value of all classes of shares of a corporation. If we are treated as receiving a deemed distribution from a CFC, we will be required to include such distribution in our investment company taxable income regardless of whether we receive any actual distributions from such CFC, and we must distribute such income to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement.

Failure to Qualify as a RIC

If we were unable to qualify for treatment as a RIC, and certain cure provisions are not met, we would be subject to tax on all of our taxable income at regular corporate rates, regardless of whether we make any distributions to our stockholders. Distributions would not be required, and any distributions made would be taxable to our stockholders as ordinary dividend income that, subject to certain limitations, may be eligible for the 20.0% maximum rate to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in

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excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. To requalify as a RIC in a subsequent taxable year, we would be required to satisfy the RIC qualification requirements for that year and dispose of any earnings and profits from any year in which we failed to qualify as a RIC. Subject to a limited exception applicable to RICs that qualified as such under the Code for at least one year prior to disqualification and that requalify as a RIC no later than the second year following the nonqualifying year, we would be subject to tax on any unrealized net built-in gains in the assets held by us during the period in which we failed to qualify as a RIC that are recognized within the subsequent 5 years, unless we made a special election to pay corporate-level U.S. federal income tax on such built-in gains at the time of our requalification as a RIC.

REGULATION AS A BUSINESS DEVELOPMENT COMPANY

General

A BDC is regulated by the 1940 Act. A BDC must be organized in the United States for the purpose of investing in or lending to primarily private companies and making managerial assistance available to them. A BDC may use capital provided by public stockholders and from other sources to invest in long-term, private investments in businesses. A BDC provides stockholders the ability to retain the liquidity of a publicly traded stock, while sharing in the possible benefits, if any, of investing in primarily privately owned companies.

We may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless authorized by the vote of a majority of the outstanding voting securities, as required by the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (i) 67% or more of such company’s voting securities present at a meeting if more than 50% of the outstanding voting securities of such company are present or represented by proxy, or (ii) more than 50% of the outstanding voting securities of such company. We currently do not anticipate any substantial change in the nature of our business.

As with other companies regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. A majority of our directors must be persons who are not interested persons, as that term is defined in the 1940 Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the BDC. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to the company or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

As a BDC, we are required to meet a coverage ratio of the value of total assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future. On March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement to 150% from 200% under certain circumstances. The reduced asset coverage requirement permits a BDC to have a ratio of total indebtedness represented by senior securities to our equity of 2:1 as compared to a maximum of 1:1 under the 200% asset coverage requirement. On April 6, 2018, the Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board of Directors, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. As a result, our asset coverage requirement for senior securities was changed from 200% to 150%, effective as of April 6, 2019. In other words, under the 1940 Act, we are now able to borrow $2 for investment purposes for every $1 of investor equity, as opposed to borrowing $1 for investment purposes for every $1 of investor equity. We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by the SEC.

We are not generally able to sell our common stock at a price below net asset value per share. Refer to “Risk Factors — Risks Relating to our Business and Structure — Regulations governing our operation as a BDC affect our ability to, and the way in which we raise additional capital, which may expose us to risks, including the typical risks associated with leverage.” We may, however, sell our common stock at a price below net asset value per share (i) in connection with a rights offering to our existing stockholders, (ii) with the consent of the majority of our common

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stockholders, or (iii) under such other circumstances as the SEC may permit. For example, we may sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then current net asset value of our common stock if our Board of Directors determines that such sale is in our best interests and the best interests of our stockholders, and our stockholders approve our policy and practice of making such sales. In any such case, under such circumstances, the price at which our common stock is to be issued and sold may not be less than a price which, in the determination of our Board of Directors, closely approximates the market value of such common stock. In addition, we may generally issue new shares of our common stock at a price below the net asset value in rights offerings to existing stockholders, in payment of distributions and in certain other limited circumstances

We may be examined by the SEC for compliance with the 1940 Act.

As a BDC, we are subject to certain risks and uncertainties. Refer to “Item 1A. Risk Factors — Risks Relating to our Business and Structure.”

Qualifying Assets

As a BDC, we may not acquire any asset other than “qualifying assets” unless, at the time we make the acquisition, the value of our qualifying assets represent at least 70% of the value of our total assets. The principal categories of qualifying assets relevant to our business are:

•        securities purchased in transactions not involving any public offering, the issuer of which is an eligible portfolio company;

•        securities received in exchange for or distributed with respect to securities described in the bullet above or pursuant to the exercise of options, warrants or rights relating to such securities; and

•        cash, cash items, government securities or high quality debt securities (within the meaning of the 1940 Act), maturing in one year or less from the time of investment.

An eligible portfolio company is generally a domestic company that is not an investment company (other than a small business investment company wholly owned by a BDC) and that:

•        does not have a class of securities with respect to which a broker may extend margin credit at the time the acquisition is made;

•        is controlled by the BDC and has an affiliate of the BDC on its board of directors;

•        does not have any class of securities listed on a national securities exchange;

•        is a public company that lists its securities on a national securities exchange with a market capitalization of less than $250 million; or

•        meets such other criteria as may be established by the SEC.

Control, as defined by the 1940 Act, is presumed to exist where a BDC beneficially owns more than 25% of the outstanding voting securities of the portfolio company.

In addition, a BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in eligible portfolio companies, or in other securities that are consistent with its purpose as a BDC.

Significant Managerial Assistance

BDCs generally must offer to make available to the issuer of the securities significant managerial assistance, except in circumstances where either (i) the BDC controls such issuer of securities or (ii) the BDC purchases such securities in conjunction with one or more other persons acting together and one of the other persons in the group makes available such managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC offers to provide, and, if accepted, does so provide, significant guidance and

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counsel concerning the management, operations or business objectives and policies of a portfolio company. The Administrator or its affiliate provides such managerial assistance on our behalf to portfolio companies that request this assistance.

Code of Ethics and Insider Trading Policy

As required by the 1940 Act, we maintain a Code of Ethics and Insider Trading Policy, or “Code of Ethics,” that establishes procedures for personal investments and restricts certain transactions by our personnel. Refer to “Item 1A. Risk Factors — Risks Relating to our Business and Structure — There are significant potential conflicts of interest between OXSQ and our management team.” Our Code of Ethics generally does not permit investments by our employees in securities that may be purchased or held by us. The Code of Ethics is available on the EDGAR Database on the SEC’s website at http://www.sec.gov. You may obtain copies of the Code of Ethics, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov. Our Code of Ethics is also available on our website at http://oxfordsquarecapital.com/.

Compliance Policies and Procedures

We and our investment adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws, and are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation, and to designate a Chief Compliance Officer to be responsible for administering the policies and procedures.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. Many of these requirements affect us. For example:

•        pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), our Chief Executive Officer and Chief Financial Officer must certify the accuracy of the financial statements contained in our periodic reports;

•        pursuant to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and procedures;

•        pursuant to Rule 13a-15 of the Exchange Act, our management must prepare a report regarding its assessment of our internal control over financial reporting; and

•        pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.

Proxy Voting Policies and Procedures

We have delegated our proxy voting responsibility to our investment adviser, Oxford Square Management. The Proxy Voting Policies and Procedures of Oxford Square Management are set forth below. The guidelines are reviewed periodically by Oxford Square Management, and, accordingly, are subject to change.

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Introduction

As an investment adviser registered under the Advisers Act, Oxford Square Management has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, Oxford Square Management recognizes that it must vote client securities in a timely manner free of conflicts of interest and in the best interests of its clients.

These policies and procedures for voting proxies for Oxford Square Management’s investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.

Proxy Policies

Oxford Square Management will vote proxies relating to our portfolio securities in the best interests of our stockholders. Oxford Square Management will review on a case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by OXSQ. Although Oxford Square Management will generally vote against proposals that may have a negative impact on our portfolio securities, it may vote for such a proposal if there exist compelling long-term reasons to do so. Oxford Square Management will abstain from voting only in unusual circumstances and where there is a compelling reason to do so.

The proxy voting decisions of Oxford Square Management are made by the senior officers of Oxford Square Management who are responsible for monitoring each of our investments. To ensure that its vote is not the product of a conflict of interest, Oxford Square Management requires that: (i) anyone involved in the decision making process disclose to Oxford Square Management’s Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in the decision making process or vote administration are prohibited from revealing how Oxford Square Management intends to vote on a proposal without the prior approval of the Chief Compliance Officer and senior management in order to reduce any attempted influence from interested parties.

Proxy Voting Records

You may obtain information about how Oxford Square Management voted proxies by making a written request for proxy voting information to: Chief Compliance Officer, Oxford Square Management, LLC, 8 Sound Shore Drive, Suite 255, Greenwich, CT 06830.

Periodic Reporting and Audited Financial Statements

We have registered our common stock under the Exchange Act, and have reporting obligations thereunder, including the requirement that we file annual and quarterly reports with the SEC. In accordance with the requirements of the Exchange Act, this annual report contains financial statements audited and reported on by our independent registered public accounting firm. You may obtain our annual reports on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K on our website at http://oxfordsquarecapital.com/ free of charge as soon as reasonably practicable after we file such reports electronically with the SEC.

NASDAQ Global Select Market Requirements

We have adopted certain policies and procedures intended to comply with the NASDAQ Global Select Market’s corporate governance rules. We will continue to monitor our compliance with all future listing standards that are approved by the SEC and will take actions necessary to ensure that we are in compliance therewith.

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Item 1A. Risk Factors

Investing in our securities involves a number of significant risks. In addition to the other information contained in this Annual Report, you should consider carefully the following information before making an investment in our securities. The risk factors described below are the principal risk factors associated with an investment in our securities, as well as those factors generally associated with a business development company with investment objectives, investment policies, capital structure or trading markets similar to ours, including the risks associated with investing in a portfolio of small and developing or financially troubled businesses. Additional risks and uncertainties not presently known to us or not presently deemed material by us might also impair our operations and performance. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, our net asset value and the trading price of our common stock could decline, and you may lose all or part of your investment.

RISKS RELATING TO OUR BUSINESS AND STRUCTURE

Any failure on our part to maintain our status as a business development company would reduce our operating flexibility, including our ability to borrow money.

If we do not remain a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to substantially more regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility, including our ability to borrow money.

We are dependent upon Oxford Square Management’s key management personnel for our future success, particularly Jonathan H. Cohen and Saul B. Rosenthal.

We depend on the diligence, skill and network of business contacts of the senior management of Oxford Square Management. The senior management, together with other investment professionals, will evaluate, negotiate, structure, close, monitor and service our investments. Our future success will depend to a significant extent on the continued service and coordination of the senior management team, particularly Jonathan H. Cohen, the Chief Executive Officer of Oxford Square Management, and Saul B. Rosenthal, the President and Chief Operating Officer of Oxford Square Management. Neither Mr. Cohen nor Mr. Rosenthal will devote all of their business time to our operations, and both will have other demands on their time as a result of their other activities. Neither Mr. Cohen nor Mr. Rosenthal is subject to an employment contract. The departure of either of these individuals could have a material adverse effect on our ability to achieve our investment objective. In addition, due to Oxford Square Management’s relatively small staff size, the departure of any of Oxford Square Management’s personnel, including investment, accounting and compliance professionals, could have a material adverse effect on us.

Our financial condition and results of operations will depend on our ability to manage our existing portfolio and future growth effectively.

Our ability to achieve our investment objective will depend on our ability to manage our existing investment portfolio and to grow, which will depend, in turn, on our investment adviser’s ability to identify, analyze, invest in and finance companies that meet our investment criteria, and our ability to raise and retain debt and equity capital. Accomplishing this result on a cost-effective basis is largely a function of our investment adviser’s structuring of the investment process, its ability to provide competent, attentive and efficient services to us and our access to financing on acceptable terms.

We and Oxford Square Management, through its managing member, Oxford Funds, will need to continue to hire, train, supervise and manage new employees. Failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

Our business and operation could be negatively affected if we become subject to any securities litigation or shareholder activism, which could cause us to incur significant expense, hinder execution of our investment strategy and impact our stock price.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against such company. Shareholder activism, which could take many forms or arise in a variety of situations, has been increasing in the BDC space recently. While we are currently not subject to any

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securities litigation, due to the volatility of our stock price and for a variety of other reasons, we may in the future become the target of additional securities litigation and the subject of additional shareholder activism. If at any time our current investment advisory agreement is terminated we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our shares may decline.

Securities litigation and shareholder activism, including potential proxy contests, could result in substantial costs and divert management’s and our board of directors’ attention and resources from our business. Additionally, such securities litigation and shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation and activist shareholder matters. Further, our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation and shareholder activism.

The SEC has raised questions regarding certain non-traditional investments, including investments in CLOs.

The staff of the Division of Investment Management has, in correspondence with certain BDCs, raised questions about the level and special risks of investments in CLOs. While it is not possible to predict what conclusions the staff will reach in these areas, or what recommendations the staff might make to the SEC, the imposition of limitations on investments by BDCs in CLOs could adversely impact our ability to implement our investment strategy and/or our ability to raise capital through public offerings, or cause us to take certain actions with potential negative impacts on our financial condition and results of operations. We are unable at this time to assess the likelihood or timing of any such regulatory development.

We operate in a highly competitive market for investment opportunities.

A large number of entities compete with us to make the types of investments that we make. We compete with a large number of hedge funds and CLO investment vehicles, other equity and non-equity based investment funds, including other BDCs, investment banks and other sources of financing, including traditional financial services companies such as commercial banks and specialty finance companies. Many of our competitors are substantially larger than us and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. If we are unable to source attractive investments, we may hold a greater percentage of our assets in cash than anticipated, which could impact potential returns on our portfolio. There can be no assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.

Our business model depends to a significant extent upon strong referral relationships with financial sponsors, and the inability of the senior investment professionals of our investment adviser to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.

We expect that the principals of our investment adviser will maintain and develop their relationships with financial sponsors, brokers and agents and we will rely to a significant extent upon these relationships to provide us with potential investment opportunities. If the senior investment professionals of our investment adviser fail to maintain their existing relationships or develop new relationships with other sponsors or sources of investment opportunities, we will not be able to grow our investment portfolio. In addition, individuals with whom the senior investment professionals of our investment adviser have relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for us. If our investment adviser is unable to source investment opportunities, we may hold a greater percentage of our assets in cash than anticipated, which could impact potential returns on our portfolio.

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We may not realize gains from our equity investments.

When we invest in debt securities, we may acquire warrants or other equity securities as well. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.

There will be uncertainty as to the value of our portfolio investments, which may impact our net asset value.

A large percentage of our portfolio investments are in the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. We value these securities on a quarterly basis in accordance with our valuation policy, which is consistent with U.S. generally accepted accounting principles (“GAAP”). Our board of directors utilizes the services of third-party valuation firms to aid it in determining the fair value of certain securities. The board of directors discusses valuations and determines the fair value in good faith based on the input of our investment adviser and the respective third-party valuation firms. The factors that may be considered in fair value pricing our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, comparisons to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities.

The lack of liquidity in our investments may adversely affect our business.

As stated above, our investments are generally not in publicly traded securities. Substantially all of these securities are subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. For example, there is a limited secondary market for any of our investments in warehouse facilities and our investments in warehouse facilities are less liquid than our investments in CLOs. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. Also, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments.

In addition, because we generally invest in debt securities with a term of up to seven years and generally intend to hold such investments until maturity of the debt, we do not expect realization events, if any, to occur in the near-term. We expect that our holdings of equity securities may require several years to appreciate in value, and we can offer no assurance that such appreciation will occur.

We may experience fluctuations in our operating results for any period, and as a result, our financial results for any period should not be relied upon as being indicative of performance in future periods.

We may experience fluctuations in our operating results due to a number of factors, including the rate at which we make new investments, the interest rates payable on the debt securities we acquire, the default rate on such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

If we cannot obtain additional capital because of either regulatory or market price constraints, we could be forced to curtail or cease our new lending and investment activities, our net asset value could decrease and our level of distributions and liquidity could be affected adversely.

Our ability to secure additional financing and satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, which is subject to the prevailing general economic and credit market conditions, including interest rate levels and the availability of credit generally, and financial, business and other factors, many of which are beyond our control. The worsening of current economic and capital market conditions could have a material adverse effect on our ability to secure financing on favorable terms, if at all.

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If we are unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on equity resulting from leverage to the extent that our investment strategy is successful and we may be limited in our ability to make new commitments or fundings to our portfolio companies.

Market conditions affect debt and equity capital markets in the U.S. and abroad and may in the future have a negative impact on our business and operations.

Equity capital may be difficult to raise because, subject to some limited exceptions which apply to us, as a BDC we are generally not able to issue additional shares of our common stock at a price less than net asset value. In addition, our ability to incur indebtedness (including by issuing preferred stock) is limited by applicable regulations such that our asset coverage, as defined in the 1940 Act, must equal at least 200% (or 150% effective April 6, 2019) immediately after each time we incur indebtedness. The debt capital that will be available, if at all, may be at a higher cost and on less favorable terms and conditions in the future. Any inability to raise capital could have a negative effect on our business, financial condition and results of operations.

The illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we may realize significantly less than the value at which we have recorded our investments. In addition, significant changes in the capital markets, including the recent period of extreme volatility and disruption, have had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments. An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material adverse impact on our business, financial condition or results of operations.

Economic recessions or downturns could impair our portfolio companies and harm our operating results.

Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods. Therefore, our non-performing assets may increase and the value of our portfolio may decrease during these periods as we are required to record the values of our investments. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments at fair value. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.

A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, acceleration of the time when the loans are due and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the debt that we hold. We may incur additional expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. In addition, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided significant managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt holding and subordinate all or a portion of our claim to that of other creditors. These events could harm our financial condition and operating results.

Our portfolio companies may face intense competition, including competition from companies with greater financial resources, more extensive research and development, manufacturing, marketing and service capabilities and greater number of qualified and experienced managerial and technical personnel. They may need additional financing which they are unable to secure and which we are unable or unwilling to provide, or they may be subject to adverse developments unrelated to the technologies they acquire.

Global capital markets could enter a period of severe disruption and instability. These market conditions have historically and could again have a materially adverse effect on debt and equity capital markets in the U.S., which could have a materially negative impact on our business, financial condition and results of operations.

The U.S. and global capital markets have experienced periods of disruption characterized by the freezing of available credit, a lack of liquidity in the debt capital markets, significant losses in the principal value of investments, the re-pricing of credit risk in the broadly syndicated credit market, the failure of certain major financial institutions and general volatility in the financial markets. During these periods of disruption, general economic conditions deteriorated with material and adverse consequences for the broader financial and credit markets, and the availability

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of debt and equity capital for the market as a whole, and financial services firms in particular, was reduced significantly. These conditions may reoccur for a prolonged period of time or materially worsen in the future. In addition, signs of deteriorating sovereign debt conditions in Europe and concerns of economic slowdown in China create uncertainty that could lead to further disruptions and instability. We may in the future have difficulty accessing debt and equity capital, and a severe disruption in the global financial markets, deterioration in credit and financing conditions or uncertainty regarding U.S. government spending and deficit levels, European sovereign debt, Chinese economic slowdown or other global economic conditions could have a material adverse effect on our business, financial condition and results of operations.

Further downgrades of the U.S. credit rating, impending automatic spending cuts or another government shutdown could negatively impact our liquidity, financial condition and earnings.

Recent U.S. debt ceiling and budget deficit concerns have increased the possibility of additional credit-rating downgrades and economic slowdowns, or a recession in the U.S. In the future, the U.S. government may not be able to meet its debt payments unless the federal debt ceiling is raised. If legislation increasing the debt ceiling is not enacted, as needed, and the debt ceiling is reached, the U.S. federal government may stop or delay making payments on its obligations. Any default by the U.S. government on its obligations or any prolonged U.S. government shutdown could negatively impact the U.S. economy and our portfolio companies. Multiple factors relating to the international operations of some of our portfolio companies and to particular countries in which they operate could negatively impact their business, financial condition and results of operations. In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time. Continued adverse political and economic conditions could have a material adverse effect on our business, financial condition and results of operations.

Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.

The current worldwide financial market situation, as well as various social and political tensions in the United States and around the world, may contribute to increased market volatility, may have long-term effects on the U.S. and worldwide financial markets, and may cause economic uncertainties or deterioration in the United States and worldwide. The U.S. and global capital markets experienced extreme volatility and disruption during the economic downturn that began in mid-2007, and the U.S. economy was in a recession for several consecutive calendar quarters during the same period. In 2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising direct and contingent sovereign debt, which created concerns about the ability of certain nations to continue to service their sovereign debt obligations. Risks resulting from such debt crisis, including any austerity measures taken in exchange for bailout of certain nations, and any future debt crisis in Europe or any similar crisis elsewhere could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in certain countries and the financial condition of financial institutions generally.

In June 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union or Brexit, and, subsequently, on February 1, 2017, the U.K. Parliament voted in favor of allowing the U.K. government to begin the formal process of Brexit. The initial negotiations on Brexit commenced in June 2017. Brexit created political and economic uncertainty and instability in the global markets (including currency and credit markets), and especially in the United Kingdom and the European Union. Under Prime Minister Boris Johnson, the House of Commons passed the Brexit deal on December 20, 2019 and, after the European Parliament ratified the Brexit deal, the U.K. formally left the European Union on January 31, 2020. The U.K. has entered into a transition period until December 31, 2020, where agreements surrounding trade and other aspects of the U.K.’s future relationship with the European Union will need to be finalized. Failure to come to terms on a free trade deal could result in checks and tariffs on U.K. goods traveling to the European Union and thus prolong the economic uncertainty. There is continued concern about national-level support for the Euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. In addition, the fiscal and monetary policies of foreign nations, such as Russia and China, may have a severe impact on the worldwide and U.S. financial markets.

The Republican Party currently controls the executive branch and the Senate portion of the legislative branch of government, which increases the likelihood that legislation may be adopted that could significantly affect the regulation of U.S. financial markets. Areas subject to potential change, amendment or repeal include the Dodd-Frank

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Act and the authority of the Federal Reserve and the Financial Stability Oversight Council. For example, in March 2018, the U.S. Senate passed a bill that eased financial regulations and reduced oversight for certain entities. The United States may also potentially withdraw from or renegotiate various trade agreements and take other actions that would change current trade policies of the United States. We cannot predict which, if any, of these actions will be taken or, if taken, their effect on the financial stability of the United States. Such actions could have a significant adverse effect on our business, financial condition and results of operations. We cannot predict the effects of these or similar events in the future on the U.S. economy and securities markets or on our investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.

The effect of global climate change may impact the operations of our portfolio companies.

There may be evidence of global climate change. Climate change creates physical and financial risk and some of our portfolio companies may be adversely affected by climate change. For example, the needs of customers of energy companies vary with weather conditions, primarily temperature and humidity. To the extent weather conditions are affected by climate change, energy use could increase or decrease depending on the duration and magnitude of any changes. Increases in the cost of energy could adversely affect the cost of operations of our portfolio companies if the use of energy products or services is material to their business. A decrease in energy use due to weather changes may affect some of our portfolio companies’ financial condition, through decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system stresses, including service interruptions. In December 2015 the United Nations, of which the U.S. is a member, adopted a climate accord (the “Paris Agreement”) with the long-term goal of limiting global warming and the short-term goal of significantly reducing greenhouse gas emissions. Although the U.S. ratified the Paris Agreement on November 4, 2016, the current administration announced the U.S. would cease participation. As a result, some of our portfolio companies may become subject to new or strengthened regulations or legislation, at least through November 4, 2020 (the earliest date the U.S. may withdraw from the Paris Agreement), which could increase their operating costs and/or decrease their revenues.

Our business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that could adversely affect our business and financial results.

We are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight Board, the SEC and the NASDAQ Stock Market, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities.

Uncertainty relating to the LIBOR calculation process may adversely affect the value of our portfolio of the LIBOR-indexed, floating-rate debt securities.

LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending transactions between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in floating-rate loans we extend to portfolio companies such that the interest due to us pursuant to a term loan extended to a portfolio company is calculated using LIBOR. The terms of our debt investments may include minimum interest rate floors which are calculated based on LIBOR.

Concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association or the BBA in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.

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On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time whether or not LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large US financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by Treasury securities. The future of LIBOR at this time is uncertain. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established.

Additionally, on June 12, 2019 the Staff of the SEC’s Division of Corporate Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant issued a statement about the potentially significant effects on financial markets and market participants when LIBOR is discontinued in 2021 and no longer available as a reference benchmark rate. The Staff encouraged all market participants to identify contracts that reference LIBOR and begin transitions to alternative rates. On December 30, 2019, the SEC’s Chairman, Division of Corporate Finance and Office of the Chief Accountant issued a statement to encourage audit committees in particular to understand management’s plans to identify and address the risks associated with the elimination of LIBOR, and, specifically, the impact on accounting and financial reporting and any related issues associated with financial products and contracts that reference LIBOR, as the risks associated with the discontinuation of LIBOR and transition to an alternative reference rate will be exacerbated if the work is not completed in a timely manner.

The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us, or on our overall financial condition or results of operations. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. In addition, the cessation of LIBOR could:

•        Adversely impact the pricing, liquidity, value of, return on and trading for a broad array of financial products, including any LIBOR-linked securities, loans and derivatives that are included in our assets and liabilities;

•        Require extensive changes to documentation that governs or references LIBOR or LIBOR-based products, including, for example, pursuant to time-consuming renegotiations of existing documentation to modify the terms of outstanding investments;

•        Result in inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with one or more alternative reference rates;

•        Result in disputes, litigation or other actions with portfolio companies, or other counterparties, regarding the interpretation and enforceability of provisions in our LIBOR-based investments, such as fallback language or other related provisions, including, in the case of fallbacks to the alternative reference rates, any economic, legal, operational or other impact resulting from the fundamental differences between LIBOR and the various alternative reference rates;

•        Require the transition and/or development of appropriate systems and analytics to effectively transition our risk management processes from LIBOR-based products to those based on one or more alternative reference rates, which may prove challenging given the limited history of the proposed alternative reference rates; and

•        Cause us to incur additional costs in relation to any of the above factors.

There is no guarantee that a transition from LIBOR to an alternative will not result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers, any of which could have a material adverse effect on our business, result of operations, financial condition, and unit price.

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A disruption in the capital markets and the credit markets could negatively affect our business.

As a BDC, we seek to maintain our ability to raise additional capital for investment purposes. Without sufficient access to the capital markets or credit markets, we may not be able to pursue new business opportunities. Disruptive conditions in the financial industry and the impact of new legislation in response to those conditions could restrict our business operations and could adversely impact our results of operations and financial condition.

Our ability to grow our business could be impaired by an inability to access the capital markets or to enter into new credit facilities. At various times over the past three years, reflecting concern about the stability of the financial markets, many lenders and institutional investors have reduced or ceased providing funding to borrowers. This market disruption and tightening of credit has led to increased market volatility and widespread reduction of business activity generally. If we are unable to raise additional equity capital or consummate new credit facilities on terms that are acceptable to us, we may not be able to initiate significant originations.

These situations may arise due to circumstances that we may be unable to control, such as access to the credit markets, a severe decline in the value of the U.S. dollar, a further economic downturn or an operational problem that affects third parties or us, and could materially harm our business. Even though such conditions have improved broadly and significantly over the short-term, adverse conditions in particular sectors of the financial markets could adversely impact our business over the long-term.

Price declines and illiquidity in the corporate debt markets have adversely affected, and may continue to adversely affect, the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation. Any unrealized depreciation that we experience on our loan portfolio may be an indication of future realized losses, which could reduce our income available for distribution and could adversely affect our ability to service our outstanding borrowings.

As a BDC, we are required to carry our investments at fair value as determined in good faith by or under the direction of our Board of Directors. Decreases in fair values of our investments are recorded as unrealized depreciation. Any unrealized depreciation in our loan portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us with respect to the affected loans. This could result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods and could materially adversely affect our ability to service our outstanding borrowings. The unprecedented declines in prices and liquidity in the corporate debt markets from 2008 through mid-2010 resulted in significant net unrealized depreciation in our portfolio, reducing our net asset value. Depending on market conditions, we may incur substantial losses in future periods, which could have a material adverse impact on our business, financial condition and results of operations.

Even in the event the value of your investment declines, the management fee and, in certain circumstances, the incentive fee will still be payable.

The management fee is calculated as a percentage of our gross assets at a specific time. Accordingly, the management fee will be payable regardless of whether the value of our gross assets and/or your investment have decreased. Moreover, a portion of the incentive fee is payable if our net investment income for a calendar quarter exceeds a designated hurdle rate. Although this portion of the incentive fee is subject to the Total Return Requirement, the Net Investment Income Incentive Fee may still be payable during a quarter with net capital losses. Accordingly, this portion of our adviser’s incentive fee may also be payable notwithstanding a decline in net asset value that quarter. In addition, in the event we recognize deferred loan interest income in excess of our available capital as a result of our receipt of payment-in-kind, or “PIK” interest, we may be required to liquidate assets in order to pay a portion of the incentive fee. Oxford Square Management, however, is not required to reimburse us for the portion of any incentive fees attributable to deferred loan interest income in the event of a subsequent default.

PIK interest/dividend payments we receive will increase our assets under management and, as a result, will increase the amount of base management fees and incentive fees payable by us to our investment adviser.

Certain of our debt and preferred stock investments contain provisions providing for the payment of contractual PIK interest or dividends. Because PIK interest/dividends results in an increase in the size of the loan/preferred stock balance of the underlying investment, the receipt by us of PIK interest/dividend will have the

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effect of increasing our assets under management. As a result, because the base management fee that we pay to our investment adviser is based on the value of our gross assets, the receipt by us of PIK interest/dividend will result in an increase in the amount of the base management fee payable by us. In addition, any such increase in an investment balance due to the receipt of PIK interest/dividend will cause such investment to accrue interest/dividend on the higher investment balance, which will result in an increase in our pre-incentive fee net investment income and, as a result, a potential increase in incentive fees that are payable by us to our investment adviser.

Our investment adviser is not obligated to reimburse us for any part of the incentive fee it receives that is based on accrued income that we never receive.

Part of the incentive fee payable by us to our investment adviser that relates to our net investment income is computed and paid on income that may include interest that has been accrued but not yet received in cash, such as market discount, debt instruments with PIK interest, preferred stock with PIK dividends and zero coupon securities. If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible. Our investment adviser will not be under any obligation to reimburse us for any part of the incentive fee it received that was based on accrued income that we never receive as a result of a default by an entity on the obligation that resulted in the accrual of such income.

Our investment adviser can resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.

Our investment adviser has the right, under our investment advisory agreement, to resign at any time upon 60 days’ written notice, whether we have found a replacement or not. If our investment adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our investment adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations.

We are permitted to borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.

Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. We may borrow from and issue senior debt securities to banks, insurance companies, and other lenders. Lenders of these senior securities have fixed dollar claims on our assets that are superior to the claims of our common stockholders. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock distribution payments. Leverage is generally considered a speculative investment technique. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. Moreover, as the management fee payable to Oxford Square Management will be payable on our gross assets, including those assets acquired through the use of leverage, Oxford Square Management may have a financial incentive to incur leverage which may not be consistent with our stockholders’ interests. In addition, our common stockholders will bear the burden of any increase in our expenses as a result of leverage, including any increase in the management fee payable to Oxford Square Management.

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On March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement to 150% from 200% under certain circumstances. On April 6, 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 modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. As a result, our asset coverage requirements for senior securities was changed from 200% to 150%, effective as of April 6, 2019. Prior to the enactment of the SBCAA, BDCs were required to maintain an asset coverage ratio of at least 200% in order to incur debt or to issue other senior securities. Generally, for every $1.00 of debt incurred or in senior securities issued, a BDC was required to have at least $2.00 of assets immediately following such incurrence or issuance. For those BDCs that satisfy the SBCAA’s disclosure and approval requirements, the minimum asset coverage ratio is reduced such that for every $1.00 of debt incurred or in senior securities issued, a BDC must now have at least $1.50 of assets. If we incur additional leverage, general interest rate fluctuations may have a more significant negative impact on our investments and investment opportunities than they would have absent such additional incurrence, and, accordingly, may have a material adverse effect on our investment objectives and rate of return on investment capital.

On April 12, 2017, we completed a public offering of our 6.50% Unsecured Notes. The 6.50% Unsecured Notes will mature on March 30, 2024, and may be redeemed in whole or in part at any time or from time to time at our option on or after March 30, 2020. The 6.50% Unsecured Notes bear interest at a rate of 6.50% per year payable quarterly on March 30, June 30, September 30 and December 30. The 6.50% Unsecured Notes are our general unsecured obligations, rank equally in right of payment with our future senior unsecured debt, and rank senior in right of payment to any potential subordinated debt, should any be issued in the future.

On June 21, 2018, Oxford Funding entered into the OXSQ Facility. On October 12, 2018, OXSQ Funding amended the OXSQ Facility to provide for additional borrowings under the OXSQ Facility. Pursuant to the terms of the OXSQ Facility, as amended, OXSQ Funding may borrow up to $125.0 million. As of December 31, 2019, the OXSQ Facility had approximately $28.1 million of principal outstanding. Subject to certain exceptions, pricing under the OXSQ Facility is based on the London interbank offered rate for an interest period equal to three months plus a spread of 2.25% per annum. Interest on the outstanding principal amount owing under the OXSQ Facility is payable quarterly in arrears. The OXSQ Facility will mature, and all outstanding principal and accrued and unpaid interest thereunder will be due and payable, on June 21, 2020, and is subject to periodic repayment prior to such date from collections on OXSQ Funding’s loan assets and certain other mandatory payment requirements.

On April 3, 2019, we completed an underwritten public offering of approximately $44.8 million in aggregate principal amount of 6.25% Unsecured Notes. The 6.25% Unsecured Notes will mature on April 30, 2026, and may be redeemed in whole or in part at any time or from time to time at our option on or after April 30, 2022. The 6.25% Unsecured Notes bear interest at a rate of 6.25% per year payable quarterly on January 31, April 30, July 31, and October 31, of each year. The 6.25% Unsecured Notes are our general unsecured obligations, rank equally in right of payment with our future senior unsecured debt, and rank senior in right of payment to any potential subordinated debt, should any be issued in the future.

Illustration.    The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns on the portfolio, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing in the table below.

 

Assumed total return on our portfolio (net of expenses)

   

(10.0)%

 

 

(5.0)%

 

 

0.0%

 

 

5.0%

 

 

10.0%

 

Corresponding return to stockholder(1)

 

(19.1

)%

 

(11.3

)%

 

(3.6

)%

 

4.2

%

 

12.0

%

____________

(1)      Assumes $385.3 million in total assets and $137.3 million in total debt principal outstanding, which reflects our total assets and total debt outstanding as of December 31, 2019, and a cost of funds of approximately 6.4%.

Our portfolio must have an annual return of at least 2.3% in order to cover the annual interest payments on our current borrowings.

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If we are unable to comply with the covenants or restrictions in our borrowings, our business could be materially adversely affected.

The OXSQ Facility includes covenants, among others, that, subject to exceptions, restrict our ability to pay distributions, create liens on assets, make investments, make acquisitions and engage in mergers or consolidations. The OXSQ Facility also includes a change of control provision that accelerates the indebtedness under the facility in the event of certain change of control events. Complying with these restrictions may prevent us from taking actions that we believe would help us grow our business or are otherwise consistent with our investment objective. These restrictions could also limit our ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise restrict corporate activities. In addition, the restrictions contained in the OXSQ Facility could limit our ability to make distributions to our stockholders in certain circumstances, which could result in us failing to qualify for tax treatment as a RIC and thus becoming subject to corporate-level U.S. federal income tax (and any applicable state and local taxes).

The breach of any of the covenants or restrictions, unless cured within the applicable grace period, would result in a default under the OXSQ Facility that would permit the lender thereunder to declare all amounts outstanding to be due and payable. In such an event, we may not have sufficient assets to repay such indebtedness. As a result, any default could have serious consequences to our financial condition. An event of default or an acceleration under the OXSQ Facility could also cause a cross-default or cross-acceleration of another debt instrument or contractual obligation, which would adversely impact our liquidity. We may not be granted waivers or amendments to the OXSQ Facility if for any reason we are unable to comply with it, and we may not be able to refinance the OXSQ Facility on terms acceptable to us, or at all.

The terms of the OXSQ Facility may contractually limit our ability to incur additional indebtedness.

We will need additional capital to fund new investments and grow our portfolio of investments. We intend to access the capital markets periodically to issue debt or equity securities or borrow from financial institutions in order to obtain such additional capital. We believe that having the flexibility to incur additional leverage could augment the returns to our stockholders and would be in the best interests of our stockholders. Contractual leverage limitations under our existing OXSQ Facility or future borrowings may limit our ability to incur additional indebtedness. We cannot assure you that we will be able to negotiate a change to the OXSQ Facility to allow us to incur additional leverage or that any such an amendment will be available to us on favorable terms. An inability on our part to amend the contractual asset coverage limitation and access additional leverage could limit our ability to take advantage of the benefits described above related to our ability to incur additional leverage and could decrease our earnings, if any, which would have an adverse effect on our results of operations and the value of our shares of common stock.

We may need to raise additional capital to grow because we must distribute most of our income.

We may need additional capital to fund growth in our investments. We expect to issue equity securities and expect to borrow from financial institutions in the future. A reduction in the availability of new capital could limit our ability to grow. We must distribute at least 90% of our investment company taxable income to our stockholders to maintain our tax treatment as a regulated investment company. As a result, any such cash earnings may not be available to fund investment originations. We expect to borrow from financial institutions and issue additional debt and equity securities. If we fail to obtain funds from such sources or from other sources to fund our investments, it could limit our ability to grow, which may have an adverse effect on the value of our securities. In addition, as a BDC, our ability to borrow or issue preferred stock may be restricted if our total assets are less than 150% of our total borrowings and preferred stock.

Regulations governing our operation as a BDC affect our ability to, and the way in which we raise additional capital, which may expose us to risks, including the typical risks associated with leverage.

Our ability to grow our business requires a substantial amount of capital, which we may acquire from the following sources:

Senior Securities and Other Indebtedness

We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the

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1940 Act. Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 150% immediately after each issuance of senior securities.

This requirement of sustaining a 150% asset coverage ratio limits the amount that we may borrow. Because we will continue to need capital to grow our loan and investment portfolio, this limitation may prevent us from incurring debt. Further additional debt financing may not be available on favorable terms, if at all, or may be restricted by the terms of our debt facilities. If we are unable to incur additional debt, we may be required to raise additional equity at a time when it may be disadvantageous to do so.

As a result of the issuance of senior securities, including preferred stock and debt securities, we are exposed to typical risks associated with leverage, including an increased risk of loss and an increase in expenses, which are ultimately borne by our common stockholders. Because we may incur leverage to make investments, a decrease in the value of our investments would have a greater negative impact on the value of our common stock. When we issue debt securities or preferred stock, it is likely that such securities will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. In addition, such securities may be rated by rating agencies, and in obtaining a rating for such securities, we may be required to abide by operating and investment guidelines that could further restrict our operating flexibility. Refer to “— We are permitted to borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us” for a description of our outstanding senior securities.

Our ability to pay distributions or issue additional senior securities may be restricted if our asset coverage ratio is not at least 150%. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Furthermore, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders.

Common Stock

We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value of our common stock if our Board of Directors determines that such sale is in the best interests of OXSQ and its stockholders, and our stockholders approve such sale.

In certain limited circumstances, we may also issue shares at a price below net asset value in connection with a transferable rights offering so long as: (1) the offer does not discriminate among stockholders; (2) we use our best efforts to ensure an adequate trading market exists for the rights; and (3) the ratio of the offering does not exceed one new share for each three rights held. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease and they may experience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on favorable terms or at all.

Our Board of Directors is authorized to reclassify any unissued shares of common stock into one or more classes of preferred stock, which could convey special rights and privileges to its owners.

Our charter permits our Board of Directors to reclassify any authorized but unissued shares of stock into one or more classes of preferred stock. We are currently authorized to issue up to 100,000,000 shares of common stock, of which 48,990,575 shares are issued and outstanding as of February 25, 2020. In the event our Board of Directors opts to reclassify a portion of our unissued shares of common stock into a class of preferred stock, those preferred shares would have a preference over our common stock with respect to distributions and liquidation. The cost of any such reclassification would be borne by our existing common stockholders. The class voting rights of any preferred shares we may issue could make it more difficult for us to take some actions that may, in the future, be proposed by our Board of Directors and/or the holders of our common stock, such as a merger, exchange of securities, liquidation, or alteration of the rights of a class of our securities, if these actions were perceived by the holders of preferred shares as not in their best interests. The issuance of preferred shares convertible into shares of common stock might also reduce the net income and net asset value per share of our common stock upon conversion. These effects, among others, could have an adverse effect on your investment in our common stock.

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A change in interest rates may adversely affect our profitability and we may expose ourselves to risks if we engage in hedging transactions to mitigate changes in interest rates.

Currently, all of the debt investments in our investment portfolio are at variable rates. In addition, our CLO equity investments are sensitive to risks associated with changes in interest rates. Although we have not done so in the past, we may in the future choose to hedge against interest rate fluctuations by using standard hedging instruments such as futures, forward contracts, options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions should increase. It may not be possible to hedge against an interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.

The success of our hedging transactions will depend on our ability to correctly predict movements in interest rates. Therefore, while we may enter into such transactions to seek to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. To the extent we engage in hedging transactions, we also face the risk that counterparties to the derivative instruments we hold may default, which may expose us to unexpected losses from positions where we believed that our risk had been appropriately hedged. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. Also, we have limited experience in entering into hedging transactions, and we will initially have to purchase or develop such expertise if we choose to employ hedging strategies in the future.

In November 2019, the SEC proposed a rule regarding the ability of a BDC (or a registered investment company) to use derivatives and other transactions that create future payment or delivery obligations (except reverse repurchase agreements and similar financing transactions). If adopted as proposed, BDCs that use derivatives would be subject to a value-at-risk, or VaR, leverage limit, certain other derivatives risk management program and testing requirements and requirements related to board reporting. These new requirements would apply unless the BDC qualified as a “limited derivatives user,” as defined in the SEC’s proposal. A BDC that enters into reverse repurchase agreements or similar financing transactions would need to aggregate the amount of indebtedness associated with the reverse repurchase agreements or similar financing transactions with the aggregate amount of any other senior securities representing indebtedness when calculating the BDC’s asset coverage ratio. Under the proposed rule, a BDC may enter into an unfunded commitment agreement that is not a derivatives transaction, such as an agreement to provide financing to a portfolio company, if the BDC has a reasonable belief, at the time it enters into such an agreement, that it will have sufficient cash and cash equivalents to meet its obligations with respect to all of its unfunded commitment agreements, in each case as it becomes due. If the BDC cannot meet this test, it is required to treat unfunded commitments as a derivatives transaction subject to the requirements of the rule. Collectively, these proposed requirements, if adopted, may limit our ability to use derivatives and/or enter into certain other financial contracts.

We will be subject to corporate-level U.S. federal income tax if we are unable to qualify for tax treatment as a RIC for U.S. federal income tax purposes.

To remain entitled to the tax benefits accorded to RICs under the Code, we must meet certain income source, asset diversification and Annual Distribution Requirements. In order to qualify as a RIC, we must derive each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities. The Annual Distribution Requirement for a RIC is satisfied if we distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, to our stockholders on an annual basis. Because we use debt financing, we are subject to certain asset

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coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the Annual Distribution Requirement. If we are unable to obtain cash from other sources, we may fail to qualify for special tax treatment as a RIC and, thus, may be subject to corporate-level U.S. federal income tax on all of our income.

To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC treatment. Because most of our investments will be in private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses. If we fail to qualify for tax treatment as a RIC for any reason and remain or become subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders.

We cannot predict how tax reform legislation will affect us, our investments, or our stockholders, and any such legislation could adversely affect our business.

Legislative or other actions relating to taxes could have a negative effect on us. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. We cannot predict with certainty how any changes in the tax laws might affect us, our stockholders, or our portfolio investments. New legislation and any U.S. Treasury regulations, administrative interpretations or court decisions interpreting such legislation could significantly and negatively affect our ability to qualify for tax treatment as a RIC and the U.S. federal income tax consequences to us and our stockholders of such qualification, and could have other adverse consequences. Stockholders are urged to consult with their tax advisor regarding tax legislative, regulatory, or administrative developments and proposals and their potential effect on an investment in our securities.

Our investments in CLOs may be subject to special anti-deferral provisions that could result in us incurring tax or recognizing income prior to receiving cash distributions related to such income.

We have purchased and may in the future purchase residual or subordinated interests in CLOs that are treated for U.S. federal income tax purposes as shares in a passive foreign investment company or PFIC. If we acquire investments in a PFIC (including equity tranche investments in CLOs that are PFICs), we may be subject to U.S. federal income tax on a portion of any “excess distribution” or gain from the disposition of such shares even if such income is distributed as a taxable distribution by us to our stockholders. Certain elections may be available to mitigate or eliminate such tax on excess distributions, but such elections (if available) will generally require us to recognize our share of the PFICs income for each year regardless of whether we receive any distributions from such PFICs. We must nonetheless distribute such income to maintain our tax treatment as a RIC.

If we hold more than 10% of the shares in a foreign corporation that is treated as a controlled foreign corporation or CFC (including equity tranche investments in a CLO treated as CFC), we may be treated as receiving a deemed distribution (taxable as ordinary income) each year from such foreign corporation in an amount equal to our pro rata share of the corporation’s income for the tax year (including both ordinary earnings and capital gains). If we are required to include such deemed distributions from a CFC in our income, we will be required to distribute such income to maintain our RIC tax treatment regardless of whether or not the CFC makes an actual distribution during such year.

If we are required to include amounts in income prior to receiving distributions representing such income, we may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level U.S. federal income tax.

If we do not receive timely distributions from our CLO investments, we may fail to qualify as a RIC.

We are required to include in our taxable income our proportionate share of the income of certain CLO investments to the extent that such CLOs are PFICs for which we have made a qualifying electing fund, or “QEF,” election or are CFCs. To the extent that such CLOs do not distribute all of their earnings and profits on a current

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basis, we may fail to qualify as a RIC. To qualify as a RIC, we must, among other thing, derive in each taxable year at least 90% of our gross income from certain sources specified in the Code, or the “90% Income Test.” Although the Code generally provides that the income inclusions from a QEF or a CFC will be “good income” for purposes of this 90% Income Test to the extent that the QEF or the CFC distribute such income to us in the same taxable year to which the income is included in our income, the Code does not specifically provide whether these income inclusions would be “good income” for this 90% Income Test if we do not receive distributions from the QEF or CFC during such taxable year. The IRS has issued a series of private rulings in which it has concluded that all income inclusions from a QEF or a CFC included in a RIC’s gross income would constitute “good income” for purposes of the 90% Income Test. Such rulings are not binding on the IRS except with respect to the taxpayers to whom such rulings were issued. Recently, however, the IRS and U.S. Treasury Department issued proposed regulations that provide that the income inclusions from a QEF or a CFC would not be good income for purposes of the 90% Income Test unless we receive a cash distribution from such entity in the same year attributable to the included income. If such income were not considered “good income” for purposes of the 90% Income Test, we may fail to qualify as a RIC.

The CLOs in which we invest may be subject to withholding tax if they fail to comply with certain reporting requirements.

Legislation commonly referred to as the Foreign Account Tax Compliance Act, or FATCA, imposes a withholding tax of 30% on payments of U.S. source interest and distributions to certain non-U.S. entities, including certain non-U.S. financial institutions and investment funds, unless such non-U.S. entity complies with certain reporting requirements regarding its U.S. account holders and its U.S. owners. While existing U.S. Treasury regulations would also require withholding on payments of the gross proceeds from the sale of any property that could produce U.S. source interest or dividends, the U.S. Treasury Department has indicated in subsequent proposed regulations its intent to eliminate this requirement. Most CLO vehicles in which we invest will be treated as non-U.S. financial entities for this purpose, and therefore will be required to comply with these reporting requirements to avoid the 30% withholding. If a CLO vehicle in which we invest fails to properly comply with these reporting requirements, it could reduce the amounts available to distribute to equity and junior debt holders in such CLO vehicle, which could materially and adversely affect our operating results and cash flows.

We may choose to pay distributions in our own common stock, in which case, our stockholders may be required to pay U.S. federal income taxes in excess of the cash distributions they receive.

We may distribute taxable distributions that are payable in cash or shares of our common stock at the election of each stockholder. Under certain applicable IRS guidance, distributions by publicly offered RICs that are payable in cash or in shares of stock at the election of stockholders are treated as taxable distributions. The Internal Revenue Service has published guidance indicating that this rule will apply even where the total amount of cash that may be distributed is limited to no more than 20% of the total distribution. Under this guidance, if too many stockholders elect to receive their distributions in cash, the cash available for distribution must be allocated among the stockholders electing to receive cash (with the balance of the distribution paid in stock). In no event will any stockholder electing to receive cash, receive less than the lesser of (a) the portion of the distribution such stockholder has elected to receive in cash or (b) an amount equal to his, her or its entire distribution times the percentage limitation on cash available for distribution. If we decide to make any distributions consistent with this guidance that are payable in part in our stock, taxable stockholders receiving such distributions will be required to include the full amount of the distribution (whether received in cash, our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain distribution) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such distributions in excess of any cash received. If a U.S. stockholder sells the stock it receives as a distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such distributions, including in respect of all or a portion of such distribution that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on distributions, it may put downward pressure on the trading price of our stock.

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We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.

For U.S. federal income tax purposes, we will include in income certain amounts that we have not yet received in cash, such as original issue discount or OID, which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or contracted PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. In addition, we may be required to accrue for U.S. federal income tax purposes amounts attributable to our investment in CLOs that may differ from the distributions received in respect of such investments. We also may be required to include in income certain other amounts that we will not receive in cash.

Because in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty satisfying the Annual Distribution Requirement applicable to RICs. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital, reduce new investments or make taxable distributions of our stock or debt securities to meet that distribution requirement. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus be subject to corporate-level U.S. federal income tax.

In addition, OID income for certain portfolio investments may or may not be included as a factor in the determination of the fair value of such investments.

There are significant potential conflicts of interest between OXSQ and our management team.

In the course of our investing activities, we pay management and incentive fees to Oxford Square Management, and reimburse Oxford Funds for certain expenses it incurs. As a result, investors in our common stock invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct investments. As a result of this arrangement, there may be times when the management team of Oxford Square Management has interests that differ from those of our stockholders, giving rise to a conflict.

Oxford Square Management receives a quarterly incentive fee based, in part, on our “Pre-Incentive Fee Net Investment Income,” if any, for the immediately preceding calendar quarter. This incentive fee is subject to a quarterly hurdle rate before providing an incentive fee return to Oxford Square Management. To the extent we or Oxford Square Management are able to exert influence over our portfolio companies, the quarterly pre-incentive fee may provide Oxford Square Management with an incentive to induce our portfolio companies to accelerate or defer interest or other obligations owed to us from one calendar quarter to another.

In addition, our executive officers and directors, and the executive officers of Oxford Square Management, and its managing member, 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. Charles M. Royce, a member of our Board of Directors, holds a minority, non-controlling interest in our investment adviser.

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 currently invests primarily in CLO debt and equity tranches, and its investment adviser, Oxford Lane Management. Messrs. Cohen and Rosenthal also currently serve as Chief Executive Officer and President, respectively, at Oxford Bridge Management, the investment adviser to the Oxford Bridge Funds and Oxford Gate Management, the investment adviser to the Oxford Gate Funds. The Oxford Bridge Funds and Oxford Gate Funds are private funds that invest principally in CLO debt and equity. Oxford Funds is the managing member of Oxford Bridge 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 the portfolios of Oxford Lane Capital Corp., the Oxford Bridge Funds and the Oxford Gate Funds, respectively, on the other hand. In addition, Bruce L. Rubin, our Chief Financial Officer, Corporate Secretary and Treasurer, currently serves in similar capacities for Oxford Lane Capital Corp. Mr. Rubin also currently serves as the Chief Financial Officer and Secretary of Oxford Lane Management, Oxford Square Management, LLC, Oxford Bridge Management, LLC, Oxford Gate Management, LLC and Oxford Funds. Further, Mr. Gerald Cummins, our Chief Compliance Officer, currently serves in similar capacities for Oxford Lane Management, Oxford Lane Capital Corp., Oxford Square

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Management, LLC, Oxford Bridge Management, LLC and Oxford Gate Management, LLC. Because of these possible conflicts of interest, these individuals may direct potential business and investment opportunities to other entities rather than to us or such individuals may undertake or otherwise engage in activities or conduct on behalf of such other entities that is not in, or which may be adverse to, our best interests.

Oxford Square Management, Oxford Lane Management, LLC, Oxford Bridge Management, LLC, and Oxford Gate Management, LLC, are subject to a written policy with respect to the allocation of investment opportunities among OXSQ, Oxford Lane Capital Corp., the Oxford Bridge Funds and the Oxford Gate Funds. Where investments are suitable for more than one entity, the allocation policy generally provides that, depending on size and subject to current and anticipated cash availability, the absolute size of the investment as well as its relative size compared to the total assets of each entity, current and anticipated weighted average costs of capital, and whether the proposed investment is an add-on investment to an existing investment, 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 October 13, 2016, we filed an exemptive application with the SEC to permit us to co-invest with funds or entities managed by Oxford Square Management or its affiliates in certain negotiated transactions where co-investing would otherwise be prohibited under the 1940 Act. On June 14, 2017, the SEC issued an order permitting OXSQ 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, OXSQ 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 OXSQ ‘s investment adviser or an investment adviser controlling, controlled by, or under common control with OXSQ ‘s investment adviser, to co-invest in negotiated investment opportunities where doing so would otherwise be prohibited under the 1940 Act, providing OXSQ ‘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 of Directors reviews these procedures on an annual basis.

We have also adopted a Code of Business Conduct and Ethics which applies to, among others, 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 of Directors is also required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K).

Changes in laws or regulations governing our operations may adversely affect our business.

Changes in the laws or regulations, or the interpretations of the laws and regulations, which govern BDCs, RICs or non-depository commercial lenders could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations and are subject to judicial and administrative

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decisions that affect our operations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures, and other trade practices. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements than those in which we currently conduct business, then we may have to incur significant expenses in order to comply or we may have to restrict our operations. In addition, if we do not comply with applicable laws, regulations and decisions, then we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties, any of which could have a material adverse effect upon our business results of operations or financial condition.

Changes to U.S. tariff and import/export regulations may have a negative effect on our portfolio companies and, in turn, harm us.

There has been ongoing discussion and commentary regarding potential significant changes to U.S. trade policies, treaties and tariffs. The current U.S. presidential administration, along with the U.S. Congress, has created significant uncertainty about the future relationship between the United States and other countries with respect to trade policies, treaties and tariffs. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. Any of these factors could depress economic activity and restrict our portfolio companies’ access to suppliers or customers and have a material adverse effect on their business, financial condition and results of operations, which in turn would negatively impact us.

Uncertainty about presidential administration initiatives could negatively impact our business, financial condition and results of operations.

The current administration has called for significant changes to U.S. trade, healthcare, immigration, foreign and government regulatory policy. In this regard, there is significant uncertainty with respect to legislation, regulation and government policy at the federal level, as well as the state and local levels. Recent events have created a climate of heightened uncertainty and introduced new and difficult-to-quantify macroeconomic and political risks with potentially far-reaching implications. There has been a corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the extent the U.S. Congress or the current administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory environment, inflation and other areas. Although we cannot predict the impact, if any, of these changes to our business, they could adversely affect our business, financial condition, operating results and cash flows. Until we know what policy changes are made and how those changes impact our business and the business of our competitors over the long term, we will not know if, overall, we will benefit from them or be negatively affected by them.

If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a business development company or be precluded from investing according to our current business strategy.

As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of such acquisition, at least 70% of our total assets are qualifying assets.

We believe that most of our portfolio investments will constitute qualifying assets. However, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could lose our status as a BDC, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to comply with the 1940 Act. If we need to dispose of such investments quickly, it would be difficult to dispose of such investments on favorable terms. For example, we may have difficulty in finding a buyer and, even if we do find a buyer, we may have to sell the investments at a substantial loss.

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Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.

The Maryland General Corporation Law and our charter and bylaws contain provisions that may discourage, delay or make more difficult a change in control of OXSQ or the removal of our directors. We are subject to the Maryland Business Combination Act, subject to any applicable requirements of the 1940 Act. Our board of directors has adopted a resolution exempting from the Business Combination Act any business combination between us and any other person, subject to prior approval of such business combination by our board, including approval by a majority of our disinterested directors. If the resolution exempting business combinations is repealed or our board does not approve a business combination, the Business Combination Act may discourage third parties from trying to acquire control of us and increase the difficulty of consummating such an offer. Our bylaws exempt from the Maryland Control Share Acquisition Act acquisitions of our stock by any person. If we amend our bylaws to repeal the exemption from the Control Share Acquisition Act, the Control Share Acquisition Act also may make it more difficult for a third party to obtain control of us and increase the difficulty of consummating such a transaction. However, we will amend our bylaws to be subject to the Control Share Acquisition Act only if our board of directors determines that it would be in our best interests and if the SEC staff does not object to our determination that our being subject to the Control Share Acquisition Act does not conflict with the 1940 Act. The SEC staff has issued informal guidance setting forth its position that certain provisions of the Control Share Acquisition Act would, if implemented, violate Section 18(i) of the 1940 Act.

We have also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our charter classifying our board of directors in three classes serving staggered three-year terms, and authorizing our board of directors to classify or reclassify shares of our stock in one or more classes or series, to cause the issuance of additional shares of our stock and to amend our charter without stockholder approval to increase or decrease the number of shares of stock that we have authority to issue. These provisions, as well as other provisions of our charter and bylaws, may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our stockholders.

The foregoing provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our Board of Directors. However, these provisions may deprive a stockholder of the opportunity to sell such stockholder’s shares at a premium to a potential acquirer. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms. Our Board of Directors has considered both the positive and negative effects of the foregoing provisions and determined that they are in the best interest of our stockholders.

Internal and external cyber threats, as well as other disasters, could impair our ability to conduct business effectively.

The occurrence of a disaster such as a cyber-attack against us or against a third-party that has access to our data or networks, a natural catastrophe, an industrial accident, a terrorist attack or war, disease pandemics, events unanticipated in our disaster recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data.

We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computers, networks, and data, like those of other companies, could be subject to cyber-attacks and unauthorized access, use, alteration, or destruction, such as from physical and electronic break-ins or unauthorized tampering. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed, stored in, and transmitted through our computer systems and networks. Such an attack could cause interruptions or malfunctions in our operations, which could result in financial losses, litigation, regulatory penalties, client dissatisfaction or loss, reputational damage, and increased costs associated with mitigation of damages and remediation.

Third parties with which we do business may also be sources of cybersecurity or other technological risk. We outsource certain functions and these relationships allow for the storage and processing of our information, as well as client, counterparty, employee, and borrower information. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure, destruction, or other cybersecurity incident that affects our data, resulting in increased costs and other consequences as described above.

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We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay distributions.

Our business is highly dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:

•        sudden electrical or telecommunications outages;

•        natural disasters such as earthquakes, tornadoes and hurricanes;

•        events arising from local or larger scale political or social matters, including terrorist acts; and

•        cyber-attacks

These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay distributions to our stockholders.

Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval.

Our board of directors has the authority to modify or waive certain of our operating policies and strategies without prior notice (except as required by the 1940 Act) and without stockholder approval. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as a BDC. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and value of our stock. Nevertheless, the effects may adversely affect our business and impact our ability to make distributions.

RISKS RELATED TO OUR INVESTMENTS

Our investment portfolio may be concentrated in a limited number of portfolio companies, which will subject us to a risk of significant loss if any of these companies defaults on its obligations under any of its debt securities that we hold or if the sectors in which we invest experience a market downturn.

A consequence of our limited number of investments is that the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment. Beyond the asset diversification requirements applicable to RICs, we do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few issuers. While we have historically focused on the technology sector, we are actively seeking new investment opportunities outside this sector that otherwise meet our investment criteria. As a result, a market downturn, including a downturn in the sectors in which we invest, could materially adversely affect us.

Most of our debt investments will not fully amortize during their lifetime, which may subject us to the risk of loss of our principal in the event a portfolio company is unable to repay us prior to maturity.

Most of our debt investments are not structured to fully amortize during their lifetime. Accordingly, if a portfolio company has not previously pre-paid its debt investment to us, a significant portion of the principal amount due on such a debt investment may be due at maturity. In order to create liquidity to pay the final principal payment, a portfolio company typically must raise additional capital. If it is unable to raise sufficient funds to repay us, the debt investment may go into default, which may compel us to foreclose on the borrower’s assets, even if the debt investment was otherwise performing prior to maturity. This may prevent us from immediately obtaining full recovery on the debt investment and may prevent or delay the reinvestment of the investment proceeds in other, possibly more profitable investments.

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Our portfolio companies may prepay loans, which may reduce our yields if capital returned cannot be invested in transactions with equal or greater expected yields.

The loans in our investment portfolio may be prepaid at any time, generally with little advance notice. Whether a loan is prepaid will depend both on the continued positive performance of the portfolio company and the existence of favorable financing market conditions that allow such company the ability to replace existing financing with less expensive capital. As market conditions change, we do not know when, and if, prepayment may be possible for each portfolio company. In some cases, the prepayment of a loan may reduce our achievable yield if the capital returned cannot be invested in transactions with equal or greater expected yields, which could have a material adverse effect on our business, financial condition and results of operations.

The application of the risk retention rules to CLOs may have broader effects on the CLO and loan markets in general, potentially resulting in fewer or less desirable investment opportunities for the Company.

Section 941 of the Dodd-Frank Act added a provision to the Exchange Act requiring the seller, sponsor or securitizer of a securitization vehicle to retain no less than five percent of the credit risk in assets it sells into a securitization and prohibiting such securitizer from directly or indirectly hedging or otherwise transferring the retained credit risk. The responsible federal agencies adopted final rules implementing these restrictions on October 22, 2014 and the final rules became effective on December 24, 2016. Under the final rules, the asset manager of a CLO is considered the sponsor of a securitization vehicle and is required to retain five percent of the credit risk in the CLO, which may be retained horizontally in the equity tranche of the CLO or vertically as a five percent interest in each tranche of the securities issued by the CLO. Although the final rules contain an exemption from such requirements for the asset manager of a CLO if, among other things, the originator or lead arranger of all of the loans acquired by the CLO retain such risk at the asset level and, at origination of such asset, takes a loan tranche of at least 20% of the aggregate principal balance, it is possible that the originators and lead arrangers of loans in this market will not agree to assume this risk or provide such retention at origination of the asset in a manner that would provide meaningful relief from the risk retention requirements for CLO managers.

Collateral managers of “open market CLOs” are no longer required to comply with the U.S. risk retention rules at this time. On February 9, 2018, a three-judge panel of the United States Court of Appeals for the District of Columbia Circuit ruled that managers of so-called “open market CLOs” are not “securitizers” under Section 941 of the Dodd-Frank Act and, therefore, are not subject to the requirements of the U.S. risk retention rules. On April 5, 2018, the United States District Court for the District of Columbia entered an order implementing the D.C. Circuit ruling and thereby vacated the U.S. Risk Retention Rules insofar as they apply to CLO managers of “open market CLOs”.

It is possible that some collateral managers of open market CLOs will decide to dispose of the notes constituting the “eligible vertical interest” or “eligible horizontal interest” they were previously required to retain, or decide to take other action with respect to such notes that is not otherwise permitted by the U.S. risk retention rules. As a result of this decision, certain CLO managers of “open market CLOs” will no longer be required to comply with the U.S. risk retention rules solely because of their roles as managers of “open market CLOs”, and there may be no “sponsor” of such securitization transactions and no party may be required to acquire and retain an economic interest in the credit risk of the securitized assets of such transactions.

There can be no assurance or representation that any of the transactions, structures or arrangements currently under consideration by or currently used by CLO market participants will comply with the U.S. risk retention rules to the extent such rules are reinstated or otherwise become applicable to open market CLOs. The ultimate impact of the U.S. risk retention rules on the loan securitization market and the leveraged loan market generally remains uncertain, and any negative impact on secondary market liquidity for securities comprising a CLO may be experienced due to the effects of the U.S. risk retention rules on market expectations or uncertainty, the relative appeal of other investments not impacted by the U.S. risk retention rules and other factors.

Our investments in the companies that we target may be extremely risky and we could lose all or part of our investments.

Although a prospective portfolio company’s assets are one component of our analysis when determining whether to provide debt capital, we generally do not base investment decisions primarily on the liquidation value of a company’s balance sheet assets. Instead, given the nature of the companies that we invest in, we also review the company’s historical and projected cash flows, equity capital and “soft” assets, including intellectual property

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(patented and non-patented), databases, business relationships (both contractual and non-contractual) and the like. Accordingly, considerably higher levels of overall risk will likely be associated with our portfolio compared with that of a traditional asset-based lender whose security consists primarily of receivables, inventories, equipment and other tangible assets. Interest rates payable by our portfolio companies may not compensate for these additional risks, any of which could cause us to lose part or all of our investment.

Specifically, investment in certain of the companies that we are invested in involves a number of significant risks, including:

•        these companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any value from the liquidation of such collateral;

•        they may have limited operating histories, narrower product lines and smaller market shares than larger businesses, which may tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns;

•        because many of them tend to be privately owned, there is generally little publicly available information about these businesses; therefore, although Oxford Square Management’s agents will perform “due diligence” investigations on these portfolio companies, their operations and their prospects, we may not learn all of the material information we need to know regarding these businesses;

•        some of these companies are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us;

•        some of these companies may have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; and

•        many of these companies may be more susceptible to economic recessions or downturns than other better capitalized companies that operate in less capital-intensive industries.

A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio company’s ability to meet its obligations under the debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. In addition, if a portfolio company goes bankrupt, even though we may have structured our interest as senior debt, depending on the facts and circumstances, including the extent to which we actually provided significant “managerial assistance” to that portfolio company, a bankruptcy court might recharacterize our debt holding and subordinate all or a portion of our claim to that of other creditors.

Our failure to make follow-on investments in our portfolio companies could impair the value of our investment portfolio.

Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in order to: (i) increase or maintain in whole or in part our equity ownership percentage; (ii) exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or (iii) attempt to preserve or enhance the value of our investment.

We may elect not to make follow-on investments or otherwise lack sufficient funds to make those investments. We have the discretion to make any follow-on investments, subject to the availability of capital resources. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our concentration of risk, because we prefer other opportunities, or because we are inhibited by compliance with BDC requirements or the desire to maintain our tax status.

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Our incentive fee may induce Oxford Square Management to use leverage and to make speculative investments.

The incentive fee payable by us to Oxford Square Management may create an incentive for Oxford Square Management to use leverage and to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee on “Pre-Incentive Fee Net Investment Income” is determined, which is calculated as a percentage of the return on invested capital, may encourage Oxford Square Management to use leverage to increase the return on our equity capital. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor holders of our common stock. Similarly, because Oxford Square Management may also receive an incentive fee based, in part, upon the capital gains realized on our investments, the investment adviser may invest more than would otherwise be appropriate in companies whose securities are likely to yield capital gains, as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during an economic downturn.

Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.

We intend to invest primarily in senior debt securities, but may also invest in subordinated debt securities, issued by our portfolio companies. In some cases, portfolio companies will be permitted to have other debt that ranks equally with, or senior to, the debt securities in which we invest. By their terms, such debt instruments may provide that the holders thereof are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of the debt securities in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligations to us. In the case of debt ranking equally with debt securities in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company. In addition, we will not be in a position to control any portfolio company by investing in its debt securities. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such companies, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not best serve our interests as debt investors.

Because we generally do not hold controlling equity interests in our portfolio companies, we may not be in a position to exercise control over our portfolio companies or to prevent decisions by the managements of our portfolio companies that could decrease the value of our investments.

Although we have taken and may in the future take controlling equity positions in our portfolio companies from time to time, we generally do not do so. As a result, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity for the debt and equity investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company, and may therefore suffer a decrease in the value of our investments.

Our investments in CLO vehicles are riskier and less transparent than direct investments in portfolio companies and our investments in warehouse facilities are subject to greater risks compared to our other investments.

From time to time we have invested and may in the future invest in debt and residual value interests of CLO vehicles. Generally, there may be less information available to us regarding the underlying debt investments held by such CLOs than if we had invested directly in the debt of the underlying companies. As a result, our stockholders may not know the details of the underlying securities of the CLO vehicles in which we may invest. Our CLO investments will also be subject to the risk of leverage associated with the debt issued by such CLOs and the repayment priority of debt holders senior to us in such CLOs.

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The accounting and tax implications of such investments are complicated. In particular, reported earnings from the equity tranche investments of these CLO vehicles are recorded under GAAP based upon an effective yield calculation. Current taxable earnings on these investments, however, will generally not be determinable until after the end of the fiscal year of each individual CLO vehicle that ends within the Company’s fiscal year, even though the investments are generating cash flow. In general, the tax treatment of these investments may result in higher distributable earnings in the early years and a capital loss at maturity, while for reporting purposes the totality of cash flows are reflected in a constant yield to maturity.

Some instruments issued by CLO vehicles may not be readily marketable and may be subject to restrictions on resale. Securities issued by CLO vehicles are generally not listed on any U.S. national securities exchange and no active trading market may exist for the securities of CLO vehicles in which we may invest. Although a secondary market may exist for our investments in CLO vehicles, the market for our investments in CLO vehicles may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. As a result, these types of investments may be more difficult to value.

In addition, our investments in warehouse facilities are short term investments and therefore may be subject to a greater risk relating to market conditions and economic recession or downturns.

Failure by a CLO vehicle in which we are invested to satisfy certain tests will harm our operating results.

The failure by a CLO vehicle in which we invest to satisfy certain financial covenants, specifically those with respect to adequate collateralization and/or interest coverage tests, could lead to a reduction in its payments to us. In the event that a CLO vehicle failed these certain tests, holders of debt senior to us may be entitled to additional payments that would, in turn, reduce the payments we would otherwise be entitled to receive. Separately, we may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting CLO vehicle or any other investment we may make. If any of these occur, it could materially and adversely affect our operating results and cash flows.

Our financial results may be affected adversely if one or more of our significant equity or junior debt investments in a CLO vehicle defaults on its payment obligations or fails to perform as we expect or if the market price fluctuates significantly in such illiquid investments.

As a BDC, we may not acquire equity and junior debt investments in CLO vehicles unless, at the time of such acquisition, at least 70% of our total assets are “qualifying assets.” CLO vehicles that we invest in are typically very highly levered, and therefore, the junior debt and equity tranches that we invest in are subject to a higher degree of risk of total loss. As of December 31, 2019, the CLO vehicles in which we were invested had average leverage of 9.8 times and ranged from approximately 4.6 times to 13.3 times levered. In particular, investors in CLO vehicles indirectly bear risks of the underlying debt investments held by such CLO vehicles. We will generally have the right to receive payments only from the CLO vehicles, and will generally not have direct rights against the underlying borrowers or the entity that sponsored the CLO vehicle. While the CLO vehicles we have and continue to target generally enable the investor to acquire interests in a pool of leveraged corporate loans without the expenses associated with directly holding the same investments, we will generally pay a proportionate share of the CLO vehicles’ administrative and other expenses. Although it is difficult to predict whether the prices of indices and securities underlying CLO vehicles will rise or fall, these prices (and, therefore, the prices of the CLO vehicles) will be influenced by the same types of political and economic events that affect issuers of securities and capital markets generally. The failure by a CLO vehicle in which we invest to satisfy certain financial covenants, specifically those with respect to adequate collateralization and/or interest coverage tests, could lead to a reduction in its payments to us. In the event that a CLO vehicle failed those tests, holders of debt senior to us may be entitled to additional payments that would, in turn, reduce the payments we would otherwise be entitled to receive. Separately, we may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting CLO vehicle or any other investment we may make. If any of these occur, it could materially and adversely affect our operating results and cash flows.

The interests we intend to acquire in CLO vehicles will likely be thinly traded or have only a limited trading market. CLO vehicles are typically privately offered and sold, even in the secondary market. As a result, investments in CLO vehicles may be characterized as illiquid securities. In addition to the general risks associated with investing in debt securities, CLO vehicles carry additional risks, including, but not limited to: (i) the possibility

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that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) the fact that our investments in CLO tranches will likely be subordinate to other senior classes of note tranches thereof; and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the CLO vehicle or unexpected investment results. Our net asset value may also decline over time if our principal recovery with respect to CLO equity investments is less than the price we paid for those investments

Investments in structured vehicles, including equity and junior debt instruments issued by CLO vehicles, involve risks, including credit risk and market risk. Changes in interest rates and credit quality may cause significant price fluctuations. Additionally, changes in the underlying leveraged corporate loans held by a CLO vehicle may cause payments on the instruments we hold to be reduced, either temporarily or permanently.

Structured investments, particularly the subordinated interests in which we intend to invest, are less liquid than many other types of securities and may be more volatile than the leveraged corporate loans underlying the CLO vehicles we intend to target. Fluctuations in interest rates may also cause payments on the tranches of CLO vehicles that we hold to be reduced, either temporarily or permanently.

Investments in foreign securities formed under the laws of the Cayman Islands may involve significant risks in addition to the risks inherent in U.S. investments.

Our investment strategy involves investments in securities issued by foreign entities, including foreign CLO vehicles that are formed under the laws of the Cayman Islands. Investing in foreign entities formed under the laws of the Cayman Islands may expose us to additional risks not typically associated with investing in U.S. issues. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the U.S., higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. Further, we, and the CLO vehicles in which we invest, may have difficulty enforcing creditor’s rights in foreign jurisdictions, such as the Cayman Islands. In addition, the underlying companies of the CLO vehicles in which we invest may be foreign, which may create greater exposure for us to foreign economic developments.

Although we expect that most of our investments will be U.S. dollar-denominated, any investments denominated in a foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments. We may employ hedging techniques to minimize these risks, but we can offer no assurance that we will, in fact, hedge currency risk, or that if we do, such strategies will be effective.

RISKS RELATED TO AN INVESTMENT IN OUR SECURITIES

Our common stock price may be volatile.

The trading price of our common stock may fluctuate substantially depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:

•        price and volume fluctuations in the overall stock market from time to time;

•        significant volatility in the market price and trading volume of securities of regulated investment companies, BDCs or other financial services companies;

•        exclusion of our common stock from certain indices, such as the Russell 2000 Financial Services Index, which could reduce the ability of certain investment funds to own our common stock and put short-term selling pressure on our common stock;

•        changes in regulatory policies or tax guidelines with respect to regulated investment companies or BDCs;

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•        actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts;

•        general economic conditions and trends;

•        loss of a major funding source; or

•        departures of key personnel.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against such company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business. Refer to “Risks relating to our business and structure — Our business and operation could be negatively affected if we become subject to any additional securities litigation or shareholder activism, which could cause us to incur significant expense, hinder execution of our investment strategy and impact our stock price.”

Our shares of common stock have traded at a discount from net asset value and may do so in the future.

Shares of closed-end investment companies have frequently traded at a market price that is less than the net asset value that is attributable to those shares. Our common stock traded below our net asset value per share during some periods from 2010 through 2019. Our common stock could trade at a discount to net asset value at any time in the future. The possibility that our shares of common stock may trade at a discount from net asset value over the long term is separate and distinct from the risk that our net asset value will decrease. We cannot predict whether shares of our common stock will trade above, at or below our net asset value. If our common stock trades below its net asset value, we will generally not be able to issue additional shares of our common stock at its market price without first obtaining the approval for such issuance from our stockholders and our independent directors. If additional funds are not available to us, we could be forced to curtail or cease our new lending and investment activities, and our net asset value could decrease and our level of distributions could be impacted. Our net asset value may also decline over time if our principal recovery with respect to CLO equity investments is less than the price that we paid for those investments.

You may not receive distributions or our distributions may decline or may not grow over time.

We cannot assure you that we will achieve investment results or maintain a tax treatment that will allow or require any specified level of cash distributions or year-to-year increases in cash distributions. In particular, our future distributions are dependent upon the investment income we receive on our portfolio investments, including our higher-yielding CLO equity investments. To the extent such investment income, including income from our CLO equity investments (which we expect to decline as those vehicles de-leverage after the end of their respective re-investment periods), declines or if we transition our portfolio into lower-yielding investments, our ability to pay future distributions may be harmed.

Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering.

In the event we issue subscription rights or warrants to purchase shares of our common stock, stockholders who do not fully exercise their rights or warrants should expect that they will, at the completion of the offer, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights or warrants. We cannot state precisely the amount of any such dilution in share ownership because we do not know at this time what proportion of the shares will be purchased as a result of the offer.

In addition, if the subscription price is less than our net asset value per share, then our stockholders would experience an immediate dilution of the aggregate net asset value of their shares as a result of the offer. The amount of any decrease in net asset value is not predictable because it is not known at this time what the subscription price, warrant exercise price or net asset value per share will be on the expiration date of such rights offering or what proportion of the shares will be purchased as a result of the offer. Such dilution could be substantial.

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If we issue preferred stock, the net asset value and market value of our common stock will likely become more volatile.

We cannot assure you that the issuance of preferred stock would result in a higher yield or return to the holders of the common stock. The issuance of preferred stock would likely cause the net asset value and market value of the common stock to become more volatile. If the distribution rate on the preferred stock were to approach the net rate of return on our investment portfolio, the benefit of leverage to the holders of the common stock would be reduced. If the distribution rate on the preferred stock were to exceed the net rate of return on our portfolio, the leverage would result in a lower rate of return to the holders of common stock than if we had not issued preferred stock. Any decline in the net asset value of our investments would be borne entirely by the holders of common stock. Therefore, if the market value of our portfolio were to decline, the leverage would result in a greater decrease in net asset value to the holders of common stock than if we were not leveraged through the issuance of preferred stock. This greater net asset value decrease would also tend to cause a greater decline in the market price for the common stock. We might be in danger of failing to maintain the required asset coverage of the preferred stock or of losing our ratings, if any, on the preferred stock or, in an extreme case, our current investment income might not be sufficient to meet the distribution requirements on the preferred stock. In order to counteract such an event, we might need to liquidate investments in order to fund a redemption of some or all of the preferred stock. In addition, we would pay (and the holders of common stock would bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred stock, including higher advisory fees if our total return exceeds the distribution rate on the preferred stock. Holders of preferred stock may have different interests than holders of common stock and may at times have disproportionate influence over our affairs.

Holders of any preferred stock we might issue would have the right to elect members of our Board of Directors and class voting rights on certain matters.

Holders of any preferred stock we might issue, voting separately as a single class, would have the right to elect two members of our Board of Directors at all times and in the event distributions become two full years in arrears would have the right to elect a majority of the directors until such arrearage is completely eliminated. In addition, preferred stockholders have class voting rights on certain matters, including changes in fundamental investment restrictions and conversion to open-end status, and accordingly can veto any such changes. Restrictions imposed on the declarations and payment of distributions or other distributions to the holders of our common stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies, if any, or the terms of our credit facilities, if any, might impair our ability to maintain our tax treatment as a RIC for U.S. federal income tax purposes. While we would intend to redeem our preferred stock to the extent necessary to enable us to distribute our income as required to maintain our qualification as a RIC, there can be no assurance that such actions could be effected in time to meet the tax requirements.

The net asset value per share of our common stock may be diluted if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock.

If we were to sell shares of our common stock below its then current net asset value per share, such sales would result in an immediate dilution to the net asset value per share of our common stock. This dilution would occur as a result of the sale of shares at a price below the then current net asset value per share of our common stock and a proportionately greater decrease in the stockholders’ interest in our earnings and assets and their voting interest in us than the increase in our assets resulting from such issuance. Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be predicted.

Further, if our current stockholders do not purchase any shares to maintain their percentage interest, regardless of whether such offering is above or below the then current net asset value per share, their voting power will be diluted. For example, if we sell an additional 10% of our common shares at a 10% discount from net asset value, a stockholder who does not participate in that offering for its proportionate interest will suffer net asset value dilution of up to 1.0% or $10 per $1,000 of net asset value.

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Delays in the government budget process or a government shutdown may adversely affect our operations and may prevent us from conducting a securities offering.

Each year, the U.S. Congress must pass all spending bills in the federal budget. If any such spending bill is not timely passed, a government shutdown will close many federally run operations, which includes those of the SEC, and halt work for federal employees unless they are considered essential or such work is separately funded by industry. If a government shutdown was to occur, and the SEC were to remain closed for a prolonged period of time, we may not be able to conduct a securities offering. Our ability to raise additional capital through the sale of securities could be materially affected by any prolonged government shutdown.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

We do not own any real estate or other physical properties materially important to our operation. Our headquarters are located at 8 Sound Shore Drive, Suite 255, Greenwich, Connecticut, where we occupy our office space pursuant to our Administration Agreement with Oxford Funds. We believe that our office facilities are suitable and adequate for our business as it is presently conducted.

Item 3. Legal Proceedings

We and our consolidated subsidiaries are not currently subject to any pending material legal proceedings. From time to time, we and our consolidated subsidiaries may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Global Select Market under the symbol “OXSQ.” The last reported sale price for our common stock on the NASDAQ Global Select Market on February 25, 2020 was $5.41 per share. As of February 25, 2020, we had 145 stockholders of record.

Distributions

We currently intend to distribute a minimum of 90% of our ordinary income and short-term capital gains (net of short-term capital losses), if any, on a quarterly basis to our stockholders, in accordance with our election to be treated, and intention to qualify annually, as a RIC under Subchapter M of the Code. For a more detailed discussion of the requirements under Subchapter M, please refer to the discussion in “Business — Certain U.S. Federal Income Tax Considerations” set forth above. In order to qualify as a RIC and to avoid corporate level tax on the income we distribute to our stockholders, we are required, under Subchapter M of the Code, to distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses to our stockholders on an annual basis.

A written statement identifying the nature of our distributions for tax reporting purposes was posted on our website. The final determination of the nature of distribution can only be made upon the filing of our tax return. 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 RIC tax treatment. We cannot assure stockholders that they will receive any distributions.

To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to our stockholders. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our taxable ordinary income or capital gains. Stockholders should read any written disclosure accompanying a distribution payment carefully and should not assume that the source of any distribution is taxable ordinary income or capital gains.

Recent Sales of Unregistered Securities

We did not engage in unregistered sales of equity securities during the year ended December 31, 2019, however, we issued a total of 23,225 shares of common stock under our distribution reinvestment plan. This issuance was not subject to the registration requirements of the Securities Act of 1933, as amended. The aggregate value for the shares of common stock issued under the distribution reinvestment plan was $147,827. Also, during the year ended December 31, 2019, as part of our distribution reinvestment plan for our common stockholders, our distribution reinvestment administrator purchased 120,368 shares of our common stock for $0.7 million in the open market to satisfy the reinvestment portion of our distribution.

Issuer Purchases of Equity Securities

During the year ended December 31, 2019, no common stock was repurchased.

Performance Graph

This graph compares the cumulative stockholder return on our common stock with that of the NASDAQ Composite Index and the NASDAQ Financial 100, as we do not believe there is an appropriate index of companies with an investment strategy similar to our own with which to compare the return on our common stock, for the period from December 31, 2014 through December 31, 2019. The graph assumes that, on December 31, 2014, a person invested $100 in each of our common stock, the NASDAQ Composite Index and the NASDAQ Financial 100, which includes the 100 largest domestic and international financial organizations listed on the NASDAQ Stock Market based on market capitalization. The NASDAQ Financial 100 contains banks and savings institutions and related holding companies, insurance companies, broker-dealers, investment companies and financial services organizations.

52

The graph measures cumulative total stockholder return, which takes into account both changes in stock price and distributions. It assumes that distributions paid are reinvested in like securities.

The graph and the information furnished under this Part II Item 5 of this Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act. The stock price performance included in the above graph is not necessarily indicative of future stock price performance.

53

Item 6. Selected Financial and Other Data

The following selected financial data for the years ended December 31, 2019, 2018, 2017, 2016, and 2015 is derived from our consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm. Other data included below is unaudited. The data should be read in conjunction with our consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.

($ in millions, except share data)

 

Year Ended
December 31,
2019

 

Year Ended
December 31,
2018

 

Year Ended
December 31,
2017

 

Year Ended
December 31,
2016

 

Year Ended
December 31,
2015

Total Investment Income

 

$

62.7

 

 

$

56.3

 

 

$

61.4

 

 

$

69.3

 

 

$

87.5

 

Total Expenses

 

$

24.2

 

 

$

22.8

 

 

$

30.7

 

 

$

42.5

 

 

$

47.8

 

Net Investment Income

 

$

38.5

 

 

$

33.5

 

 

$

30.7

 

 

$

26.8

 

 

$

39.6

 

Net (Decrease) Increase in Net Assets Resulting from Operations

 

$

(32.8

)

 

$

(9.2

)

 

$

43.6

 

 

$

110.4

 

 

$

(66.1

)

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Increase in Net Assets Resulting from Net Investment Income per common share (Basic and Diluted)(1)

 

$

0.81

 

 

$

0.67

 

 

$

0.60

 

 

$

0.52

 

 

$

0.66

 

Net (Decrease) Increase in Net Assets Resulting from Operations per common share (Basic)

 

$

(0.69

)

 

$

(0.19

)

 

$

0.85

 

 

$

2.13

 

 

$

(1.11

)

Net (Decrease) Increase in Net Assets Resulting from Operations per common share (Diluted)(1)

 

$

(0.69

)

 

$

(0.19

)

 

$

0.83

 

 

$

1.90

 

 

$

(1.11

)

Distributions Declared per Share

 

$

0.80

 

 

$

0.80

 

 

$

0.80

 

 

$

1.16

 

 

$

1.14

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

385.3

 

 

$

467.1

 

 

$

454.1

 

 

$

612.5

 

 

$

718.3

 

Total Long Term Debt

 

$

134.4

 

 

$

148.2

 

 

$

62.3

 

 

$

220.0

 

 

$

347.7

 

Total Net Assets

 

$

248.0

 

 

$

314.7

 

 

$

388.4

 

 

$

386.0

 

 

$

360.9

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Portfolio Companies at Period End

 

 

48

 

 

 

50

 

 

 

51

 

 

 

60

 

 

 

72

 

Purchases of Securities

 

$

54.8

 

 

$

244.6

 

 

$

208.8

 

 

$

171.6

 

 

$

234.8

 

Debt Repayments

 

$

43.9

 

 

$

131.5

 

 

$

189.2

 

 

$

115.2

 

 

$

224.2

 

Proceeds from Sales of Securities

 

$

15.9

 

 

$

25.9

 

 

$

171.4

 

 

$

176.8

 

 

$

196.2

 

Reductions to CLO Equity
Cost Value

 

$

12.8

(5)

 

$

18.8

(6)

 

$

37.1

(7)

 

$

34.2

(8)

 

$

41.6

(9)

Total Return Based on Market
Value
(2)

 

 

(4.14

)%

 

 

26.95

%

 

 

(2.01

)%

 

 

33.29

%

 

 

(4.35

)%

Total Return Based on Net Asset Value(3)

 

 

(10.26

)%

 

 

(1.99

)%

 

 

11.33

%

 

 

35.31

%

 

 

(12.73

)%

Weighted Average Yield on Debt Investments at Period End(4)

 

 

9.1

%

 

 

9.7

%

 

 

9.7

%

 

 

8.3

%

 

 

7.1

%

____________

(1)      Due to the anti-dilutive effect on the computation of net increase in net assets resulting from net investment income (diluted) per share for the years ended December 31, 2017, 2016 and 2015, and net increase (decrease) in net assets resulting from operations (diluted) per share for the year ended December 31, 2015, the adjustments for interest and deferred issuance costs on the 7.50% Senior Convertible Notes due 2017 (the “Convertible Notes”) and the related impact on the Base Fees and Net Investment Income Incentive Fees, as well as weighted average common shares outstanding adjustments for the dilutive effect of the Convertible Notes, were excluded from the respective period’s diluted earnings per share computation.

54

(2)      Total return based on market value equals the increase or decrease of ending market value over beginning market value, plus distributions, divided by the beginning market value per share, assuming distribution reinvestment at prices obtained under our distribution reinvestment plan, excluding any discounts.

(3)      Total return based on net asset value equals the increase or decrease of ending net asset value over beginning net asset value, plus distributions, divided by the beginning net asset value.

(4)      Weighted average yield calculation includes the impact of any loans on non-accrual status as of the year end.

(5)      Reduction to cost value on our CLO equity investments represents the difference between distributions received, or entitled to be received, of approximately $38.0 million and the effective yield interest income of approximately $25.2 million.

(6)      Reduction to cost value on our CLO equity investments represents the difference between distributions received, or entitled to be received, of approximately $46.6 million and the effective yield interest income of approximately $27.8 million.

(7)      Reduction to cost value on our CLO equity investments represents the difference between distributions received, or entitled to be received, of approximately $70.4 million and the effective yield interest income of approximately $33.3 million.

(8)      Reduction to cost value on our CLO equity investments represents the difference between distributions received, or entitled to be received, of approximately $66.7 million and the effective yield interest income of approximately $32.5 million.

(9)      Reduction to cost value on our CLO equity investments represents the difference between distributions received, or entitled to be received, of approximately $76.5 million and the effective yield interest income of approximately $34.9 million.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT 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 OXSQ 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;

•        our business prospects and the prospects of our portfolio companies;

•        the impact of investments that we expect to make;

•        our contractual arrangements and relationships with third parties;

•        the dependence of our future success on the general economy and its impact on the industries in which we invest;

•        the ability of our portfolio companies to achieve their objectives;

•        our expected financings and investments;

•        the adequacy of our cash resources and working capital; and

•        the timing of cash flows, if any, from the operations of our portfolio companies.

These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

•        an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;

•        a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;

•        interest rate volatility could adversely affect our results, particularly because we use leverage as part of our investment strategy;

55

•        currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars; 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. 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.

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 Form 10-K.

OVERVIEW

Our investment objective is to maximize our portfolio’s total return. Our primary current focus is to seek an attractive risk-adjusted total return by investing primarily in corporate debt securities and in collateralized loan obligation (“CLO”) 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, beginning with our 2003 taxable year.

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 Charles M. Royce, a member of our Board of Directors who holds a minority, non-controlling interest in Oxford Square Management. Jonathan H. Cohen, our Chief Executive Officer, and Saul B. Rosenthal, our President and Chief Operating Officer, are the controlling members of Oxford Funds. Under an investment advisory agreement (the “Investment Advisory Agreement”), we have agreed to pay Oxford Square Management an annual base management fee calculated on gross assets, and an incentive fee based upon our performance. Under an amended and restated administration agreement (the “Administration Agreement”), we have agreed to pay or reimburse Oxford Funds, as administrator, for certain expenses incurred in operating OXSQ. Our executive officers and directors, and the executive officers of Oxford Square Management and Oxford Funds, serve or may serve as officers and directors of entities that operate in a line of business similar to our own. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders.

We generally expect to invest between $5 million and $50 million in each of our portfolio companies, although this investment size may vary proportionately as the size of our capital base changes and market conditions warrant. We invest in both fixed and variable interest rate structures. 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, 2019, our debt investments had stated interest rates of between 5.19% and 12.56% and maturity dates of between 17 and 139 months. In addition, our total portfolio had a weighted average yield on debt investments of approximately 9.1%.

The weighted average 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 yield was computed using the effective interest rates as of December 31, 2019, 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 yield will remain at its current level.

56

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 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. 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.

Prior to making an investment, we may enter into a non-binding term sheet with the potential portfolio company. These term sheets are generally subject to a number of conditions, including but not limited to the satisfactory completion of our due diligence investigations of the company’s business and legal documentation for the loan.

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 $364.8 million and $445.0 million as of December 31, 2019 and December 31, 2018, respectively. The decrease in the value of investments during the year ended December 31, 2019 was due primarily to a net change in unrealized depreciation on our investment portfolio of approximately $69.5 million (which incorporates reductions to CLO equity cost value of $12.8 million), debt repayments and sales of securities totaling approximately $59.8 million, partially offset by purchases of investments of approximately $54.8 million. Refer to the table below, which reconciles the investment portfolio for the year ended December 31, 2019 and the year ended December 31, 2018.

A reconciliation of the investment portfolio for the years ended December 31, 2019 and 2018 follows:

($ in millions)

 

December 31,
2019

 

December 31,
2018

Beginning investment portfolio

 

$

445.0

 

 

$

418.4

 

Portfolio investments acquired

 

 

54.8

 

 

 

244.6

 

Debt repayments

 

 

(43.9

)

 

 

(131.5

)

Sales of securities

 

 

(15.9

)

 

 

(25.9

)

Reductions to CLO equity cost value(1)

 

 

(12.8

)

 

 

(18.8

)

Non-cash interest and dividend income due to PIK

 

 

8.0

 

 

 

0.3

 

Accretion of discounts on investments

 

 

0.8

 

 

 

0.6

 

Net change in unrealized appreciation/depreciation on investments

 

 

(69.5

)

 

 

(39.3

)

Net realized losses on investments

 

 

(1.7

)

 

 

(3.4

)

Ending investment portfolio

 

$

364.8

 

 

$

445.0

 

____________

(1)      For the year ended December 31, 2019, reduction to cost value on our CLO equity investments represents the difference between distributions received, or entitled to be received, for the year ended December 31, 2019, of approximately $38.0 million and the effective yield interest income of approximately $25.2 million. For the year ended December 31, 2018, reduction to cost value on our CLO equity investments represents the difference between distributions received, or entitled to be received, for the year ended December 31, 2018, of approximately $46.6 million and the effective yield interest income of approximately $27.8 million.

57

During the year ended December 31, 2019, we purchased approximately $54.8 million in portfolio investments, including additional investments of approximately $14.3 million in existing portfolio companies and approximately $40.4 million in new portfolio companies. For the year ended December 31, 2018, we purchased approximately $244.6 million in portfolio investments, including additional investments of approximately $90.3 million in existing portfolio companies and approximately $154.3 million in new portfolio companies.

In certain instances, we receive payments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period.

For the years ended December 31, 2019 and December 31, 2018, we had approximately $43.9 million and approximately $131.5 million, respectively, of loan principal repayments. The repayments during the year ended December 31, 2019 were as follows ($ in millions):

Portfolio Company

 

2019
Repayments

Help/Systems Holdings, Inc.

 

$

19.5

Amerilife Group, LLC

 

 

15.0

Verifone Systems, Inc.

 

 

8.1

Premiere Global Services, Inc.

 

 

0.4

Capstone Logistics Acquisition, Inc.

 

 

0.3

Net all other

 

 

0.6

Total repayments

 

$

43.9

Portfolio activity also reflects sales of securities in the amounts of approximately $15.9 million and approximately $25.9 million for the years ended December 31, 2019 and 2018, respectively. The sales during the year ended December 31, 2019 were as follows ($ in millions):

Portfolio Company

 

2019
Sales

Merrill Communications, LLC

 

$

4.9

Steele Creek CLO 2014-1, Ltd.

 

 

3.5

Global Tel Link Corp.

 

 

3.0

Scribe America Intermediate Holdco, LLC

 

 

2.5

Carlyle Global Market Strategies CLO 2013-2, Ltd.

 

 

1.9

Net all other

 

 

0.1

Total sales

 

$

15.9

As of December 31, 2019, we had investments in debt securities of, or loans to, 21 portfolio companies, with a fair value of approximately $241.4 million, and equity investments of approximately $123.4 million. Our debt and preferred stock investments included approximately $8.0 million in PIK interest/dividends, which, as described in “— Overview” above, is added to the carrying value of our investments, reduced by repayments of principal. As of December 31, 2018, we had investments in debt securities of, or loans to, 22 portfolio companies, with a fair value of approximately $283.7 million, and equity investments of approximately $161.3 million. Our debt investments included approximately $0.3 million in accrued PIK interest, which, as described in “— Overview” above, is added to the carrying value of our investments, reduced by repayments of principal.

58

The following table indicates the quarterly portfolio investment activity for the years ended December 31, 2019 and 2018:

($ in millions)

 

Purchases of
Securities

 

Debt
Repayments

 

Reductions to
CLO Equity
Cost
(1)

 

Sales of
Securities

Quarter ended

 

 

   

 

   

 

   

 

 

December 31, 2019

 

$

3.9

 

$

19.7

 

$

5.5

 

$

September 30, 2019

 

 

 

 

0.2

 

 

3.2

 

 

4.9

June 30, 2019

 

 

46.4

 

 

23.5

 

 

2.6

 

 

7.4

March 31, 2019

 

 

4.4

 

 

0.4

 

 

1.4

 

 

3.6

Total(2)

 

$

54.8

 

$

43.9

 

$

12.8

 

$

15.9

   

 

   

 

   

 

   

 

 

December 31, 2018

 

$

39.2

 

$

38.9

 

$

7.9

 

$

10.5

September 30, 2018

 

 

91.8

 

 

24.1

 

 

1.2

 

 

12.1

June 30, 2018

 

 

88.8

 

 

43.7

 

 

5.8

 

 

0.2

March 31, 2018

 

 

24.7

 

 

24.9

 

 

3.9

 

 

3.1

Total(2)

 

$

244.6

 

$

131.5

 

$

18.8

 

$

25.9

____________

(1)      Represents reductions to CLO equity cost value (representing distributions received, or entitled to be received, in excess of effective yield interest income).

(2)      Totals may not sum due to rounding.

The following table shows the fair value of our portfolio of investments by asset class as of December 31, 2019 and 2018:

 

2019

 

2018

($ in millions)

 

Investments at
Fair Value

 

Percentage of
Total Portfolio

 

Investments at
Fair Value

 

Percentage of
Total Portfolio

Senior Secured Notes

 

$

240.5

 

65.9

%

 

$

282.7

 

63.5

%

CLO Debt

 

 

0.8

 

0.2

%

 

 

0.9

 

0.2

%

CLO Equity

 

 

120.6

 

33.1

%

 

 

146.8

 

33.0

%

Equity and Other Investments

 

 

2.8

 

0.8

%

 

 

14.5

 

3.3

%

Total(1)

 

$

364.8

 

100.0

%

 

$

445.0

 

100.0

%

____________

(1)      Totals may not sum 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, 2019, we held qualifying assets that represented 68.4% of the total assets. No additional non-qualifying assets were acquired during the periods when qualifying assets were less than 70% of the total assets.

59

The following table shows our portfolio of investments by industry at fair value, in millions, as of December 31, 2019 and 2018:

 

December 31, 2019

 

December 31, 2018

   

Investments at
Fair Value

 

Percentage of
Fair Value

 

Investments at
Fair Value

 

Percentage of
Fair Value

   

 

($ in millions)

 

   

 

 

 

($ in millions)

 

   

 

Structured finance(1)

 

$

121.4

 

 

33.3

%

 

$

147.8

 

 

33.2

%

Healthcare

 

 

59.6

 

 

16.3

%

 

 

46.9

 

 

10.5

%

Business services

 

 

59.3

 

 

16.3

%

 

 

85.5

 

 

19.2

%

Software

 

 

40.2

 

 

11.0

%

 

 

59.0

 

 

13.3

%

Financial intermediaries

 

 

21.2

 

 

5.8

%

 

 

16.8

 

 

3.8

%

Telecommunication services

 

 

14.5

 

 

4.0

%

 

 

19.4

 

 

4.4

%

Logistics

 

 

12.7

 

 

3.5

%

 

 

13.0

 

 

2.9

%

Utilities

 

 

12.2

 

 

3.3

%

 

 

12.3

 

 

2.8

%

Diversified insurance

 

 

9.9

 

 

2.7

%

 

 

14.7

 

 

3.3

%

Education

 

 

5.6

 

 

1.5

%

 

 

4.9

 

 

1.1

%

Aerospace and defense

 

 

5.4

 

 

1.5

%

 

 

5.3

 

 

1.2

%

IT consulting

 

 

2.8

 

 

0.8

%

 

 

14.5

 

 

3.2

%

Printing and publishing

 

 

 

 

%

 

 

4.8

 

 

1.1

%

Total(2)

 

$

364.8

 

 

100.0

%

 

$

445.0

 

 

100.0

%

____________

(1)      Reflects our debt and equity investments in CLOs as of December 31, 2019 and December 31, 2018, respectively.

(2)      Totals may not sum due to rounding.

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, 2019 and December 31, 2018.

Top Ten Industries

 

December 31,
201
9

 

December 31,
201
8

Healthcare & Pharmaceuticals

 

9.8

%

 

8.4

%

Banking, Finance, Insurance & Real Estate

 

8.9

%

 

8.3

%

High Tech Industries

 

8.4

%

 

8.9

%

Business Services

 

7.9

%

 

8.2

%

Hotel, Gaming, and Leisure

 

5.2

%

 

5.7

%

Telecommunications

 

4.9

%

 

5.8

%

Media: Broadcasting and Subscription

 

4.4

%

 

3.4

%

Chemicals, Plastics, and Rubber

 

4.3

%

 

3.7

%

Beverage, Food & Tobacco

 

4.1

%

 

4.2

%

Retail

 

3.9

%

 

4.7

%

Total

 

61.8

%

 

61.3

%

PORTFOLIO GRADING

We have adopted a credit grading system to monitor the quality of our debt investment portfolio. Equity securities are not graded. As of December 31, 2019 and 2018 our portfolio had a weighted average grade of 2.2 and 2.1, respectively, based upon the fair value of the debt investments in the portfolio.

60

At December 31, 2019 and 2018, our debt investment portfolio was graded as follows:

($ in millions)

 

December 31, 2019

Grade

 

Summary Description

 

Principal
Value

 

Percentage of
Debt Portfolio

 

Portfolio at
Fair Value

 

Percentage of
Debt Portfolio

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.

 

 

206.6

 

75.3

%

 

 

200.5

 

83.1

%

3

 

Closer monitoring is required. Full repayment of the outstanding amount of OXSQ’s cost basis and interest is expected for the specific tranche.

 

 

42.5

 

15.5

%

 

 

35.1

 

14.5

%

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.

 

 

10.2

 

3.7

%

 

 

3.6

 

1.5

%

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.

 

 

15.0

 

5.5

%

 

 

2.3

 

0.9

%

   

Total(1)

 

$

274.2

 

100.0

%

 

$

241.4

 

100.0

%

____________

(1)      Totals may not sum due to rounding.

($ in millions)

 

December 31, 2018

Grade

 

Summary Description

 

Principal
Value

 

Percentage of
Debt Portfolio

 

Portfolio at
Fair Value

 

Percentage of
Debt Portfolio

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.

 

 

260.8

 

87.8

%

 

 

253.6

 

89.4

%

3

 

Closer monitoring is required. Full repayment of the outstanding amount of OXSQ’s cost basis and interest is expected for the specific tranche.

 

 

36.2

 

12.2

%

 

 

30.0

 

10.6

%

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.

 

 

 

%

 

 

 

%

   

Total(1)

 

$

297.0

 

100.0

%

 

$

283.7

 

100.0

%

____________

(1)      Totals may not sum due to rounding.

61

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.

RESULTS OF OPERATIONS

Set forth below is a comparison of our results of operations for the years ended December 31, 2019 and 2018. For information regarding results of operations for the year ended December 31, 2017, refer to Part II Item 7 in our Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 28, 2019, which is incorporated by reference herein.

Investment Income

The following tables set forth the components of investment income for the years ended December 31, 2019 and 2018:

 

December 31,
2019

 

December 31,
2018

Interest Income

 

 

   

 

 

Stated interest income

 

$

26,701,382

 

$

24,403,191

Original issue discount and market discount income

 

 

819,595

 

 

613,073

Non-cash interest income due to PIK

 

 

271,642

 

 

290,600

Discount income derived from unscheduled remittances at par

 

 

207,664

 

 

148,599

Total interest income

 

 

28,000,283

 

 

25,455,463

Income from securitization vehicles and investments

 

 

25,244,866

 

 

27,837,032

Non-cash dividend income due to PIK

 

 

7,710,805

 

 

Other income

 

 

   

 

 

Fee letters

 

 

884,493

 

 

664,061

Loan prepayment and bond call fees

 

 

315,000

 

 

1,130,741

All other fees

 

 

494,941

 

 

1,189,971

Total other income

 

 

1,694,434

 

 

2,984,773

Total investment income

 

$

62,650,388

 

$

56,277,268

Total investment income for the year ended December 31, 2019 increased by approximately $6.4 million compared to December 31, 2018. This increase was largely the result of an increase in income from non-cash interest and dividend income due to PIK of $7.7 million as a result of the recognition of cumulative preferred stock dividend income PIK in 2019. Additionally, other income declined by approximately $1.3 million which is due to lower fees from loan prepayments.

The total principal outstanding on income producing debt investments as of December 31, 2019 and December 31, 2018 was approximately $249.0 million and $297.0 million, respectively. As of December 31, 2019, our debt investments had stated interest rates of between 5.19% and 12.56% and maturity dates of between 17 and 139 months. As of December 31, 2018, our debt investments had stated interest rates of between 5.89% and 13.04% and maturity dates of between 29 and 151 months. In addition, our total portfolio had a weighted average yield on debt investments of approximately 9.1% compared to a weighted average yield on debt investments of 9.7% as of December 31, 2018.

62

Operating Expenses

The following tables set forth the components of operating expenses for the years ended December 31, 2019 and 2018:

 

December 31,
2019

 

December 31,
2018

Interest expense

 

$

9,901,426

 

$

7,181,009

Base management fees

 

 

6,704,467

 

 

7,309,435

Professional fees

 

 

1,454,942

 

 

1,227,296

Compensation expense

 

 

832,256

 

 

907,995

Director’s fees

 

 

417,500

 

 

441,501

Insurance

 

 

281,146

 

 

247,178

Transfer agent and custodian fees

 

 

239,323

 

 

227,381

General and administrative

 

 

829,476

 

 

644,104

Net Investment Income Incentive Fees

 

 

3,511,493

 

 

4,585,151

Total operating expenses

 

$

24,172,029

 

$

22,771,050

Total operating expenses for the year ended December 31, 2019 increased by approximately $1.4 million compared to the year ended December 31, 2018. The increase in 2019 is attributable primarily to higher interest expense offset by lower Net Investment Income Incentive Fees.

Interest expense increased by approximately $2.7 million in 2019 compared to 2018. The increase in 2019 was a result of entering into the 6.25% Unsecured Notes, partially offset by partial repayments of the Credit Facility. The aggregate accrued interest which remained payable as of December 31, 2019 and 2018 was approximately $0.6 million and $0.5 million, respectively.

The base management fee decreased approximately $0.6 million in 2019 compared to the prior year due to lower average adjusted gross assets in 2019. The base management fees which remained payable to Oxford Square Management as of December 31, 2019 and 2018 was approximately $1.5 million and $2.1 million, respectively.

Professional fees, consisting of legal, valuation, compliance, audit and tax fees, increased approximately $0.2 million in 2019 compared to the prior year due primarily to higher audit fees.

Compensation expense reflects the allocation of compensation expenses for the services of our Chief Financial Officer, accounting personnel, and other administrative support staff. The decrease in 2019 was largely the result of staffing changes during these periods. As of December 31, 2019 and 2018, no compensation expenses remained payable for each respective date.

General and administrative expenses consist primarily of listing fees, office supplies, facilities costs and other miscellaneous expenses, increased by approximately $0.2 million in 2019. Office supplies, facilities costs and other expenses are allocated to us under the terms of the Administration Agreement.

The Net Investment Income Incentive Fee decreased by approximately $1.1 million in 2019 compared to 2018. The decrease in 2019 was a result of the Net Investment Income Incentive Fee being reduced due to 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 management 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 consolidated financial statements.

The Capital Gains Incentive Fee expense, as reported under GAAP, is calculated on the basis of net realized and unrealized gains and losses at the end of each period. The expense related to the hypothetical liquidation of the portfolio (and assuming no other changes in realized or unrealized gains and losses) would only become payable to

63

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, 2019 and 2018, 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 December 31, 2019, we recognized net realized losses on investments of approximately $1.7 million, which primarily represents the losses from the sale of several CLO equity investments.

For the year ended December 31, 2019, our net change in unrealized depreciation was approximately $69.5 million, composed of approximately $5.1 million in gross unrealized appreciation, approximately $77.0 million in gross unrealized depreciation and approximately $2.4 million relating to the reversal of prior period net unrealized depreciation as investment gains and losses were realized. This includes net unrealized appreciation of approximately $12.8 million as a result of reductions to the cost value of our CLO equity investments under the effective yield accounting methodology, whereby the cost value of the respective investments are reduced by the excess of actual cash received and record date distributions to be received over the calculated income using the effective yield method.

The components of the net change in unrealized appreciation/depreciation during the year ended December 31, 2019 were as follows ($ in millions):

Portfolio Company

 

Changes in
unrealized
appreciation/
(depreciation)

Unitek Global Services, Inc.

 

$

(19.4

)

Sound Point CLO XVI, Ltd.

 

 

(13.3

)

Imagine! Print Solutions, LLC

 

 

(11.1

)

Premiere Global Services, Inc.

 

 

(7.6

)

Telos CLO 2014-5, Ltd.

 

 

(6.3

)

Nassau 2019-I CLO, Ltd.

 

 

(3.3

)

Zais CLO 6, Ltd.

 

 

(2.5

)

Telos CLO 2013-4, Ltd.

 

 

(2.4

)

Global Tel-Link Corporation

 

 

(2.0

)

KVK CLO 2013-2, Ltd.

 

 

1.5

 

Net all other

 

 

(3.1

)

Total

 

$

(69.5

)

For the year ended December 31, 2018, we recognized net realized losses on investments of approximately $3.4 million, which primarily represents the losses from the sale of several CLO equity investments.

For the year ended December 31, 2018, our net change in unrealized depreciation was approximately $39.3 million, composed of approximately $1.3 million in gross unrealized appreciation, approximately $49.7 million in gross unrealized depreciation and approximately $9.1 million relating to the reversal of prior period net unrealized depreciation as investment gains and losses were realized. This includes net unrealized appreciation of approximately $18.8 million as a result of reductions to the cost value of our CLO equity investments under the effective yield accounting methodology, whereby the cost value of the respective investments are reduced by the excess of actual cash received and record date distributions to be received over the calculated income using the effective yield method.

64

The components of the net change in unrealized appreciation/depreciation during the year ended December 31, 2018 were as follows ($ in millions):

Portfolio Company

 

Changes in
unrealized
appreciation
/
(depreciation)

Catamaran CLO 2012-1 Ltd.

 

$

5.0

 

Ares XXVI CLO Ltd.

 

 

2.0

 

Jamestown CLO V Ltd.

 

 

2.0

 

Telos CLO 2013-3, Ltd.

 

 

(2.7

)

Telos CLO 2014-5, Ltd.

 

 

(2.7

)

AMMC CLO XII, Ltd.

 

 

(3.0

)

Vibrant CLO V, Ltd.

 

 

(3.2

)

Cedar Funding II CLO, Ltd.

 

 

(4.2

)

Premiere Global Services, Inc.

 

 

(4.3

)

Sound Point CLO XVI, Ltd.

 

 

(4.8

)

Net all other

 

 

(23.4

)

Total

 

$

(39.3

)

Net Increase in Net Assets Resulting from Net Investment Income

Net investment income for the year ended December 31, 2019 was approximately $38.5 million, compared to $33.5 million for the year ended December 31, 2018. The change was primary the result of higher total investment income, as discussed above. For the year ended December 31, 2019, the net increase in net assets resulting from net investment income per common share was $0.81 (basic and diluted), compared to $0.67 per share (basic and diluted) for the year ended December 31, 2018, based on the weighted average common shares outstanding for the respective period.

Net Decrease in Net Assets Resulting from Operations

Net decrease in net assets resulting from operations for the year ended December 31, 2019 was approximately $32.8 million, compared to a net decrease of $9.2 million for year ended December 31, 2018. These changes were largely due to a net change in unrealized depreciation, as discussed above. For the year ended December 31, 2019, the net decrease in net assets resulting from operations per common share was $0.69 (basic and diluted), compared to a net decrease in net assets per common share of $0.19 (basic and diluted) for the year ended December 31, 2018, based on the weighted average common shares outstanding for the respective period.

LIQUIDITY AND CAPITAL RESOURCES

During the year ended December 31, 2019, cash, cash equivalents and restricted cash decreased from approximately $17.1 million at the beginning of the period to approximately $16.5 million at the end of the period. Net cash provided by operating activities for the year ended December 31, 2019, consisting primarily of the items described in “— Results of Operations,” was approximately $47.8 million, largely reflecting repayments of principal of approximately $43.9 million and proceeds from the sale of investments of approximately $15.9 million, partially offset by purchases of new investments of approximately $54.8 million. During the year ended December 31, 2019, net cash used in financing activities was approximately $48.4 million, reflecting the payment of distributions of approximately $38.2 million, partial repayment of the Credit Facility of approximately $57.6 million, partially offset by the net proceeds from issuance of the 6.25% Unsecured Notes of approximately $44.8 million.

Contractual Obligations

We have certain obligations with respect to the investment advisory and administration services we receive. Refer to “— Overview”. We incurred approximately $6.7 million for base management fees, approximately $3.5 million for Net Investment Income Incentive Fees, and approximately $1.9 million for administrative services for the year ended December 31, 2019. Refer to “Note 7. Related Party Transactions” in the notes to our consolidated financial statements.

65

A summary of our significant contractual payment obligations is as follows as of December 31, 2019. Refer to “Note 5. Borrowings” in the notes to our consolidated financial statements.

Contractual obligations (in millions)

 

Principal
Amount

 

Payments Due by Period

Less than
1 year

 

1 – 3 years

 

3 – 5 years

 

More than
5 years

Long-term debt obligations:

 

 

   

 

   

 

   

 

   

 

 

6.50% Unsecured Notes

 

$

64.4

 

$

 

$

 

$

64.4

 

$

Credit Facility

 

 

28.1

 

 

28.1

 

 

 

 

 

 

6.25% Unsecured Notes

 

 

44.8

 

 

 

 

 

 

 

 

44.8

   

$

137.3

 

$

28.1

 

$

 

$

64.4

 

$

44.8

Off-Balance Sheet Arrangements

As of December 31, 2019, the Company did not have any commitments to purchase additional debt investments.

On October 18, 2019, the Company entered into a $10 million repurchase 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 has a funding cost of 1-month LIBOR plus 2.05% per annum for each Reverse Repo transaction and is subject to a facility fee of 0.85% per annum on the full $10 million facility amount. The Repo Facility expires on October 18, 2020, subject to optional termination or extension that is mutually agreed. The Company accounts for these Reverse Repo transactions as secured financings for financial reporting purposes in accordance with GAAP. As of December 31, 2019, there was no outstanding principal, or securities sold under the Repo Facility. The Company accrued approximately $18,000 in undrawn fees as of December 31, 2019, which is classified as interest expense on the Statement of Operations.

Share Issuance and Repurchase Programs

On August 1, 2019, the Company entered into an Equity Distribution Agreement with Ladenburg Thalmann & Co. through which the Company may offer for sale, from time to time, up to $150.0 million of the Company’s common stock through an At-the-Market (“ATM”) offering. The Company sold a total of 774,803 shares of common stock pursuant to the ATM during the year ended December 31, 2019. The total amount of capital raised under the ATM during the year ended December 31, 2019 was approximately $4.4 million.

On February 5, 2018, the Board authorized a program for the purpose of repurchasing up to $25.0 million worth of our common stock. Under that repurchase program, we were authorized, but not obligated, to repurchase outstanding common stock in the open market from time to time through December 31, 2018, provided that repurchases comply with the prohibitions under our Insider Trading Policies and Procedures and the guidelines specified in Rule 10b-18 of the Securities Exchange Act of 1934, as amended, including certain price, market volume and timing constraints. Further, any repurchases were to be conducted in accordance with the 1940 Act. During the year ended December 31, 2018, under that repurchase program, we repurchased 3,828,450 shares of outstanding common stock for approximately $25.0 million, while complying with the prohibitions under the Company’s Insider Trading Policies and Procedures and the guidelines specified in Rule 10b-18 of the Securities Exchange Act of 1934, as amended, including certain price, market volume and timing constraints. This represents a discount of approximately 1.1% of the net asset value per share as of December 31, 2018. In addition, repurchases were conducted in accordance with the 1940 Act.

Borrowings

In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 150% immediately after such borrowing. As of December 31, 2019, the Company’s asset coverage for borrowed amounts was approximately 279%.

66

On March 23, 2018, the SBCAA was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement to 150% from 200% under certain circumstances. On April 6, 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 modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. As a result, the Company’s asset coverage requirements for senior securities was changed from 200% to 150%, effective as of April 6, 2019.

The following are the Company’s outstanding principal amounts, carrying values and fair values of the Company’s borrowings as of December 31, 2019 and December 31, 2018. The fair value of the 6.50% Unsecured Notes and 6.25% Unsecured Notes are based upon the closing price on the last day of the period. The 6.50% Unsecured Notes and 6.25% Unsecured Notes are listed on the NASDAQ Global Select Market (trading symbol “OXSQL” and “OXSQZ”, respectively). The fair value of the Credit Facility represents the par amount.

 

As of

   

December 31, 2019

 

December 31, 2018

($ in millions)

 

Principal
Amount

 

Carrying
Value

 

Fair
Value

 

Principal
Amount

 

Carrying
Value

 

Fair
Value

6.50% Unsecured Notes

 

$

64.4

 

$

63.0

 

$

65.6

 

$

64.4

 

$

62.7

 

$

64.4

Credit Facility

 

 

28.1

 

 

28.1

 

 

28.1

 

 

85.7

 

 

85.5

 

 

85.7

6.25% Unsecured Notes

 

 

44.8

 

 

43.3

 

 

45.6

 

 

 

 

 

 

Total(1)

 

$

137.3

 

$

134.4

 

$

139.3

 

$

150.0

 

$

148.2

 

$

150.0

____________

(1)      Totals may not sum due to rounding.

The weighted average stated interest rate and weighted average maturity on all our debt outstanding as of December 31, 2019 were 5.94% and 4.2 years, respectively, and as of December 31, 2018 were 5.64% and 3.1 years, respectively. The aggregate accrued interest which remained payable at December 31, 2019 and 2018, was approximately $0.6 million and $0.5 million, respectively.

The table below summarizes the components of interest expense for the years ended December 31, 2019 and 2018:

 

Year Ended December 31, 2019

($ in thousands)

 

Stated Interest
Expense

 

Amortization of
Deferred Debt
Issuance Costs

 

Total

Credit Facility

 

$

3,043.3

 

$

74.1

 

$

3,117.4

6.25% Unsecured Notes

 

 

2,084.0

 

 

173.5

 

 

2,257.5

6.50% Unsecured Notes

 

 

4,184.1

 

 

324.7

 

 

4,508.8

Repo Facility

 

 

17.7

 

 

 

 

17.7

Total

 

$

9,329.1

 

$

572.3

 

$

9,901.4

 

Year Ended December 31, 2018

($ in thousands)

 

Stated Interest
Expense

 

Amortization of
Deferred Debt
Issuance Costs

 

Total

Credit Facility

 

$

2,618.2

 

$

54.0

 

$

2,672.2

6.50% Unsecured Notes

 

 

4,184.1

 

 

324.7

 

 

4,508.8

Total

 

$

6,802.3

 

$

378.7

 

$

7,181.0

67

Distributions

In order to qualify for tax treatment as a RIC and to avoid corporate level tax on the income we distribute to our stockholders, we are required, under Subchapter M of the Code, to distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses to our stockholders 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 our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our taxable ordinary income or capital gains. Stockholders should read any written disclosure accompanying a distribution payment carefully and should not assume that the source of any distribution is taxable ordinary income or capital gains. The final determination of the nature of our distributions can only be made upon the filing of our tax return. We have until October 15, 2020 to file our federal income tax return for the year ended December 31, 2019.

68

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 2017 fiscal year through 2019:

Date Declared

 

Record Date

 

Payment Date

 

Total
Distributions

 

GAAP Net
Investment
Income

 

Distributions in
excess of/
(less than)
GAAP net
investment
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

(1)

 

$

0.81

(5)

 

$

(0.01

)(5)

           

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2018

         

 

 

 

 

 

 

 

 

 

 

 

October 26, 2018

 

December 17, 2018

 

December 31, 2018

 

$

0.20

 

 

$

0.18

 

 

$

0.02

 

July 26, 2018

 

September 14, 2018

 

September 28, 2018

 

 

0.20

 

 

 

0.18

 

 

 

0.02

 

April 24, 2018

 

June 15, 2018

 

June 29, 2018

 

 

0.20

 

 

 

0.15

 

 

 

0.05

 

February 22, 2018

 

March 16, 2018

 

March 30, 2018

 

 

0.20

 

 

 

0.17

 

 

 

0.03

 

Total (2018)

         

$

0.80

(2)

 

$

0.67

(5)

 

$

0.13

(5)

           

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2017

         

 

 

 

 

 

 

 

 

 

 

 

October 27, 2017

 

December 15, 2017

 

December 29, 2017

 

$

0.20

 

 

$

0.15

 

 

$

0.05

 

February 27, 2017

 

September 15, 2017

 

September 29, 2017

 

 

0.20

 

 

 

0.13

 

 

 

0.07

 

February 27, 2017

 

June 16, 2017

 

June 30, 2017

 

 

0.20

 

 

 

0.16

 

 

 

0.04

 

February 27, 2017

 

March 16, 2017

 

March 31, 2017

 

 

0.20

 

 

 

0.16

 

 

 

0.04

 

Total (2017)

         

$

0.80

(3)

 

$

0.60

 

 

$

0.20

 

____________

(1)      The tax characterization of cash distributions for the year ended December 31, 2019 will not be known until the tax return for such year is finalized. For the year ended December 31, 2019, 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 2019 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, 2018 includes a tax return of capital of approximately $0.26 per share for tax purposes.

(3)      Cash distributions for the year ended December 31, 2017 includes a tax return of capital of approximately $0.50 per 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.

69

RELATED PARTIES

We have a number of business relationships with affiliated or related parties, including the following:

•        We have entered into the Investment Advisory Agreement with Oxford Square Management. Oxford Square Management is controlled by Oxford Funds, its managing member. In addition to Oxford Funds, Oxford Square Management is owned by Charles M. Royce, a member of our Board of Directors, 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 Bridge Management, LLC, the investment adviser to the Oxford Bridge Funds, and at Oxford Gate Management, LLC, the investment adviser to the Oxford Gate Funds. Oxford Funds is the managing member of both Oxford Bridge Management, LLC and Oxford Gate Management, LLC. In addition, Bruce L. Rubin serves as the Chief Financial Officer and Secretary, and Gerald Cummins serves as the Chief Compliance Officer, respectively, of both Oxford Bridge Management, LLC and Oxford Gate Management, LLC.

•        Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and President, respectively, of Oxford Lane Capital Corp., a non-diversified closed-end management investment company that invests primarily in equity and junior debt tranches of CLO vehicles, and its investment adviser, Oxford Lane Management, LLC. Oxford Funds provides Oxford Lane Capital Corp. with office facilities and administrative services pursuant to an administration agreement and also serves as the managing member of Oxford Lane Management, LLC. In addition, Bruce L. Rubin serves as the Chief Financial Officer, Treasurer and Corporate Secretary of Oxford Lane Capital Corp. and Chief Financial Officer and Treasurer of Oxford Lane Management, LLC, and Mr. Cummins serves as the Chief Compliance Officer of Oxford Lane Capital Corp. and Oxford Lane Management, LLC.

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., the Oxford Bridge Funds and the Oxford Gate Funds, respectively, on the other hand.

Oxford Square Management, Oxford Lane Management, LLC, Oxford Bridge Management, LLC and Oxford Gate Management, LLC are subject to a written policy with respect to the allocation of investment opportunities among the Company, Oxford Lane Capital Corp., the Oxford Bridge Funds and the Oxford Gate Funds. Where investments are suitable for more than one entity, the allocation policy generally provides that, depending on size and subject to current and anticipated cash availability, the absolute size of the investment as well as its relative size compared to the total assets of each entity, current and anticipated weighted average costs of capital, among other factors, an investment amount will be determined by the adviser to each entity. If the investment opportunity is sufficient for each entity to receive its investment amount, then each entity receives the investment amount; otherwise, the investment amount is reduced pro rata. On June 14, 2017, the Securities and Exchange Commission issued an order permitting the Company and certain of its affiliates to complete negotiated co-investment transactions in portfolio companies, subject to certain conditions (the “Order”). Subject to satisfaction of certain conditions to the Order, the Company and certain of its affiliates are now permitted, together with any future BDCs, registered closed-end funds and certain private funds, each of whose investment adviser is the Company’s investment adviser or an investment adviser controlling, controlled by, or under common control 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

70

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 of Directors reviews these procedures on an annual basis.

We have also adopted a Code of Business Conduct and Ethics which applies to, among others, 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 Ethics. As required by the NASDAQ Global Select Market corporate governance listing standards, the Audit Committee of our Board of Directors 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 consolidated financial statements and related notes, appearing elsewhere in this annual report on Form 10-K.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated 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 consolidated 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.

Investment Valuation

We fair value our investment portfolio in accordance with the provisions of ASC 820, Fair Value Measurement and Disclosure. Estimates made in the preparation of our consolidated 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, almost all of our investments are based upon “Level 3” inputs as of December 31, 2019.

Our Board of Directors determines the value of our investment portfolio each quarter. In connection with that determination, members of Oxford Square Management’s portfolio management team prepare a quarterly analysis of each portfolio investment using the most recent portfolio company financial statements, forecasts and other relevant financial and operational information. Since March 2004, we have engaged third-party valuation firms to provide assistance in valuing certain of its syndicated loans and bilateral investments, including related equity investments, although our Board of Directors ultimately determines the appropriate valuation of each such investment. Changes in fair value, as described above, are recorded in the consolidated statement of operations as net change in unrealized appreciation/depreciation.

71

Syndicated Loans

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. 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 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.

Collateralized 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 Board of Directors for its determination of fair value of these investments.

Bilateral Investments (Including Equity)

Bilateral investments for which market quotations are readily available are valued by an independent pricing agent or market maker. If such market quotations are not readily available, under the valuation procedures approved by our Board of Directors, 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 of Directors retains ultimate authority as to the third-party review cycle as well as the appropriate valuation of each investment.

72

The term “Bilateral investments” means debt and equity investments directly negotiated between the Company and a portfolio company, but excludes syndicated loans (i.e., corporate loans arranged by an agent on behalf of a company, portions of which are held by multiple investors in addition to OXSQ).

Refer to “Note 3. Fair Value” in the notes to our consolidated financial statements for more information on investment valuation and our portfolio of investments.

INVESTMENT INCOME:

Interest Income

Interest income is recorded on an accrual basis using the contractual rate applicable to each debt investment and includes the accretion of market discounts and/or original issue discount (“OID”) and amortization of market premiums. Discounts from and premiums to par value on securities purchased are accreted/amortized into interest income over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums, if any.

Generally, when interest and/or principal payments on a loan become past due, or if 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 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.

Payment-In-Kind

We have investments in our portfolio which contain a contractual payment-in-kind (“PIK”) provision. Certain PIK investments offer issuers the option at each payment date of making payments in cash or additional securities. PIK interest computed at the contractual rate is accrued into income and added to the principal balance on the capitalization date. Upon capitalization, the PIK portion of the investment is subject to the fair value estimates associated with their related investments. PIK investments on non-accrual status are restored to accrual status once it becomes probable that PIK will be realized. To qualify for tax treatment as a RIC, this income must be paid out to stockholders in the form of distributions, even though we have not collected any cash. Amounts necessary to pay these distributions may come from available cash or the liquidation of certain investments.

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, Beneficial Interests in Securitized Financial Assets, based upon an estimation of an effective yield to expected redemption utilizing estimated cash flows, including those CLO equity investments that have not made their inaugural distribution for the relevant period end. We monitor the expected residual payments, and the 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.

Other Income

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, 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.

73

RECENT DEVELOPMENTS

The following distributions payable to stockholders are shown below:

Per Share Distribution
Amount Declared

 

Record Dates

 

Payable Dates

 $0.067

 

January 17, 2020

 

January 31, 2020

 $0.067

 

February 14, 2020

 

February 28, 2020

 $0.067

 

March 17, 2020

 

March 31, 2020

 $0.067

 

April 15, 2020

 

April 30, 2020

 $0.067

 

May 14, 2020

 

May 29, 2020

 $0.067

 

June 15, 2020

 

June 30, 2020

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. As of December 31, 2019, all debt investments in our portfolio were at variable rates, representing approximately $274.2 million in principal debt. As of December 31, 2019, all except two of our variable rate investments were income producing. The variable rates are based upon the five-year Treasury note, the Prime rate or LIBOR, and, in the case of our bilateral investments, are generally reset annually, whereas our non-bilateral investments generally reset quarterly. We expect that future debt investments will generally be made at variable rates. Many of the variable rate investments contain floors.

We may in the future hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.

Based on our Consolidated Statements of Assets and Liabilities as of December 31, 2019, the following table shows the annualized impact on net investment income of hypothetical base rate changes in interest rates for our settled investments (considering interest rate floors for floating rate instruments), excluding CLO equity investments. The base interest rate case assumes the rates on our portfolio investments remain unchanged from the actual effective interest rates as of December 31, 2019. These hypothetical calculations are based on a model of the investments in our portfolio, held as of December 31, 2019, and are only adjusted for assumed changes in the underlying base interest rates. Although management believes that this analysis is indicative of our existing interest rate sensitivity, it does not adjust for changes in the credit quality, size and composition of our portfolio, and other business developments, including a change in the level of our borrowings, that could affect the net increase (or decrease) in net assets resulting from operations. Accordingly, no assurances can be given that actual results would not differ materially from the results under this hypothetical analysis.

($ in thousands)

 

Estimated
Percentage
change in
Investment
Income

Up 100 basis points

 

4.6

%

Up 200 basis points

 

9.3

%

Up 300 basis points

 

13.9

%

Down 25 basis points

 

(1.2

)%

74

75

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2019. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 based upon criteria in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that the Company’s internal control over financial reporting was effective as of December 31, 2019 based on the criteria in Internal Control — Integrated Framework issued by COSO. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, as stated in its report, which is included herein.

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Oxford Square Capital Corp.:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of assets and liabilities, including the consolidated schedules of investments, of Oxford Square Capital Corp. and its subsidiaries (the “Company”) as of December 31, 2019 and December 31, 2018, and the related consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 2019, including the related notes and financial statement schedule listed in the accompanying index appearing under item 15 (c) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and December 31, 2018, and the results of its operations, changes in its net assets and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our procedures included confirmation of securities owned as of December 31, 2019 and December 31, 2018 by correspondence with the custodians and transfer agent. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable

F-2

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 2020

We have served as the Company’s auditor since 2003.

F-3

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

December 31,
2019

 

December 31,
2018

ASSETS

 

 

 

 

 

 

 

 

Non-affiliated/non-control investments (cost: $467,828,907 and $486,232,755, respectively)

 

$

361,985,203

 

 

$

430,496,633

 

Affiliated investments (cost: $16,836,822 and $9,126,017, respectively)

 

 

2,816,790

 

 

 

14,492,197

 

Cash equivalents

 

 

14,410,486

 

 

 

13,905,059

 

Restricted cash

 

 

2,050,452

 

 

 

3,175,805

 

Interest and distributions receivable

 

 

3,480,036

 

 

 

4,682,735

 

Other assets

 

 

523,626

 

 

 

392,784

 

Total assets

 

$

385,266,593

 

 

$

467,145,213

 

LIABILITIES

 

 

 

 

 

 

 

 

Notes payable – 6.50% Unsecured Notes, net of deferred issuance costs

 

$

62,989,567

 

 

$

62,664,863

 

Notes payable – 6.25% Unsecured Notes, net of deferred issuance costs

 

 

43,313,872

 

 

 

 

Notes payable – Credit Facility, net of deferred issuance costs

 

 

28,080,550

 

 

 

85,522,569

 

Base management fee and net investment income incentive fee payable to affiliate

 

 

1,480,653

 

 

 

3,227,456

 

Accrued interest payable

 

 

632,235

 

 

 

488,608

 

Accrued expenses

 

 

771,174

 

 

 

517,470

 

Total liabilities

 

 

137,268,051

 

 

 

152,420,966

 

COMMITMENTS AND CONTINGENCIES (Note 9)

 

 

 

 

 

 

 

 

NET ASSETS

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, 100,000,000 shares authorized; 48,448,987 and 47,650,959 shares issued and outstanding, respectively

 

 

484,489

 

 

 

476,509

 

Capital in excess of par value

 

 

451,839,302

 

 

 

456,970,560

 

Total distributable earnings/(accumulated losses)

 

 

(204,325,249

)

 

 

(142,722,822

)

Total net assets

 

 

247,998,542

 

 

 

314,724,247

 

Total liabilities and net assets

 

$

385,266,593

 

 

$

467,145,213

 

Net asset value per common share

 

$

5.12

 

 

$

6.60

 

See Accompanying Notes.

F-4

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2019

COMPANY/INVESTMENT(1)(20)

 

PRINCIPAL
AMOUNT

 

COST

 

FAIR
VALUE(2)

 

% of
Net Assets

Senior Secured Notes

 

 

   

 

   

 

     

 

Aerospace and Defense

 

 

   

 

   

 

     

 

Novetta, LLC

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.80% (LIBOR + 5.00%), (1.00% floor) due October 16, 2022(4)(5)(6)(15)(21)

 

$

5,471,630

 

$

5,425,506

 

$

5,366,301

   

 

Total Aerospace and Defense

 

 

   

$

5,425,506

 

$

5,366,301

 

2.2

%

   

 

   

 

   

 

     

 

Business Services

 

 

   

 

   

 

     

 

Access CIG, LLC

 

 

   

 

   

 

     

 

first lien senior secured notes, 5.44% (LIBOR + 3.75%), (0.00% floor) due February 27, 2025(4)(5)(6)(14)(15)(21)

 

$

491,254

 

$

491,254

 

$

490,232

   

 

second lien senior secured notes, 9.44% (LIBOR + 7.75%), (0.00% floor) due February 27, 2026(4)(5)(14)(15)(21)

 

 

16,754,000

 

 

16,845,453

 

 

16,628,345

   

 

   

 

   

 

   

 

     

 

Convergint Technologies, LLC

 

 

   

 

   

 

     

 

second lien senior secured notes, 8.55% (LIBOR + 6.75%), (0.75% floor) due February 2, 2026(4)(5)(15)(21)

 

 

1,500,000

 

 

1,493,025

 

 

1,440,000

   

 

   

 

   

 

   

 

     

 

Imagine! Print Solutions

 

 

   

 

   

 

     

 

second lien senior secured notes, 10.55% (LIBOR + 8.75%), (1.00% floor) due June 21, 2023(4)(5)(15)(17)(21)

 

 

15,000,000

 

 

14,861,877

 

 

2,250,000

   

 

   

 

   

 

   

 

     

 

OMNIA Partners, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 5.69% (LIBOR + 3.75%), (0.00% floor) due May 23, 2025(4)(5)(6)(14)(16)(21)

 

 

5,910,081

 

 

5,910,627

 

 

5,910,081

   

 

second lien senior secured notes, 9.44% (LIBOR + 7.50%), (0.00% floor) due May 22, 2026(4)(5)(14)(16)(21)

 

 

14,000,000

 

 

13,940,539

 

 

13,720,000

   

 

   

 

   

 

   

 

     

 

Premiere Global Services, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 8.40% (LIBOR + 6.50%), (1.00% floor) due June 8, 2023(4)(5)(6)(16)

 

 

14,306,068

 

 

13,664,567

 

 

8,490,651

   

 

second lien senior secured notes, 0.50% Cash, 10.98% PIK (LIBOR + 9.00%) (1.00% floor) due June 6,
2024
(3)(4)(5)(16)(17)

 

 

10,232,132

 

 

9,817,795

 

 

3,581,246

   

 

   

 

   

 

   

 

     

 

Verifone Systems, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 5.90% (LIBOR + 4.00%), (0.00% floor) due August 20, 2025(4)(5)(6)(16)(21)

 

 

6,930,000

 

 

6,900,223

 

 

6,826,050

   

 

Total Business Services

 

 

   

$

83,925,360

 

$

59,336,605

 

23.9

%

   

 

   

 

   

 

     

 

Diversified Insurance

 

 

   

 

   

 

     

 

AmeriLife Group LLC

 

 

   

 

   

 

     

 

second lien senior secured notes, 10.80% (LIBOR + 9.00%), (0.00% floor) due June 11, 2027(4)(5)(6)(15)

 

$

10,000,000

 

$

9,900,692

 

$

9,925,000

   

 

Total Diversified Insurance

 

 

   

$

9,900,692

 

$

9,925,000

 

4.0

%

   

 

   

 

   

 

     

 

Education

 

 

   

 

   

 

     

 

Edmentum, Inc. (f/k/a Plato, Inc.)

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.43% (LIBOR + 4.50%), (1.00% floor) Cash, 4.00% PIK due June 9,
2021
(3)(4)(5)(6)(16)

 

$

6,080,350

 

$

6,054,371

 

$

5,593,922

   

 

Total Education

 

 

   

$

6,054,371

 

$

5,593,922

 

2.3

%

(continued on next page)

See Accompanying Notes.

F-5

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)
December 31, 2019

COMPANY/INVESTMENT(1)(20)

 

PRINCIPAL
AMOUNT

 

COST

 

FAIR
VALUE(2)

 

% of
Net Assets

Senior Secured Notes(continued)

 

 

   

 

   

 

     

 

Financial Intermediaries

 

 

   

 

   

 

     

 

First American Payment Systems

 

 

   

 

   

 

     

 

second lien senior secured notes, 12.56% (LIBOR + 10.50%), (1.00% floor) due July 5, 2024(4)(5)(16)(21)

 

$

1,500,000

 

$

1,468,914

 

$

1,470,000

   

 

   

 

   

 

   

 

     

 

Shift4 Payments, LLC (f/k/a Lighthouse Network, LLC)

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.43% (LIBOR + 4.50%), (1.00% floor) due November 30, 2024(4)(5)(6)(14)(16)(21)

 

 

3,430,000

 

 

3,417,872

 

 

3,438,575

   

 

second lien senior secured notes, 10.43% (LIBOR + 8.50%), (1.00% floor) due November 30, 2025(4)(5)(14)(16)(21)

 

 

16,490,000

 

 

16,353,183

 

 

16,242,650

   

 

Total Financial Intermediaries

 

 

   

$

21,239,969

 

$

21,151,225

 

8.5

%

   

 

   

 

   

 

     

 

Healthcare

 

 

   

 

   

 

     

 

Keystone Acquisition Corp.

 

 

   

 

   

 

     

 

first lien senior secured notes, 7.19% (LIBOR + 5.25%), (1.00% floor) due May 1, 2024(4)(5)(6)(14)(16)(21)

 

$

7,457,869

 

$

7,430,191

 

$

7,271,422

   

 

second lien senior secured notes, 11.19% (LIBOR + 9.25%), (1.00% floor) due May 1, 2025(4)(5)(14)(16)(21)

 

 

13,000,000

 

 

12,868,879

 

 

12,610,000

   

 

   

 

   

 

   

 

     

 

Viant Medical Holdings, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 5.69% (LIBOR + 3.75%), (0.00% floor) due July 2, 2025(4)(5)(6)(14)(16)(21)

 

 

9,875,000

 

 

9,873,395

 

 

9,677,500

   

 

second lien senior secured notes, 9.69% (LIBOR + 7.75%), (0.00% floor) due July 2, 2026(4)(5)(14)(16)(21)

 

 

5,000,000

 

 

4,955,602

 

 

4,725,000

   

 

   

 

   

 

   

 

     

 

Healthport Technologies, LLC

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.05% (LIBOR + 4.25%), (1.00% floor) due December 1, 2021(4)(5)(6)(14)(15)

 

 

16,597,888

 

 

14,964,163

 

 

15,618,613

   

 

   

 

   

 

   

 

     

 

HealthChannels, Inc. (f/k/a ScribeAmerica, LLC)

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.24% (LIBOR + 4.50%), (0.00% floor) due April 3, 2025(4)(5)(6)(15)

 

 

9,861,904

 

 

9,800,587

 

 

9,664,666

   

 

Total Healthcare

 

 

   

$

59,892,817

 

$

59,567,201

 

24.0

%

   

 

   

 

   

 

     

 

Logistics

 

 

   

 

   

 

     

 

Capstone Logistics Acquisition, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.30% (LIBOR + 4.50%), (1.00% floor) due October 7, 2021(4)(5)(6)(14)(15)(21)

 

$

12,917,066

 

$

12,902,501

 

$

12,650,716

   

 

Total Logistics

 

 

   

$

12,902,501

 

$

12,650,716

 

5.1

%

   

 

   

 

   

 

     

 

Software

 

 

   

 

   

 

     

 

ECI Software Solutions, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.19% (LIBOR + 4.25%), (1.00% floor) due September 27, 2024(4)(5)(6)(14)(16)(21)

 

$

4,912,060

 

$

4,923,674

 

$

4,903,464

   

 

second lien senior secured notes, 9.94% (LIBOR + 8.00%), (1.00% floor) due September 29, 2025(4)(5)(14)(16)(21)

 

 

15,000,000

 

 

14,916,392

 

 

14,762,550

   

 

(continued on next page)

See Accompanying Notes.

F-6

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)
December 31, 2019

COMPANY/INVESTMENT(1)(20)

 

PRINCIPAL
AMOUNT

 

COST

 

FAIR
VALUE(2)

 

% of
Net Assets

Senior Secured Notes – (continued)

 

 

   

 

   

 

     

 

Software – (continued)

 

 

   

 

   

 

     

 

Quest Software, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.18% (LIBOR + 4.25%), (0.00% floor) due May 16, 2025(4)(5)(6)(14)(16)(21)

 

$

5,940,000

 

$

5,914,552

 

$

5,917,725

   

 

second lien senior secured notes, 10.18% (LIBOR + 8.25%), (0.00% floor) due May 18, 2026(4)(5)(14)(16)(21)

 

 

15,000,000

 

 

14,865,400

 

 

14,647,500

   

 

Total Software

 

 

   

$

40,620,018

 

$

40,231,239

 

16.2

%

   

 

   

 

   

 

     

 

Telecommunications Services

 

 

   

 

   

 

     

 

Global Tel Link Corp

 

 

   

 

   

 

     

 

second lien senior secured notes, 10.05% (LIBOR + 8.25%), (0.00% floor) due November 29, 2026(4)(5)(14)(15)

 

$

17,000,000

 

$

16,722,360

 

$

14,486,380

   

 

Total Telecommunication Services

 

 

   

$

16,722,360

 

$

14,486,380

 

5.8

%

   

 

   

 

   

 

     

 

Utilities

 

 

   

 

   

 

     

 

CLEAResult Consulting, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 5.19% (LIBOR + 3.50%), (0.00% floor) due August 8, 2025(4)(5)(6)(15)(21)

 

$

4,937,500

 

$

4,916,396

 

$

4,875,781

   

 

second lien senior secured notes, 8.99% (LIBOR + 7.25%), (0.00% floor) due August 10, 2026(4)(5)(15)(21)

 

 

7,650,000

 

 

7,673,313

 

 

7,363,125

   

 

Total Utilities

 

 

   

$

12,589,709

 

$

12,238,906

 

4.9

%

Total Senior Secured Notes

 

 

   

$

269,273,303

 

$

240,547,495

 

97.0

%

   

 

   

 

   

 

     

 

Collateralized Loan Obligation – Debt Investments

 

 

   

 

   

 

     

 

Structured Finance

 

 

   

 

   

 

     

 

Galaxy XXVIII CLO, Ltd.

 

 

   

 

   

 

     

 

CLO secured class F notes, 10.48% (LIBOR + 8.48%), due July 15, 2031(4)(5)(11)(12)(16)

 

$

1,000,000

 

$

933,437

 

$

840,600

   

 

Total Structured Finance

 

 

   

$

933,437

 

$

840,600

 

0.3

%

Total Collateralized Loan Obligation – Debt Investments

 

 

   

$

933,437

 

$

840,600

 

0.3

%

   

 

   

 

   

 

     

 

Collateralized Loan Obligation – Equity Investments

 

 

   

 

   

 

     

 

Structured Finance

 

 

   

 

   

 

     

 

AMMC CLO XI, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 12.29% due April 30, 2031(9)(11)(12)(18)

 

$

6,000,000

 

$

3,796,477

 

$

2,760,000

   

 

   

 

   

 

   

 

     

 

AMMC CLO XII, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 9.24% due November 10, 2030(9)(11)(12)(18)

 

 

12,921,429

 

 

7,175,569

 

 

4,393,286

   

 

   

 

   

 

   

 

     

 

Atlas Senior Loan Fund XI, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 17.73% due
July 26, 2031(9)(11)(12)(18)

 

 

5,725,000

 

 

4,319,023

 

 

3,449,313

   

 

   

 

   

 

   

 

     

 

Babson CLO Ltd. 2015-I

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 4.93% due January 20, 2031(9)(11)(12)(18)

 

 

2,840,000

 

 

1,766,500

 

 

1,050,800

   

 

(continued on next page)

See Accompanying Notes.

F-7

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)
December 31, 2019

COMPANY/INVESTMENT(1)(20)

 

PRINCIPAL
AMOUNT

 

COST

 

FAIR
VALUE(2)

 

% of
Net Assets

Collateralized Loan Obligation – Equity
Investments(continued)

 

 

   

 

   

 

     

Structured Finance – (continued)

 

 

   

 

   

 

     

BlueMountain CLO 2014-2 Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 23.58% due
October 20, 2030(9)(11)(12)(18)

 

$

6,374,000

 

$

2,612,626

 

$

2,294,640

   
   

 

   

 

   

 

     

Carlyle Global Market Strategies CLO 2013-2, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 13.61% due
January 18, 2029(9)(11)(12)(18)

 

 

6,250,000

 

 

3,748,818

 

 

2,728,621

   
   

 

   

 

   

 

     

Cedar Funding II CLO, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 11.39% due June 09, 2030(9)(11)(12)(18)

 

 

18,000,000

 

 

12,940,261

 

 

9,360,000

   
   

 

   

 

   

 

     

Cedar Funding VI CLO, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 14.47% due
October 20, 2028(9)(11)(12)(18)

 

 

7,700,000

 

 

7,363,155

 

 

5,698,000

   
   

 

   

 

   

 

     

CIFC Funding 2014-3, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 14.53% due
October 22, 2031(9)(11)(12)(18)

 

 

10,000,000

 

 

6,182,026

 

 

4,400,000

   
   

 

   

 

   

 

     

Galaxy XXVIII CLO, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 11.28% due
July 15, 2031(9)(11)(12)(18)

 

 

2,000,000

 

 

962,017

 

 

648,665

   
   

 

   

 

   

 

     

Hull Street CLO Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield -21.46% due October 18, 2026(9)(11)(12)(18)

 

 

5,000,000

 

 

1,049,476

 

 

100,000

   
   

 

   

 

   

 

     

Ivy Hill Middle Market Credit Fund VII, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 7.34% due
October 20, 2029(9)(11)(12)(18)

 

 

10,800,000

 

 

8,659,115

 

 

5,936,641

   
   

 

   

 

   

 

     

Madison Park Funding XIX, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 9.67% due
January 22, 2028(9)(11)(12)(18)

 

 

5,422,500

 

 

4,999,739

 

 

3,904,200

   
   

 

   

 

   

 

     

Nassau 2019-I Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 24.71% due April 15, 2031(9)(11)(12)(14)(18)

 

 

23,500,000

 

 

19,265,413

 

 

16,450,000

   
   

 

   

 

   

 

     

Octagon Investment Partners 38, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 14.27% due
July 20, 2030(9)(11)(12)(18)

 

 

5,000,000

 

 

4,174,948

 

 

3,500,000

   
   

 

   

 

   

 

     

Regatta XV Funding, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 0.00% due
October 25, 2026(9)(10)(11)(12)(18)

 

 

3,000,000

 

 

 

 

75,000

   
   

 

   

 

   

 

     

Sound Point CLO XVI, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 8.86% due
July 25, 2030(9)(11)(12)(14)(18)

 

 

45,500,000

 

 

41,750,653

 

 

23,660,000

   

(continued on next page)

See Accompanying Notes.

F-8

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)
December 31, 2019

COMPANY/INVESTMENT(1)(20)

 

PRINCIPAL
AMOUNT

 

COST

 

FAIR
VALUE(2)

 

% of
Net Assets

Collateralized Loan Obligation – Equity
Investments(continued)

 

 

   

 

   

 

     

 

Structured Finance – (continued)

 

 

   

 

   

 

     

 

Telos CLO 2013-3, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield -4.23% due
July 17, 2026(9)(11)(12)(18)

 

$

14,447,790

 

$

6,575,881

 

$

2,022,691

   

 

   

 

   

 

   

 

     

 

Telos CLO 2013-4, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 17.00% due
January 17, 2030(9)(11)(12)(18)

 

 

11,350,000

 

 

7,018,355

 

 

3,110,420

   

 

   

 

   

 

   

 

     

 

Telos CLO 2014-5, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 17.92% due April 17, 2028(9)(11)(12)(18)

 

 

28,500,000

 

 

17,600,832

 

 

6,575,476

   

 

   

 

   

 

   

 

     

 

Venture XIV, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 4.94% due August 28, 2029(9)(11)(12)(18)

 

 

2,500,000

 

 

1,452,738

 

 

450,000

   

 

   

 

   

 

   

 

     

 

Venture XVII, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 11.53% due April 15, 2027(9)(11)(12)(18)

 

 

6,200,000

 

 

3,614,197

 

 

1,514,369

   

 

   

 

   

 

   

 

     

 

Venture XX, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield -53.93% due April 15, 2027(9)(11)(12)(18)

 

 

3,000,000

 

 

1,347,763

 

 

930,000

   

 

   

 

   

 

   

 

     

 

Vibrant CLO V, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 3.90% due January 20, 2029(9)(11)(12)(18)

 

 

13,475,000

 

 

11,197,902

 

 

6,198,500

   

 

   

 

   

 

   

 

     

 

West CLO 2014-1, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield -0.01% due
July 18, 2026(9)(11)(12)(18)

 

 

9,250,000

 

 

5,435,293

 

 

3,330,000

   

 

   

 

   

 

   

 

     

 

Windriver 2012-1 CLO, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 6.73% due
January 15, 2026(9)(11)(12)(18)

 

 

7,500,000

 

 

3,571,607

 

 

959,980

   

 

   

 

   

 

   

 

     

 

Zais CLO 6, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 13.15% due
July 15, 2029(9)(11)(12)(18)

 

 

10,500,000

 

 

7,663,559

 

 

3,780,001

   

 

   

 

   

 

   

 

     

 

CLO Equity Side Letter Related Investments(11)(12)(13)

 

 

   

$

1,378,224

 

$

1,316,505

   

 

Total Structured Finance

 

 

   

$

197,622,167

 

$

120,597,108

 

48.6

%

Total Collateralized Loan Obligation - Equity Investments

 

 

   

$

197,622,167

 

$

120,597,108

 

48.6

%

(continued on next page)

See Accompanying Notes.

F-9

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)
December 31, 2019

COMPANY/INVESTMENT(1)(20)

 

PRINCIPAL
AMOUNT/
SHARES

 

COST

 

FAIR
VALUE(2)

 

% of
Net Assets

Common Stock

     

 

   

 

     

 

IT Consulting

     

 

   

 

     

 

Unitek Global Services, Inc.

     

 

   

 

     

 

common equity(7)

 

1,244,188

 

$

684,960

 

$

   

 

Total IT Consulting

     

$

684,960

 

$

 

0.0

%

Total Common Stock

     

$

684,960

 

$

 

0.0

%

       

 

   

 

     

 

Preferred Stock

     

 

   

 

     

 

IT Consulting

     

 

   

 

     

 

Unitek Global Services, Inc.

     

 

   

 

     

 

Series B Preferred Stock(3)(22)(25)

 

11,032,025

 

$

9,002,159

 

$

   

 

Series B Senior Preferred Stock(3)(23)(25)

 

4,775,477

 

 

4,535,443

 

 

620,812

   

 

Series B Super Senior Preferred Stock(3)(24)(25)

 

2,614,260

 

 

2,614,260

 

 

2,195,978

   

 

Total IT Consulting

     

$

16,151,862

 

$

2,816,790

 

1.1

%

Total Preferred Stock

     

$

16,151,862

 

$

2,816,790

 

1.1

%

       

 

   

 

     

 

Total Investments in Securities(8)

     

$

484,665,729

 

$

364,801,993

 

147.0

%

       

 

   

 

     

 

Cash Equivalents

     

 

   

 

     

 

First American Government Obligations Fund(19)

     

$

14,410,486

 

$

14,410,486

   

 

Total Cash Equivalents

     

$

14,410,486

 

$

14,410,486

 

5.8

%

Total Investments in Securities and Cash Equivalents

     

$

499,076,215

 

$

379,212,479

 

152.8

%

____________

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

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

(3)      Portfolio includes $16,312,482 of principal and 18,421,762 shares of debt and preferred stock investments respectively which contain a PIK provision as of December 31, 2019.

(4)      Notes bear interest at variable rates and are subject to an interest rate floor where disclosed. The rate disclosed is as of December 31, 2019.

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

(6)      Cost value reflects repayment of principal.

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

(8)      Aggregate gross unrealized appreciation for federal income tax purposes is $754,844; aggregate gross unrealized depreciation for federal income tax purposes is $135,892,337. Net unrealized depreciation is $135,137,493 based upon a tax cost basis of $499,939,486.

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

(10)    This investment represents our percent ownership in certain equity securities transferred to OXSQ upon the redemption of this investment on October 25, 2018.

(11)    Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. As of December 31 , 2019, the Company held qualifying assets that represented 68.4% of its total assets.

(12)    Investment not domiciled in the United States.

(continued on next page)

See Accompanying Notes.

F-10

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)
December 31, 2019

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

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

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

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

(17)    As of December 31, 2019, this debt investment was on non-accrual status. The aggregate fair value of these investments was approximately $5.8 million.

(18)    The CLO subordinated notes and income notes are considered equity positions in CLO vehicles. Equity investments are entitled to recurring distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s securities less contractual payments to debt holders and fund expenses. The estimated yield indicated is based on the prior quarters ending investment cost (for previously existing portfolio investments) or the original cost for those investments made during the current quarter, as well as, a current projection of the future cash flows. Such projections are periodically reviewed and adjusted, and the estimated yield may not ultimately be realized.

(19)    Represents cash equivalents held in money market accounts as of December 31, 2019.

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

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

(22)    The Company holds preferred stock in UniTek Global Services, Inc. that is entitled to receive cumulative preferential dividends at a rate of 13.5% per annum payable in additional shares.

(23)    The Company holds preferred stock in UniTek Global Services, Inc. that is entitled to receive cumulative preferential dividends at a rate of 19.0% per annum payable in additional shares.

(24)    The Company holds preferred stock in UniTek Global Services, Inc. that is entitled to receive cumulative preferential dividends at a rate of 20.0% per annum payable in additional shares.

(25)    Effective June 26, 2019, the Company entered into an Exchange Agreement with UniTek Global Services, Inc. (the “Exchange Agreement”), to receive 2,371,211 shares of Series B Super Senior Preferred Stock, 4,352,199 shares of Series B Senior Preferred Stock and 10,323,434 shares of Series B Preferred Stock (collectively, “Preferred Stock”) in exchange for all Series A shares of each respective Preferred Stock tranche that was held by OXSQ. This exchange resulted in the capitalization of approximately $6.3 million of cumulative PIK dividends which are added to the cost basis of each respective Preferred Stock tranche. This amount is recognized as dividend income — non-cash in the consolidated statement of operations.

See Accompanying Notes.

F-11

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2018

COMPANY/INVESTMENT(1)

 

PRINCIPAL
AMOUNT

 

COST

 

FAIR
VALUE
(2)

 

% of
Net Assets

Senior Secured Notes

 

 

   

 

   

 

     

 

Aerospace and Defense

 

 

   

 

   

 

     

 

Novetta, LLC

 

 

   

 

   

 

     

 

first lien senior secured notes, 7.53% (LIBOR + 5.00%), (1.00% floor) due October 16, 2022(4)(5)(6)(16)(21)

 

$

5,528,630

 

$

5,479,773

 

$

5,348,950

   

 

Total Aerospace and Defense

 

 

   

$

5,479,773

 

$

5,348,950

 

1.7

%

   

 

   

 

   

 

     

 

Business Services

 

 

   

 

   

 

     

 

Access CIG, Inc.

 

 

   

 

   

 

     

 

first lien incremental senior secured notes, 6.46%
(LIBOR + 3.75%), (0.00% floor) due
February 27, 2025
(4)(5)(14)(15)(21)

 

$

496,250

 

$

496,250

 

$

481,055

   

 

second lien senior secured notes, 10.46% (LIBOR + 7.75%), (0.00% floor) due February 27, 2026(4)(5)(14)(15)(21)

 

 

16,754,000

 

 

16,858,239

 

 

16,446,899

   

 

   

 

   

 

   

 

     

 

Convergint Technologies, LLC

 

 

   

 

   

 

     

 

second lien senior secured notes, 9.27% (LIBOR + 6.75%), (0.75% floor) due February 2, 2026(4)(5)(16)(21)

 

 

1,500,000

 

 

1,492,945

 

 

1,410,000

   

 

   

 

   

 

   

 

     

 

Imagine! Print Solutions

 

 

   

 

   

 

     

 

second lien senior secured notes, 11.28% (LIBOR + 8.75%), (1.00% floor) due June 21, 2023(4)(5)(16)(21)

 

 

15,000,000

 

 

14,839,700

 

 

13,350,000

   

 

   

 

   

 

   

 

     

 

OMNIA Partners, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.55% (LIBOR + 3.75%), (0.00% floor) due May 23, 2025(4)(5)(14)(15)(21)

 

 

5,970,000

 

 

5,971,918

 

 

5,790,900

   

 

second lien senior secured notes, 10.30% (LIBOR + 7.50%), (0.00% floor) due May 22, 2026(4)(5)(14)(15)(21)

 

 

14,000,000

 

 

13,935,939

 

 

13,580,000

   

 

   

 

   

 

   

 

     

 

Premiere Global Services, Inc.

 

 

   

 

   

 

     

 

senior secured notes, 9.09% (LIBOR + 6.50%), (1.00% floor) due December 8, 2021(4)(5)(6)(14)(15)(21)

 

 

14,747,634

 

 

13,866,831

 

 

11,798,107

   

 

second lien senior secured notes, 11.92% (LIBOR + 9.50%), (1.00% floor) due June 6, 2022(4)(5)(14)(15)(21)

 

 

10,000,000

 

 

9,787,854

 

 

8,000,000

   

 

   

 

   

 

   

 

     

 

Verifone Systems, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.64% (LIBOR + 4.00%), (0.00% floor) due August 20, 2025(4)(5)(6)(15)(21)

 

 

7,000,000

 

 

6,966,062

 

 

6,747,510

   

 

second lien senior secured notes, 10.64% (LIBOR + 8.00%), (0.00% floor) due August 20, 2026(4)(5)(15)(21)

 

 

8,000,000

 

 

7,922,744

 

 

7,860,000

   

 

Total Business Services

 

 

   

$

92,138,482

 

$

85,464,471

 

27.2

%

   

 

   

 

   

 

     

 

Diversified Insurance

 

 

   

 

   

 

     

 

AmeriLife Group LLC

 

 

   

 

   

 

     

 

first lien senior secured notes, 7.27% (LIBOR + 4.75%), (1.00% floor) due July 10, 2022(4)(5)(6)(16)(21)

 

$

14,983,674

 

$

14,891,788

 

$

14,684,001

   

 

Total Diversified Insurance

 

 

   

$

14,891,788

 

$

14,684,001

 

4.7

%

   

 

   

 

   

 

     

 

Education

 

 

   

 

   

 

     

 

Edmentum, Inc. (f/k/a Plato, Inc.)

 

 

   

 

   

 

     

 

first lien senior secured notes, 7.03% (LIBOR + 4.50%), (1.00% floor) Cash, 4.00% PIK due
June 9, 2021
(3)(4)(5)(6)(15)

 

$

5,907,089

 

$

5,860,128

 

$

4,902,884

   

 

Total Education

 

 

   

$

5,860,128

 

$

4,902,884

 

1.6

%

(continued on next page)

See Accompanying Notes.

F-12

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)

December 31, 2018

COMPANY/INVESTMENT(1)

 

PRINCIPAL
AMOUNT

 

COST

 

FAIR
VALUE
(2)

 

% of
Net Assets

Senior Secured Notes – (continued)

 

 

   

 

   

 

     

 

Financial Intermediaries

 

 

   

 

   

 

     

 

First American Payment Systems

 

 

   

 

   

 

     

 

second lien senior secured notes, 13.04% (LIBOR + 10.50%), (1.00% floor) due July 5, 2024(4)(5)(21)(22)

 

$

1,500,000

 

$

1,463,325

 

$

1,498,125

   

 

   

 

   

 

   

 

     

 

Lighthouse Network, LLC (f/k/a Harbortouch
Payments, LLC)

 

 

   

 

   

 

     

 

first lien senior secured notes, 7.03% (LIBOR + 4.50%), (1.00% floor) due November 30, 2024(4)(5)(6)(15)(21)

 

 

3,465,000

 

 

3,450,119

 

 

3,430,350

   

 

second lien senior secured notes, 11.03% (LIBOR + 8.50%), (1.00% floor) due November 30, 2025(4)(5)(15)(21)

 

 

12,000,000

 

 

11,894,617

 

 

11,910,000

   

 

Total Financial Intermediaries

 

 

   

$

16,808,061

 

$

16,838,475

 

5.4

%

   

 

   

 

   

 

     

 

Healthcare

 

 

   

 

   

 

     

 

Keystone Acquisition Corp.

 

 

   

 

   

 

     

 

first lien senior secured notes, 8.05% (LIBOR + 5.25%), (1.00% floor) due May 1, 2024(4)(5)(6)(14)(15)(21)

 

$

7,534,165

 

$

7,500,602

 

$

7,345,811

   

 

second lien senior secured notes, 12.05% (LIBOR + 9.25%), (1.00% floor) due May 1, 2025(4)(5)(14)(15)(21)

 

 

13,000,000

 

 

12,852,264

 

 

12,707,500

   

 

   

 

   

 

   

 

     

 

Viant Medical Holdings, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.55% (LIBOR + 3.75%), (0.00% floor) due July 2, 2025(4)(5)(15)(21)

 

 

9,975,000

 

 

9,975,865

 

 

9,812,906

   

 

second lien senior secured notes, 10.55% (LIBOR + 7.75%), (0.00% floor) due July 2, 2026(4)(5)(15)(21)

 

 

5,000,000

 

 

4,953,106

 

 

4,850,000

   

 

   

 

   

 

   

 

     

 

Scribe America, LLC

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.88% (LIBOR + 4.50%), (0.00% floor) due April 3, 2025(4)(5)(16)

 

 

12,468,593

 

 

12,374,678

 

 

12,203,635

   

 

Total Healthcare

 

 

   

$

47,656,515

 

$

46,919,852

 

14.9

%

   

 

   

 

   

 

     

 

Logistics

 

 

   

 

   

 

     

 

Capstone Logistics Acquisition, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 7.02% (LIBOR + 4.50%), (1.00% floor) due October 7, 2021(4)(5)(6)(16)(21)

 

$

13,221,953

 

$

13,199,885

 

$

12,998,899

   

 

Total Logistics

 

 

   

$

13,199,885

 

$

12,998,899

 

4.1

%

   

 

   

 

   

 

     

 

Printing and Publishing

 

 

   

 

   

 

     

 

Merrill Communications, LLC

 

 

   

 

   

 

     

 

first lien senior secured notes, 7.78% (LIBOR + 5.25%), (1.00% floor) due June 01, 2022(4)(5)(6)(15)(21)

 

$

4,860,339

 

$

4,852,862

 

$

4,836,037

   

 

Total Printing and Publishing

 

 

   

$

4,852,862

 

$

4,836,037

 

1.5

%

   

 

   

 

   

 

     

 

Software

 

 

   

 

   

 

     

 

ECI Software Solutions, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 7.06% (LIBOR + 4.25%), (1.00% floor) due September 27, 2024(4)(5)(6)(14)(15)(21)

 

$

4,962,312

 

$

4,978,040

 

$

4,863,066

   

 

second lien senior secured notes, 10.80% (LIBOR + 8.00%), (1.00% floor) due September 29, 2025(4)(5)(14)(15)(21)

 

 

15,000,000

 

 

14,907,907

 

 

14,737,500

   

 

(continued on next page)

See Accompanying Notes.

F-13

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)

December 31, 2018

COMPANY/INVESTMENT(1)

 

PRINCIPAL
AMOUNT

 

COST

 

FAIR
VALUE
(2)

 

% of
Net Assets

Senior Secured Notes – (continued)

 

 

   

 

   

 

     

 

Software – (continued)

 

 

   

 

   

 

     

 

Help/Systems Holdings, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.27% (LIBOR + 3.75%), (0.00% floor) due March 28, 2025(4)(5)(14)(16)(21)

 

$

3,980,000

 

$

3,988,911

 

$

3,810,850

   

 

second lien senior secured notes, 10.27% (LIBOR + 7.75%), (0.00% floor) due March 27, 2026(4)(5)(14)(16)(21)

 

 

15,500,000

 

 

15,489,645

 

 

15,035,000

   

 

   

 

   

 

   

 

     

 

Quest Software, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.78% (LIBOR + 4.25%), (0.00% floor) due May 16, 2025(4)(5)(14)(15)(21)

 

 

6,000,000

 

 

5,972,430

 

 

5,790,000

   

 

second lien senior secured notes, 10.78% (LIBOR + 8.25%), (0.00% floor) due May 18, 2026(4)(5)(14)(15)(21)

 

 

15,000,000

 

 

14,859,667

 

 

14,775,000

   

 

Total Software

 

 

   

$

60,196,600

 

$

59,011,416

 

18.8

%

   

 

   

 

   

 

     

 

Telecommunications Services

 

 

   

 

   

 

     

 

Global Tel Link Corp.

 

 

   

 

   

 

     

 

first lien senior secured notes, 6.96% (LIBOR + 4.25%), (0.00% floor) due November 29, 2025(4)(5)(6)(14)(15)

 

$

2,982,550

 

$

2,967,952

 

$

2,898,054

   

 

second lien senior secured notes, 10.96% (LIBOR + 8.25%), (0.00% floor) due November 29, 2026(4)(5)(14)(15)

 

 

17,000,000

 

 

16,704,668

 

 

16,490,000

   

 

Total Telecommunication Services

 

 

   

$

19,672,620

 

$

19,388,054

 

6.2

%

   

 

   

 

   

 

     

 

Utilities

 

 

   

 

   

 

     

 

CRCI Longhorn Holdings, Inc.

 

 

   

 

   

 

     

 

first lien senior secured notes, 5.89% (LIBOR + 3.50%), (0.00% floor) due August 8, 2025(4)(5)(16)(21)

 

$

4,987,500

 

$

4,963,660

 

$

4,750,594

   

 

second lien senior secured notes, 9.64% (LIBOR + 7.25%), (0.00% floor) due August 10, 2026(4)(5)(15)(21)

 

 

7,650,000

 

 

7,677,680

 

 

7,592,625

   

 

Total Utilities

 

 

   

$

12,641,340

 

$

12,343,219

 

3.9

%

Total Senior Secured Notes

 

 

   

$

293,398,054

 

$

282,736,258

 

90.0

%

   

 

   

 

   

 

     

 

Collateralized Loan Obligation – Debt Investments

 

 

   

 

   

 

     

 

Structured Finance

 

 

   

 

   

 

     

 

Galaxy XXVIII CLO, Ltd.

 

 

   

 

   

 

     

 

CLO secured class F notes, 10.82% (LIBOR + 8.48%), due July 15, 2031(4)(5)(11)(12)(15)

 

$

1,000,000

 

$

927,670

 

$

915,900

   

 

Total Structured Finance

 

 

   

$

927,670

 

$

915,900

 

0.3

%

Total Collateralized Loan Obligation – Debt Investments

 

 

   

$

927,670

 

$

915,900

 

0.3

%

   

 

   

 

   

 

     

 

Collateralized Loan Obligation – Equity Investments

 

 

   

 

   

 

     

 

Structured Finance

 

 

   

 

   

 

     

 

AMMC CLO XI, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 16.64% due April 30, 2031(9)(11)(12)(17)

 

$

6,000,000

 

$

3,795,529

 

$

2,880,000

   

 

   

 

   

 

   

 

     

 

AMMC CLO XII, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 14.73% due November 10, 2030(9)(11)(12)(17)

 

 

12,921,429

 

 

6,936,076

 

 

4,005,643

   

 

(continued on next page)

See Accompanying Notes.

F-14

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)

December 31, 2018

COMPANY/INVESTMENT(1)

 

PRINCIPAL
AMOUNT

 

COST

 

FAIR
VALUE
(2)

 

% of
Net Assets

Collateralized Loan Obligation – Equity Investments – (continued)

 

 

   

 

   

 

     

Structured Finance – (continued)

 

 

   

 

   

 

     

Babson CLO Ltd. 2015-I

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 17.61% due January 20, 2031(9)(11)(12)(17)

 

$

2,840,000

 

$

1,919,418

 

$

1,476,800

   
   

 

   

 

   

 

     

Carlyle Global Market Strategies CLO 2013-2, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 23.93% due January 18, 2029(9)(11)(12)(17)

 

 

9,250,000

 

 

5,671,112

 

 

5,378,741

   
   

 

   

 

   

 

     

Cedar Funding II CLO, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 13.23% due June 09, 2030(9)(11)(12)(17)

 

 

18,000,000

 

 

13,615,944

 

 

9,000,000

   
   

 

   

 

   

 

     

Cedar Funding VI CLO, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 14.92% due October 20, 2028(9)(11)(12)(17)

 

 

7,700,000

 

 

7,500,748

 

 

5,929,000

   
   

 

   

 

   

 

     

CIFC Funding 2014-3, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 16.09% due October 22, 2031(9)(11)(12)(17)

 

 

10,000,000

 

 

6,267,967

 

 

4,900,000

   
   

 

   

 

   

 

     

Galaxy XXVIII CLO, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 14.27% due July 15, 2031(9)(11)(12)(17)

 

 

2,000,000

 

 

1,007,080

 

 

655,141

   
   

 

   

 

   

 

     

Hull Street CLO Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield -20.06% due October 18, 2026(9)(11)(12)(17)

 

 

5,000,000

 

 

1,748,206

 

 

600,000

   
   

 

   

 

   

 

     

Ivy Hill Middle Market Credit Fund VII, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 11.72% due October 20, 2029(9)(11)(12)(17)

 

 

10,800,000

 

 

9,169,698

 

 

6,409,660

   
   

 

   

 

   

 

     

KVK CLO 2013-2, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 8.02% due January 15, 2026(9)(11)(12)(17)

 

 

14,200,000

 

 

1,515,422

 

 

   
   

 

   

 

   

 

     

Madison Park Funding XIX, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 14.00% due January 22, 2028(9)(11)(12)(17)

 

 

5,422,500

 

 

5,284,799

 

 

5,259,825

   
   

 

   

 

   

 

     

Octagon Investment Partners 38, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 17.33% due July 20, 2030(9)(11)(12)(17)

 

 

5,000,000

 

 

4,510,614

 

 

4,150,000

   
   

 

   

 

   

 

     

Regatta XV Funding, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 48.27% due October 25, 2026(9)(11)(12)(17)

 

 

3,000,000

 

 

 

 

90,000

   
   

 

   

 

   

 

     

Sound Point CLO XVI, Ltd.

 

 

   

 

   

 

     

CLO subordinated notes, estimated yield 15.86% due July 25, 2030(9)(11)(12)(14)(17)

 

 

45,500,000

 

 

43,936,431

 

 

39,130,000

   

(continued on next page)

See Accompanying Notes.

F-15

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)

December 31, 2018

COMPANY/INVESTMENT(1)

 

PRINCIPAL
AMOUNT

 

COST

 

FAIR
VALUE
(2)

 

% of
Net Assets

Collateralized Loan Obligation – Equity Investments – (continued)

 

 

   

 

   

 

     

 

Structured Finance – (continued)

 

 

   

 

   

 

     

 

Steele Creek CLO 2014-1, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 24.11% due April 21, 2031(9)(11)(12)(17)

 

$

5,000,000

 

$

3,561,059

 

$

3,597,500

   

 

   

 

   

 

   

 

     

 

Telos CLO 2013-3, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 11.99% due July 17, 2026(9)(11)(12)(17)

 

 

14,447,790

 

 

9,345,851

 

 

5,201,204

   

 

   

 

   

 

   

 

     

 

Telos CLO 2013-4, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 17.80% due January 17, 2030(9)(11)(12)(17)

 

 

11,350,000

 

 

7,511,448

 

 

5,961,705

   

 

   

 

   

 

   

 

     

 

Telos CLO 2014-5, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 20.93% due April 1 7, 2028(9)(11)(12)(14)(17)

 

 

28,500,000

 

 

18,995,759

 

 

14,284,910

   

 

   

 

   

 

   

 

     

 

Venture XIV, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 15.18% due August 28, 2029(9)(11)(12)(17)

 

 

2,500,000

 

 

1,581,371

 

 

1,075,000

   

 

   

 

   

 

   

 

     

 

Venture XVII, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 17.68% due April 15, 2027(9)(11)(12)(17)

 

 

6,200,000

 

 

4,167,706

 

 

3,259,209

   

 

   

 

   

 

   

 

     

 

Venture XX, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 19.72% due April 15, 2027(9)(11)(12)(17)

 

 

3,000,000

 

 

2,236,677

 

 

1,770,000

   

 

   

 

   

 

   

 

     

 

Vibrant CLO V, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 15.12% due January 20, 2029(9)(11)(12)(17)

 

 

13,475,000

 

 

12,009,373

 

 

8,219,750

   

 

   

 

   

 

   

 

     

 

West CLO 2014-1, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 10.67% due July 18, 2026(9)(11)(12)(17)

 

 

9,250,000

 

 

6,345,384

 

 

3,700,000

   

 

   

 

   

 

   

 

     

 

Windriver 2012-1 CLO, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 4.34% due January 15, 2026(9)(11)(12)(17)

 

 

7,500,000

 

 

4,588,025

 

 

2,355,647

   

 

   

 

   

 

   

 

     

 

Zais CLO 6, Ltd.

 

 

   

 

   

 

     

 

CLO subordinated notes, estimated yield 19.71% due July 15, 2029(9)(11)(12)(17)

 

 

10,500,000

 

 

8,060,334

 

 

6,720,000

   

 

   

 

   

 

   

 

     

 

CLO Equity Side Letter Related Investments(11)(12)(13)

 

 

   

 

125,000

 

 

834,740

   

 

Total Structured Finance

 

 

   

$

191,407,031

 

$

146,844,475

 

46.7

%

Total Collateralized Loan Obligation – Equity Investments

 

 

   

$

191,407,031

 

$

146,844,475

 

46.7

%

(continued on next page)

See Accompanying Notes.

F-16

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)

December 31, 2018

COMPANY/INVESTMENT(1)

 

PRINCIPAL
AMOUNT/
Shares

 

COST

 

FAIR
VALUE
(2)

 

% of
Net Assets

Common Stock

     

 

   

 

     

 

IT Consulting

     

 

   

 

     

 

Unitek Global Services, Inc.

     

 

   

 

     

 

common equity(7)

 

1,244,188

 

$

684,960

 

$

149,303

   

 

Total IT Consulting

     

$

684,960

 

$

149,303

 

0.0

%

Total Common Stock

     

$

684,960

 

$

149,303

 

0.0

%

       

 

   

 

     

 

Preferred Stock

     

 

   

 

     

 

IT Consulting

     

 

   

 

     

 

Unitek Global Services, Inc.

     

 

   

 

     

 

Series A Senior Preferred Stock(7)

 

3,002,455

 

$

2,762,421

 

$

3,963,240

   

 

Series A Preferred Stock(7)

 

5,706,866

 

 

3,677,000

 

 

8,217,887

   

 

Series A Super Senior Preferred Stock(7)

 

2,001,636

 

 

2,001,636

 

 

2,161,767

   

 

Total IT Consulting

     

$

8,441,057

 

$

14,342,894

 

4.6%

 

Total Preferred Stock

     

$

8,441,057

 

$

14,342,894

 

4.6%

 

       

 

   

 

     

 

Other Investments

     

 

   

 

     

 

Software

     

 

   

 

     

 

Algorithmic Implementations, Inc. (d/b/a “Ai Squared”)

     

 

   

 

     

 

Earnout payments(7)(18)

     

 

500,000

 

 

   

 

Total Software

     

$

500,000

 

$

 

0.0

%

Total Other Investments

     

$

500,000

 

$

 

0.0

%

       

 

   

 

     

 

Total Investments in Securities(8)

     

$

495,358,772

 

$

444,988,830

 

141.6

%

       

 

   

 

     

 

Cash Equivalents

     

 

   

 

     

 

First American Government Obligations Fund(19)

     

$

13,905,059

 

$

13,905,059

   

 

Total Cash Equivalents

     

$

13,905,059

 

$

13,905,059

 

4.4

%

Total Investments in Securities and Cash Equivalents

     

$

509,263,831

 

$

458,893,889

 

146.0

%

____________

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

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

(3)      Portfolio includes $5,907,089 of principal amount of debt investments which contain a PIK provision at December 31, 2018.

(4)      Notes bear interest at variable rates.

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

(6)      Cost value reflects repayment of principal.

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

(8)      Aggregate gross unrealized appreciation for federal income tax purposes is $11,843,742; aggregate gross unrealized depreciation for federal income tax purposes is $69,559,109. Net unrealized depreciation is $57,715,367 based upon a tax cost basis of $502,704,197.

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

(10)    The CLO equity investment was optionally redeemed. Refer to “Note 2. Summary of Significant Accounting Policies.”

(continued on next page)

See Accompanying Notes.

F-17

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED SCHEDULE OF INVESTMENTS — (continued)

December 31, 2018

(11)    Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the 1940 Act Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. As of December 31, 2018, the Company held qualifying assets that represented 68% of its total assets.

(12)    Investment not domiciled in the United States.

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

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

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

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

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

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

(19)    Represents cash equivalents held in money market accounts as of December 31, 2018.

(20)    The fair value of the investment was determined using significant unobservable inputs. See “Note 3. Fair Value.”

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

(22)    The principal balance outstanding for this debt investment, in whole or in part, is indexed to 60-day LIBOR.

(23)    This investment represents our percent ownership in certain equity securities transferred to OXSQ upon the redemption of this investment on October 25, 2018.

See Accompanying Notes.

F-18

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED STATEMENT OF OPERATIONS

 

Year Ended
December 31,
2019

 

Year Ended
December 31,
2018

 

Year Ended
December 31,
2017

INVESTMENT INCOME

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliated/non-control investments:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income – debt investments

 

$

28,000,283

 

 

$

25,183,547

 

 

$

24,561,956

 

Income from securitization vehicles and investments

 

 

25,244,866

 

 

 

27,837,032

 

 

 

33,274,392

 

Other income

 

 

1,694,434

 

 

 

2,984,773

 

 

 

3,198,469

 

Total investment income from non-affiliated/non-control investments

 

 

54,939,583

 

 

 

56,005,352

 

 

 

61,034,817

 

From affiliated investments:

 

 

 

 

 

 

 

 

 

 

 

 

Dividend income – non-cash

 

 

7,710,805

 

 

 

 

 

 

 

Interest income – debt investments

 

 

 

 

 

271,916

 

 

 

382,200

 

Total investment income from affiliated investments

 

 

7,710,805

 

 

 

271,916

 

 

 

382,200

 

Total investment income

 

 

62,650,388

 

 

 

56,277,268

 

 

 

61,417,017

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

9,901,426

 

 

 

7,181,009

 

 

 

12,898,815

 

Base management fees

 

 

6,704,467

 

 

 

7,309,435

 

 

 

8,140,010

 

Professional fees

 

 

1,454,942

 

 

 

1,227,296

 

 

 

2,799,113

 

Compensation expense

 

 

832,256

 

 

 

907,995

 

 

 

901,472

 

Director’s fees

 

 

417,500

 

 

 

441,501

 

 

 

584,580

 

Insurance

 

 

281,146

 

 

 

247,178

 

 

 

256,956

 

Transfer agent and custodian fees

 

 

239,323

 

 

 

227,381

 

 

 

244,115

 

General and administrative

 

 

829,476

 

 

 

644,104

 

 

 

1,014,580

 

Total expenses before incentive fees

 

 

20,660,536

 

 

 

18,185,899

 

 

 

26,839,641

 

Net investment income incentive fees

 

 

3,511,493

 

 

 

4,585,151

 

 

 

3,850,646

 

Capital gains incentive fees

 

 

 

 

 

 

 

 

 

Total incentive fees

 

 

3,511,493

 

 

 

4,585,151

 

 

 

3,850,646

 

Total expenses

 

 

24,172,029

 

 

 

22,771,050

 

 

 

30,690,287

 

Net investment income

 

 

38,478,359

 

 

 

33,506,218

 

 

 

30,726,730

 

Net change in unrealized appreciation/depreciation on investments

 

 

 

 

 

 

 

 

 

 

 

 

Non-Affiliate/non-control investments

 

 

(50,107,582

)

 

 

(36,969,481

)

 

 

19,478,902

 

Affiliated investments

 

 

(19,386,212

)

 

 

(2,323,867

)

 

 

3,561,269

 

Total net change in unrealized appreciation/depreciation on investments

 

 

(69,493,794

)

 

 

(39,293,348

)

 

 

23,040,171

 

Net realized (losses) gains

 

 

 

 

 

 

 

 

 

 

 

 

Non-Affiliated/non-control investments

 

 

(1,709,816

)

 

 

(3,370,732

)

 

 

(7,007,892

)

Affiliated investments

 

 

 

 

 

5,241

 

 

 

 

Extinguishment of debt

 

 

(72,666

)

 

 

(60,752

)

 

 

(3,149,338

)

Total net realized losses

 

 

(1,782,482

)

 

 

(3,426,243

)

 

 

(10,157,230

)

Net (decrease)/increase in net assets resulting from operations

 

$

(32,797,917

)

 

$

(9,213,373

)

 

$

43,609,671

 

(continued on next page)

See Accompanying Notes.

F-19

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED STATEMENT OF OPERATIONS — (continued)

 

Year Ended
December 31,
2019

 

Year Ended
December 31,
2018

 

Year Ended
December 31,
2017

Net increase in net assets resulting from net investment income per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

$

0.81

 

 

$

0.67

 

 

$

0.60

Net (decrease)/increase in net assets resulting from operations per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.69

)

 

$

(0.19

)

 

$

0.85

Diluted

 

$

(0.69

)

 

$

(0.19

)

 

$

0.83

Weighted average shares of common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

47,756,596

 

 

 

49,662,157

 

 

 

51,479,409

Diluted

 

 

47,756,596

 

 

 

49,662,157

 

 

 

58,349,224

See Accompanying Notes.

F-20

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

 

Year Ended
December 31,
2019

 

Year Ended
December 31,
2018

 

Year Ended
December 31,
2017

(Decrease)/increase in net assets from operations:

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

$

38,478,359

 

 

$

33,506,218

 

 

$

30,726,730

 

Net realized losses

 

 

(1,782,482

)

 

 

(3,426,243

)

 

 

(10,157,230

)

Net change in unrealized appreciation/depreciation on investments

 

 

(69,493,794

)

 

 

(39,293,348

)

 

 

23,040,171

 

Net (decrease)/increase in net assets resulting from operations

 

 

(32,797,917

)

 

 

(9,213,373

)

 

 

43,609,671

 

Distributions to stockholders

 

 

 

 

 

 

 

 

 

 

 

 

Distributions from net investment income

 

 

(38,364,085

)

 

 

(36,151,218

)

 

 

(33,752,176

)

Tax return of capital distributions

 

 

 

 

 

(3,329,807

)

 

 

(7,431,351

)

Total distributions to stockholders

 

 

(38,364,085

)

 

 

(39,481,025

)

 

 

(41,183,527

)

   

 

 

 

 

 

 

 

 

 

 

 

Capital share transactions:

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock (net of underwriting fees and offering costs of $131,944, $0, $0, respectively)

 

 

4,288,470

 

 

 

 

 

 

 

Reinvestment of distributions

 

 

147,827

 

 

 

 

 

 

 

Repurchase of common stock

 

 

 

 

 

(24,999,997

)

 

 

 

Net increase/(decrease) in net assets from capital share transactions

 

 

4,436,297

 

 

 

(24,999,997

)

 

 

 

Total (decrease)/increase in net assets

 

 

(66,725,705

)

 

 

(73,694,395

)

 

 

2,426,144

 

Net assets at beginning of year

 

 

314,724,247

 

 

 

388,418,642

 

 

 

385,992,498

 

Net assets at end of year

 

$

247,998,542

 

 

$

314,724,247

 

 

$

388,418,642

 

Capital share activity:

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued

 

 

774,803

 

 

 

 

 

 

 

Shares issued from reinvestment of distributions

 

 

23,225

 

 

 

 

 

 

 

Shares repurchased

 

 

 

 

 

(3,828,450

)

 

 

 

Net increase/(decrease) in capital share activity

 

 

798,028

 

 

 

(3,828,450

)

 

 

 

See Accompanying Notes.

F-21

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

Year Ended
December 31,
2019

 

Year Ended
December 31,
2018

 

Year Ended
December 31,
2017

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in net assets resulting from operations

 

$

(32,797,917

)

 

$

(9,213,373

)

 

$

43,609,671

 

Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of discounts on investments

 

 

(819,595

)

 

 

(613,073

)

 

 

(1,003,086

)

Accretion of discount on notes payable and deferred debt issuance costs

 

 

645,006

 

 

 

439,457

 

 

 

4,087,209

 

Non-cash interest and dividend income due to PIK

 

 

(7,982,447

)

 

 

(290,600

)

 

 

(229,173

)

Payment of original discount on TICC CLO 2012-1 LLC

 

 

 

 

 

 

 

 

(3,575,888

)

Purchases of investments

 

 

(54,767,714

)

 

 

(244,555,956

)

 

 

(208,765,224

)

Repayments of principal

 

 

43,879,379

 

 

 

131,542,140

 

 

 

189,159,479

 

Proceeds from the sale of investments

 

 

15,919,269

 

 

 

25,918,205

 

 

 

171,360,617

 

Net realized losses on investments

 

 

1,709,816

 

 

 

3,365,491

 

 

 

7,007,892

 

Reductions to CLO equity cost value

 

 

12,754,336

 

 

 

18,789,550

 

 

 

37,073,681

 

Net change in unrealized appreciation/depreciation on investments

 

 

69,493,794

 

 

 

39,293,348

 

 

 

(23,040,171

)

Decrease in interest and distributions receivable

 

 

1,202,699

 

 

 

402,759

 

 

 

4,597,178

 

(Increase) decrease in other assets

 

 

(130,842

)

 

 

191,201

 

 

 

474,567

 

Increase (decrease) in accrued interest payable

 

 

143,627

 

 

 

476,987

 

 

 

(1,719,490

)

Increase (decrease) in base management fee and net investment income incentive fee payable

 

 

(1,746,803

)

 

 

521,357

 

 

 

(967,282

)

Increase (decrease) in accrued expenses

 

 

253,704

 

 

 

(127,265

)

 

 

(444,308

)

Net cash provided by (used in) operating activities

 

 

47,756,312

 

 

 

(33,859,772

)

 

 

217,625,672

 

   

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Distributions paid (net of stock issued under distribution reinvestment plan of $147,827, $0 and $0, respectively)

 

 

(38,216,258

)

 

 

(39,481,025

)

 

 

(41,183,527

)

Repayment of credit facility

 

 

(57,588,802

)

 

 

(46,810,472

)

 

 

 

Proceeds from the issuance of notes payable – 6.25% Unsecured Notes

 

 

44,790,750

 

 

 

 

 

 

 

Proceeds from the issuance of notes payable – Credit Facility

 

 

 

 

 

132,489,875

 

 

 

 

Debt issuance costs

 

 

(1,650,398

)

 

 

(271,587

)

 

 

(2,263,932

)

Proceeds from issuance of common stock

 

 

4,420,414

 

 

 

 

 

 

 

Underwriting fees and offering costs for the issuance of common stock

 

 

(131,944

)

 

 

 

 

 

 

Proceeds from the issuance of notes payable – 6.50% Unsecured Notes

 

 

 

 

 

 

 

 

64,370,225

 

Repayment of original proceeds of notes payable – TICC CLO 2012-1 LLC

 

 

 

 

 

 

 

 

(125,705,930

)

Repayment of original proceeds of notes payable – Convertible Notes

 

 

 

 

 

 

 

 

(94,542,000

)

Repurchase of common stock

 

 

 

 

 

(24,999,997

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(48,376,238

)

 

 

20,926,794

 

 

 

(199,325,164

)

Net (decrease) increase in cash equivalents and restricted cash

 

 

(619,926

)

 

 

(12,932,978

)

 

 

18,300,508

 

Cash equivalents and restricted cash, beginning of year

 

 

17,080,864

 

 

 

30,013,842

 

 

 

11,713,334

 

Cash equivalents and restricted cash, end of year

 

 

16,460,938

 

 

$

17,080,864

 

 

$

30,013,842

 

(continued on next page)

See Accompanying Notes.

F-22

OXFORD SQUARE CAPITAL CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS — (continued)

 

Year Ended
December 31,
2019

 

Year Ended
December 31,
2018

 

Year Ended
December 31,
2017

NON-CASH FINANCING ACTIVITIES

 

 

   

 

   

 

 

Value of shares issued in connection with distribution reinvestment plan

 

$

147,827

 

$

 

$

   

 

   

 

   

 

 

SUPPLEMENTAL DISCLOSURES

 

 

   

 

   

 

 

Cash paid for interest

 

$

9,185,458

 

$

6,325,318

 

$

13,680,433

Impairment of other assets

 

$

 

$

4,291

 

$

75,757

See Accompanying Notes.

F-23

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 201
9

NOTE 1. ORGANIZATION

Oxford Square Capital Corp. (“OXSQ” or the “Company”), formerly TICC Capital Corp., was incorporated under the General Corporation Laws of the State of Maryland on July 21, 2003 and is a non-diversified, closed-end investment company. Effective March 19, 2018, TICC Capital Corp. changed its name to Oxford Square Capital Corp. The Company made this change in order to more closely align the branding of the Company with its affiliated funds. OXSQ has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, OXSQ has elected to be treated for tax purposes as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) beginning with its 2003 taxable year. The Company’s investment objective is to maximize its total return, by investing primarily in corporate debt securities and collateralized loan obligation (“CLO”) structured finance investments that own corporate debt securities.

OXSQ’s investment activities are managed by Oxford Square Management, LLC (“Oxford Square Management”), formerly TICC Management, LLC. Oxford Square Management is an investment adviser registered under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Oxford Square Management is owned by Oxford Funds, LLC (“Oxford Funds”), formerly BDC Partners, LLC, its managing member, and Charles M. Royce, a member of our Board of Directors who holds a minority, non-controlling interest in Oxford Square Management. Under the investment advisory agreement, OXSQ has agreed to pay Oxford Square Management an annual base management fee based on its gross assets as well as an incentive fee based on its performance.

The Company’s consolidated operations include the activities of its wholly-owned subsidiaries, TICC CLO 2012-1 LLC (“2012 Securitization Issuer” or “TICC CLO 2012-1”) and Oxford Square Funding, LLC (“OXSQ Funding”) for the periods in which they were held. These subsidiaries were formed for the purpose of enabling the Company to obtain debt financing and are operated solely for the investment activities of the Company, and the Company has substantial equity at risk. OXSQ Funding was formed on June 21, 2018, for the purpose of entering into a credit and security agreement with Citibank, N.A. (the “Facility”). TICC CLO 2012-1 was formed on October 23, 2012 for the purpose of investing in leveraged loans. The Company served as collateral manager to TICC CLO 2012-1 and held all subordinated notes issued by TICC CLO 2012-1. During the third quarter of 2017, TICC CLO 2012-1 repaid the remaining secured notes. During the quarter ended December 31, 2017, the Company, as collateral manager of TICC CLO 2012-1, dissolved TICC CLO 2012-1 pursuant to Delaware law by filing a certificate of cancellation with the Secretary of State in Delaware.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and are stated in U.S. Dollars. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, TICC CLO 2012-1 and OXSQ Funding, for the periods during which they were held. All inter-company accounts and transactions have been eliminated in consolidation.

The Company follows the accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services — Investment Companies. Certain prior period figures have been reclassified from those originally published in quarterly and annual reports to conform to the current period presentation for comparative purposes.

In the normal course of business, the Company may enter into contracts that contain a variety of representations and provide indemnifications. The Company’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Company that have not yet occurred. However, based upon experience, the Company expects the risk of loss to be remote.

F-24

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

USE OF ESTIMATES

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates, and these differences could be material.

CONSOLIDATION

As provided under Regulation S-X and ASC Topic 946-810, Consolidation, the Company will generally not consolidate its investment in a company other than a wholly-owned investment company or a controlled operating company whose business consists of providing services to the Company. The Company consolidates OXSQ Funding in its financial statements, in accordance with ASC 946-810. TICC CLO 2012-1 would be considered an investment company but for the exceptions under Sections 3(c)(1) and 3(c)(7) under the 1940 Act, and was established solely for the purpose of allowing the Company to borrow funds for the purpose of making investments. The Company owned all of the equity in this entity and controlled the decision making power that drives its economic performance. Accordingly, the Company consolidated TICC CLO 2012-1 in its financial statements for the periods which it was held, and follows the accounting and reporting guidance in ASC 946-810.

CASH, CASH EQUIVALENTS AND RESTRICTED CASH

Cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less. The Company places its cash equivalents with financial institutions and, at times, cash held in bank accounts may exceed the Federal Deposit Insurance Corporation (“FDIC”) insured limit. Cash equivalents are classified as Level 1 assets and are included on the Company’s consolidated schedule of investments. Cash equivalents are carried at cost or amortized cost which approximates fair value.

Restricted cash as of December 31, 2019 represents the cash held by the trustee of OXSQ Funding. The amount held by the trustee is for payment of interest expense and operating expenses of the entity, principal repayments on borrowings, or new investments, based upon the terms of the indenture, and are not available for general corporate purposes. Restricted cash was approximately $2.1 million and $3.2 million as of December 31, 2019 and 2018, respectively.

INVESTMENT VALUATION

The Company fair values its investment portfolio in accordance with the provisions of ASC 820, Fair Value Measurement and Disclosure. Estimates made in the preparation of OXSQ’s consolidated financial statements include the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. OXSQ believes that there is no single definitive method for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments OXSQ makes.

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

F-25

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. OXSQ considers the attributes of current market conditions on an on-going basis and has determined that due to the general illiquidity of the market for its investment portfolio, whereby little or no market data exists, all of OXSQ’s investments are based upon “Level 3” inputs as of December 31, 2019.

OXSQ’s Board of Directors determines the value of its investment portfolio each quarter. In connection with that determination, members of Oxford Square Management’s portfolio management team prepare a quarterly analysis of each portfolio investment using the most recent portfolio company financial statements, forecasts and other relevant financial and operational information. Since March 2004, OXSQ has engaged third-party valuation firms to provide assistance in valuing certain of its syndicated loans and bilateral investments, including related equity investments, although OXSQ’s Board of Directors ultimately determines the appropriate valuation of each investment. Changes in fair value, as described above, are recorded in the consolidated statement of operations as net change in unrealized appreciation/depreciation on investments.

Syndicated Loans

In accordance with ASC 820-10, OXSQ’s valuation procedures specifically provide for the review of indicative quotes supplied by the large agent banks that make a market for each security. However, the marketplace from which OXSQ obtains indicative bid quotes for purposes of determining the fair value of its syndicated loan investments has shown attributes of illiquidity as described by ASC-820-10. During such periods of illiquidity, when OXSQ believes that the non-binding indicative bids received from agent banks for certain syndicated investments that we own may not be determinative of their fair value or when no market indicative quote is available, OXSQ may engage third-party valuation firms to provide assistance in valuing certain syndicated investments that OXSQ owns. 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 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.

Collateralized Loan Obligations — Debt and Equity

OXSQ has 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, OXSQ considers the indicative prices provided by a recognized industry pricing service as a primary source, and the implied yield of such prices, supplemented by actual trades executed in the market at or around period-end, as well as the indicative prices provided by the broker who arranges transactions in such investment vehicles. OXSQ also considers those instances in which the record date for an equity distribution payment falls on or before the last day of the period, and the likelihood that a prospective purchaser would require a downward adjustment to the indicative price representing substantially all of the pending distribution. Additional factors include any available information on other relevant transactions including firm bids and offers in the market and information resulting from bids-wanted-in-competition. In addition, OXSQ considers the operating metrics of the specific investment vehicle, including compliance with collateralization tests, defaulted and restructured securities, and payment defaults, if any. Oxford Square Management or the Valuation Committee may request an additional analysis by a third-party firm to assist in the valuation process of CLO investment vehicles. All information is presented to OXSQ’s Board of Directors for its determination of fair value of these investments.

F-26

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

Bilateral Investments (Including Equity)

Bilateral investments for which market quotations are readily available are valued by an independent pricing agent or market maker. If such market quotations are not readily available, under the valuation procedures approved by OXSQ’s Board of Directors, upon the recommendation of the Valuation Committee, a third-party valuation firm will prepare valuations for each of OXSQ’s bilateral investments that, when combined with all other investments in the same portfolio company, (i) have a value as of the previous quarter of greater than or equal to 2.5% of its total assets as of the previous quarter, and (ii) have a value as of the current quarter of greater than or equal to 2.5% of its total assets as of the previous quarter, after taking into account any repayment of principal during the current quarter. In addition, in those instances where a third-party valuation is prepared for a portfolio investment which meets the parameters noted in (i) and (ii) above, the frequency of those third-party valuations is based upon the grade assigned to each such security under its credit grading system as follows: Grade 1, at least annually; Grade 2, at least semi-annually; Grades 3, 4, and 5, at least quarterly. Bilateral investments which do not meet the parameters in (i) and (ii) above are not required to have a third-party valuation and, in those instances, a valuation analysis will be prepared by Oxford Square Management. Oxford Square Management also retains the authority to seek, on OXSQ’s behalf, additional third party valuations with respect to OXSQ’s bilateral portfolio securities, OXSQ’s syndicated loan investments, and CLO investment vehicles. OXSQ’s Board of Directors 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 portfolio company, but excludes syndicated loans (i.e., corporate loans arranged by an agent on behalf of a company, portions of which are held by multiple investors in addition to OXSQ).

INVESTMENT INCOME

Interest Income

Interest income is recorded on an accrual basis using the contractual rate applicable to each debt investment and includes the accretion of discounts and amortization of premiums. Discounts from and premiums to par value on securities purchased are accreted/amortized into interest income over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums, if any.

Generally, when interest and/or principal payments on a loan become past due, or if the Company otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will place the loan on non-accrual status and will generally cease recognizing interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to restructuring such that the interest income is deemed to be collectible. The Company generally restores non-accrual loans to accrual status when past due principal and interest is paid and, in the Company’s judgment, is likely to remain current. As of December 31, 2019, the Company had two debt investments on non-accrual status. As of December 31, 2018, and 2017, the Company had no investments that were on non-accrual status.

In addition, the Company earns income from the discount on debt securities it purchases, including original issue discount (“OID”) and market discount. OID and market discounts are capitalized and amortized into income using the effective yield method, as applicable.

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 an effective yield to the expected redemption utilizing estimated cash flows, including those CLO equity

F-27

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

investments that have not made their inaugural distribution for the relevant period end. The Company monitors the expected residual payments, and effective yield is determined and updated periodically, as needed. Accordingly, investment income recognized on CLO equity securities in the consolidated statement of operations differs from both the tax-basis investment income and from the cash distributions actually received by the Company during the period.

Payment-In-Kind

OXSQ has investments in its portfolio which contain a contractual payment-in-kind (“PIK”) provision. Certain PIK investments offer issuers the option at each payment date of making payments in cash or additional securities. PIK interest computed at the contractual rate is accrued into income and added to the principal balance on the capitalization date. Upon capitalization, the PIK portion of the investment is subject to the fair value estimates associated with their related investments. PIK investments on non-accrual status are restored to accrual status once it becomes probable that PIK will be realized. To qualify for tax treatment as a RIC, this income must be paid out to stockholders in the form of distributions, even though OXSQ has not collected any cash. Amounts necessary to pay these distributions may come from available cash or the liquidation of certain investments.

Other Income

Other income includes prepayment, amendment, and other fees earned by the Company’s loan investments, distributions from fee letters and success fees associated with portfolio investments. Distributions from fee letters are an enhancement to the return on a CLO equity investment and are based upon a percentage of the collateral manager’s fees, and are recorded as other income when earned. The Company may also earn success fees associated with its investments in certain securitization vehicles or “CLO warehouse facilities,” which are contingent upon a repayment of the warehouse by a permanent CLO securitization structure; such fees are earned and recognized when the repayment is completed.

Preferred Stock Dividends

The Company holds preferred stock investments in its portfolio that contain cumulative preferred dividends that accumulate quarterly. The Company will record cumulative preferred dividends as investment income when they are declared by the portfolio company’s board of directors or upon any voluntary or involuntary liquidation, dissolution or winding up of the portfolio company. As of December 31, 2019, approximately $7.7 million of cumulative preferred dividends have been earned and recorded as dividend income - non-cash on the Company’s consolidated statement of operations. These dividends are considered in the estimation of fair value of these preferred stock investments.

DEFERRED DEBT ISSUANCE COSTS

Deferred debt issuance costs consist of fees and expenses incurred in connection with the closing or amending of credit facilities and debt offerings, and are capitalized at the time of payment. These costs are amortized using the straight line method over the terms of the respective credit facilities and debt securities. This amortization expense is included in Interest Expense in the Company’s consolidated statement of operations. Upon early termination of debt, or a credit facility, the remaining balance of unamortized fees related to such debt is accelerated into realized losses on extinguishment of debt on the Company’s consolidated statement of operations. Deferred offering costs are presented on the balance sheet as a direct deduction from the related debt liability.

F-28

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

EQUITY OFFERING COSTS

Equity offering costs consist of fees and expenses incurred in connection with the registration and public offer and sale of the Company’s common stock, including legal, accounting and printing fees. These costs are deferred at the time of incurrence and are subsequently charged to capital when the offering takes place or as shares are issued. Deferred costs are periodically reviewed and expensed if the related registration is no longer active.

SHARE REPURCHASES

From time to time, the Company’s Board of Directors may authorize a share repurchase program under which shares are purchased in open market transactions. Since the Company is incorporated in the State of Maryland, state law requires share repurchases to be accounted for as a share retirement. The cost of repurchased shares is charged against capital on the settlement date.

SECURITIES TRANSACTIONS

Securities transactions are recorded on trade date. Realized gains and losses on investments sold are recorded on the basis of specific identification. Distributions received on CLO equity investments which were optionally redeemed are first applied to the remaining cost basis until it is reduced to zero, after which distributions are recorded as realized gains. An optional redemption feature of a CLO allows a majority of the holders of the equity securities issued by the CLO issuer, after the end of a specified non-call period, to cause the redemption of the secured notes issued by the CLO with proceeds of either the liquidation of the CLO’s assets or through a refinancing with new debt. The optional redemption is effectively a voluntary prepayment of the secured debt issued by the CLO prior to the stated maturity of such debt.

SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

The Company has entered into an agreement whereby it may sell securities to be repurchased at an agreed-upon price and date. Under this agreement, the Company will account for these transactions as collateralized financing transactions which are recorded at the contracted repurchase amount plus interest. The Fund’s securities sold under the agreement to repurchase are carried at cost. Refer to “Note 5. Borrowings”for further details.

U.S. FEDERAL INCOME TAXES

The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, to not be subject to U.S. federal income tax on the portion of its taxable income and gains distributed to stockholders. To qualify for RIC tax treatment, OXSQ is required to distribute at least 90% of its investment company taxable income annually, meet diversification requirements quarterly and file Form 1120-RIC, as defined by the Code.

Because U.S. federal income tax regulations differ from accounting principles generally accepted in the United States, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

The Company recognizes the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained, assuming examination by tax authorities. Management has analyzed the Company’s tax positions and concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions expected to be taken in the Company’s 2019 tax returns. The Company identifies its major tax jurisdictions as U.S

F-29

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

Federal and Connecticut State; however, the Company is not aware of any tax position for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months.

For tax purposes, the cost basis of the portfolio investments as of December 31, 2019 and December 31, 2018, was approximately $499,939,486 and $502,704,197 respectively.

NOTE 3. FAIR VALUE

The Company’s assets measured at fair value on a recurring basis as of December 31, 2019 were as follows:

 

Fair Value Measurements at Reporting Date Using

   

Assets ($ in millions)

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

Senior Secured Notes

 

$

 

$

 

$

240.5

 

$

240.5

CLO Debt

 

 

 

 

 

 

0.8

 

 

0.8

CLO Equity

 

 

 

 

 

 

120.6

 

 

120.6

Equity and Other Investments

 

 

 

 

 

 

2.8

 

 

2.8

Total Investments at fair value(1)

 

 

 

 

 

 

364.8

 

 

364.8

Cash equivalents

 

 

14.4

 

 

 

 

 

 

14.4

Total

 

$

14.4

 

$

 

$

364.8

 

$

379.2

____________

(1)      Totals may not sum due to rounding.

The Company’s assets measured at fair value on a recurring basis as of December 31, 2018 were as follows:

 

Fair Value Measurements at Reporting Date Using

   

Assets ($ in millions)

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

Senior Secured Notes

 

$

 

$

 

$

282.7

 

$

282.7

CLO Debt

 

 

 

 

 

 

0.9

 

 

0.9

CLO Equity

 

 

 

 

 

 

146.8

 

 

146.8

Equity and Other Investments

 

 

 

 

 

 

14.5

 

 

14.5

Total Investments at fair value(1)

 

 

 

 

 

 

445.0

 

 

445.0

Cash equivalents

 

 

13.9

 

 

 

 

 

 

13.9

Total

 

$

13.9

 

$

 

$

445.0

 

$

458.9

____________

(1)      Totals may not sum due to rounding.

Significant Unobservable Inputs for Level 3 Investments

The following tables provide quantitative information about the Company’s Level 3 fair value measurements as of December 31, 2019 and 2018, respectively. The Company’s valuation policy, as described above, establishes parameters for the sources and types of valuation analysis, as well as the methodologies and inputs that the Company uses in determining fair value. If the Valuation Committee or Oxford Square Management determines that additional techniques, sources or inputs are appropriate or necessary in a given situation, such additional work

F-30

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 3. FAIR VALUE (cont.)

will be undertaken. The tables, therefore, are not all-inclusive, but provide information on the significant Level 3 inputs that are pertinent to the Company’s fair value measurements. The weighted average calculations in the table below are based on principal balances for all debt related calculations and CLO equity.

 

Quantitative Information about Level 3 Fair Value Measurements

   

Assets ($ in millions)

 

Fair Value
as of
December 31,

2019

 

Valuation Techniques/
Methodologies

 

Unobservable Input

 

Range/Weighted
Average(1)

 

Impact to
Fair Value
from an

Increase in
Input(2)

Senior Secured
Notes

 

$

201.9

 

Market quotes

 

NBIB(3)

 

 

15.0% – 100.3%/86.5%

 

NA

   

 

38.7

 

Recent transactions

 

Actual trade/payoff(4)

 

 

92.0% – 100.0%/97.3%

 

NA

CLO debt

 

 

0.8

 

Market quotes

 

NBIB(3)

 

 

84.1%/ncm(6)

 

NA

CLO equity

 

 

104.5

 

Market quotes

 

NBIB(3)

 

 

2.0% – 74.0%/43.7%

 

NA

   

 

11.3

 

Yield Analysis

 

Yield

 

 

17.3% – 23.9%/19.7%

 

Decrease

   

 

3.4

 

Recent transactions

 

Actual trade/payoff(4)

 

 

60.3%/ncm(6)

 

NA

   

 

1.3

 

Discounted cash flow(7)

 

Discount rate(8)

 

 

10.1% – 14.7%/11.9%

 

Decrease

   

 

0.1

 

Liquidation net asset value(5)

 

NBIB(3)

 

 

2.5%/ncm(6)

 

NA

Equity and Other Investments

 

 

2.8

 

Enterprise value(9)

 

EBITDA(10)/
Market multiple
(10)

 

$

25.1 million/ncm(6) 5.7x – 6.6x/ncm(6)

 

Increase
Increase

Total Fair Value for Level 3 Investments(11)

 

$

364.8

         

 

     

____________

(1)      Weighted averages are calculated based on fair value of investments.

(2)      The impact on the fair value measurement of an increase in each unobservable input is in isolation. The discount rate is the rate used to discount future cash flows in a discounted cash flow calculation. An increase in the discount rate, in isolation, would result in a decrease in a fair value measurement. Market/EBITDA multiples refer to the input (often derived from the value of a comparable company) that is multiplied by the historic and/or expected EBITDA of a company in order to estimate the company’s value. An increase in the Market/EBITDA multiple, in isolation, net of adjustments, would result in an increase in a fair value measurement.

(3)      The Company generally uses prices provided by an independent pricing service, or broker or agent bank non-binding indicative bid prices (“NBIB”), on or near the valuation date as the primary basis for the fair value determinations for syndicated notes, and CLO debt and equity investments, which may be adjusted for pending equity distributions as of valuation date. These bid prices are non-binding, and may not be determinative of fair value. Each bid price is evaluated by the Valuation Committee in conjunction with additional information compiled by Oxford Square Management, including financial performance, recent business developments, and, in the case of CLO debt and equity investments, performance and covenant compliance information as provided by the independent trustee.

(4)      Prices provided by independent pricing services are evaluated in conjunction with actual trades and payoffs and, in certain cases, the value represented by actual trades or payoffs may be more representative of fair value as determined by the Valuation Committee.

(5)      The fair value of those CLO equity positions which have been optionally redeemed are generally valued using a liquidation net asset value basis which represents the estimated expected residual value of the CLO as of the end of the period.

(6)      The calculation of weighted average for a range of values, for a single investment within a given asset category, is not considered to provide a meaningful representation (“ncm”).

(7)      The Company will calculate the fair value of certain CLO equity investments based upon the net present value of expected contractual payment streams discounted using estimated market yields for the equity tranche of the respective CLO vehicle. The Company will also consider those investments in which the record date for an equity distribution payment falls on or before the last day of the period, and the likelihood that a prospective purchaser would require an adjustment to the transaction price representing substantially all of the pending distribution.

F-31

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 3. FAIR VALUE (cont.)

(8)      Discount rate represents the rate at which future cash flows are discounted to calculate a present value, reflecting market assumptions for risk.

(9)      For equity investments, third-party valuation firms evaluate the financial and operational information of the portfolio companies that the Company provides to them, as well as independent market and industry information that they consider appropriate in forming an opinion as to the fair value of the Company’s securities. In those instances where the carrying value and/or internal credit rating of the investment does not require the use of a third-party valuation firm, a valuation is prepared by Oxford Square Management, which may include liquidation analysis or which may utilize a subsequent transaction to provide an indication of fair value.

(10)    EBITDA, or earnings before interest expense, taxes, depreciation and amortization, is an unobservable input which is generally based on the most recently available twelve month financial statements provided by the portfolio company. Market multiples, also an unobservable input, represent an estimation of where market participants might value an enterprise based upon information available for comparable companies in the market.

(11)    Total may not sum due to rounding.

 

Quantitative Information about Level 3 Fair Value Measurements

   

Assets ($ in millions)

 

Fair Value
as of
December 31,
2018

 

Valuation Techniques/
Methodologies

 

Unobservable Input

 

Range/Weighted
Average
(1)

 

Impact to
Fair Value
from an
Increase in
Input
(2)

Senior Secured
Notes

 

$

270.9

 

Market quotes

 

NBIB(3)

 

 

80.0% – 99.9%/96.3%

 

NA

   

 

11.8

 

Recent transactions

 

Actual trade/payoff(4)

 

 

80.0%/ncm(6)

 

NA

CLO debt

 

 

0.9

 

Market quotes

 

NBIB(3)

 

 

91.6%/ncm(6)

 

NA

CLO equity

 

 

106.1

 

Market quotes

 

NBIB(3)

 

 

12.0% – 97.0%/59.9%

 

NA

   

 

36.2

 

Yield Analysis

 

Yield

 

 

3.9% – 15.7%/10.2%

 

Decrease

   

 

3.6

 

Recent transactions

 

Actual trade/payoff(4)

 

 

72.0%/ncm(6)

 

NA

   

 

0.8

 

Discounted cash flow(7)

 

Discount rate(8)

 

 

8.0% – 14.4%/14.0%

 

Decrease

   

 

0.1

 

Liquidation net asset value(5)

 

NBIB(1)

 

 

3.0%/ncm(6)

 

NA

Equity and Other Investments

 

 

14.5

 

Enterprise value(9)

 

EBITDA(10)/
Market multiple
(10)

 

$

36.1 million/ncm(6) 6.8x – 7.8x/ncm(6)

 

Increase Increase

Total Fair Value for Level 3 Investments(11)

 

$

445.0

         

 

     

____________

(1)      Weighted averages are calculated based on fair value of investments.

(2)      The impact on the fair value measurement of an increase in each unobservable input is in isolation. The discount rate is the rate used to discount future cash flows in a discounted cash flow calculation. An increase in the discount rate, in isolation, would result in a decrease in a fair value measurement. Market/EBITDA multiples refer to the input (often derived from the value of a comparable company) that is multiplied by the historic and/or expected EBITDA of a company in order to estimate the company’s value. An increase in the Market/EBITDA multiple, in isolation, net of adjustments, would result in an increase in a fair value measurement.

(3)      The Company generally uses prices provided by an independent pricing service, or broker or agent bank non-binding indicative bid prices (“NBIB”), on or near the valuation date as the primary basis for the fair value determinations for syndicated notes, and CLO debt and equity investments, which may be adjusted for pending equity distributions as of valuation date. These bid prices are non-binding, and may not be determinative of fair value. Each bid price is evaluated by the Valuation Committee in conjunction with additional information compiled by Oxford Square Management, including financial performance, recent business developments, and, in the case of CLO debt and equity investments, performance and covenant compliance information as provided by the independent trustee.

(4)      Prices provided by independent pricing services are evaluated in conjunction with actual trades and payoffs and, in certain cases, the value represented by actual trades or payoffs may be more representative of fair value as determined by the Valuation Committee.

F-32

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 3. FAIR VALUE (cont.)

(5)      The fair value of those CLO equity positions which have been optionally redeemed are generally valued using a liquidation net asset value basis which represents the estimated expected residual value of the CLO as of the end of the period.

(6)      The calculation of weighted average for a range of values, for a single investment within a given asset category, is not considered to provide a meaningful representation (“ncm”).

(7)      The Company will calculate the fair value of certain CLO equity investments based upon the net present value of expected contractual payment streams discounted using estimated market yields for the equity tranche of the respective CLO vehicle. The Company will also consider those investments in which the record date for an equity distribution payment falls on or before the last day of the period, and the likelihood that a prospective purchaser would require an adjustment to the transaction price representing substantially all of the pending distribution.

(8)      Discount rate represents the rate at which future cash flows are discounted to calculate a present value, reflecting market assumptions for risk.

(9)      For the corporate debt investments and equity investments, third-party valuation firms evaluate the financial and operational information of the portfolio companies that the Company provides to them, as well as independent market and industry information that they consider appropriate in forming an opinion as to the fair value of the Company’s securities. In those instances where the carrying value and/or internal credit rating of the investment does not require the use of a third-party valuation firm, a valuation is prepared by Oxford Square Management, which may include liquidation analysis or which may utilize a subsequent transaction to provide an indication of fair value.

(10)    EBITDA, or earnings before interest expense, taxes, depreciation and amortization, is an unobservable input which is generally based on the most recently available twelve month financial statements provided by the portfolio company. Market multiples, also an unobservable input, represent an estimation of where market participants might value an enterprise based upon information available for comparable companies in the market.

(11)    Total may not sum due to rounding.

Financial Instruments Disclosed, But Not Carried, At Fair Value

The following table presents the carrying value and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of December 31, 2019 and the level of each financial liability within the fair value hierarchy:

($ in millions)

 

Carrying
Value(1)

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

6.50% Unsecured Notes(3)

 

$

63.0

 

$

65.6

 

$

 

$

65.6

 

$

6.25% Unsecured Notes(4)

 

 

43.3

 

 

45.6

 

 

 

 

45.6

 

 

Credit Facility(2)

 

 

28.1

 

 

28.1

 

 

 

 

 

 

28.1

Total(5)

 

$

134.4

 

$

139.3

 

$

 

$

111.2

 

$

28.1

____________

(1)      Carrying value is net of deferred debt issuance costs. Deferred debt issuance costs associated with the Credit Facility totaled approximately $10,000 as of December 31, 2019. Deferred debt issuance costs associated with the 6.50% Unsecured Notes totaled approximately $1.4 million as of December 31, 2019. Deferred debt issuance costs associated with the 6.25% Unsecured Notes totaled approximately $1.5 million as of December 31, 2019.

(2)      Fair value represents the par amount of the Facility.

(3)      For the 6.50% Unsecured Notes, fair value is based upon the closing price on the last day of the period. The 6.50% Unsecured Notes are listed on the NASDAQ Global Select Market (trading symbol “OXSQL”).

(4)      For the 6.25% Unsecured Notes, fair value is based upon the closing price on the last day of the period. The 6.25% Unsecured Notes are listed on the NASDAQ Global Select Market (trading symbol “OXSQZ”).

(5)      Totals may not sum due to rounding.

F-33

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 3. FAIR VALUE (cont.)

The following table presents the carrying value and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of December 31, 2018 and the level of each financial liability within the fair value hierarchy:

($ in millions)

 

Carrying
Value
(1)

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

Credit Facility(2)

 

$

85.5

 

$

85.7

 

$

 

$

 

$

85.7

6.50% Unsecured Notes(3)

 

 

62.7

 

 

64.4

 

 

 

 

64.4

 

 

Total(4)

 

$

148.2

 

$

150.0

 

$

 

$

64.4

 

$

85.7

____________

(1)      Carrying value is net of deferred debt issuance costs. Deferred debt issuance costs associated with the Credit Facility totaled approximately $0.2 million as of December 31, 2018. Deferred debt issuance costs associated with the 6.50% Unsecured Notes totaled approximately $1.7 million as of December 31, 2018.

(2)      Fair value represents the par amount of the Facility.

(3)      For the 6.50% Unsecured Notes, fair value is based upon the closing price on the last day of the period. The 6.50% Unsecured Notes are listed on the NASDAQ Global Select Market (trading symbol “OXSQL”).

(4)      Totals may not sum due to rounding.

A reconciliation of the fair value of investments for the year ended December 31, 2019, utilizing significant unobservable inputs, is as follows:

($ in millions)

 

Senior
Secured
Notes

 

CLO
Debt

 

CLO
Equity

 

Equity and
Other
Investments

 

Total(2)

Balance at December 31, 2018

 

$

282.7

 

 

$

0.9

 

 

$

146.8

 

 

$

14.5

 

 

$

445.0

 

Realized losses included in earnings

 

 

 

 

 

 

 

 

(1.2

)

 

 

(0.5

)

 

 

(1.7

)

Unrealized depreciation included in earnings

 

 

(18.1

)

 

 

(0.1

)

 

 

(32.4

)

 

 

(18.9

)

 

 

(69.5

)

Accretion of discount

 

 

0.8

 

 

 

 

 

 

 

 

 

 

 

 

0.8

 

Purchases

 

 

28.9

 

 

 

 

 

 

25.8

 

 

 

 

 

 

54.8

 

Repayments and Sales

 

 

(54.2

)

 

 

 

 

 

(5.6

)

 

 

 

 

 

(59.8

)

Reductions to CLO equity cost value(1)

 

 

 

 

 

 

 

 

(12.8

)

 

 

 

 

 

(12.8

)

Non-cash interest and dividend income due to PIK

 

 

0.4

 

 

 

 

 

 

 

 

 

7.7

 

 

 

8.0

 

Transfers in and/or (out) of level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019(2)

 

$

240.5

 

 

$

0.8

 

 

$

120.6

 

 

$

2.8

 

 

$

364.8

 

Net change in unrealized (losses) gains on Level 3 investments still held as of December 31, 2019(2)

 

$

(19.1

)

 

$

(0.1

)

 

$

(34.0

)

 

$

(19.3

)

 

$

(72.5

)

____________

(1)      Reduction to cost value on the Company’s CLO equity investments represents the difference between distributions received, or entitled to be received, of approximately $38.0 million and the effective yield interest income of approximately $25.2 million.

(2)      Totals may not sum due to rounding.

F-34

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 3. FAIR VALUE (cont.)

A reconciliation of the fair value of investments for the year ended December 31, 2018, utilizing significant unobservable inputs, is as follows:

($ in millions)

 

Senior
Secured
Notes

 

Subordinated
Debt

 

CLO
Debt

 

CLO
Equity

 

Equity and
Other
Investments

 

Total

Balance at December 31, 2017

 

$

242.2

 

 

$

0.8

 

 

$

4.7

 

 

$

156.0

 

 

$

14.7

 

 

$

418.4

 

Realized gains (losses) included in earnings

 

 

1.3

 

 

 

 

 

 

0.7

 

 

 

(5.5

)

 

 

0.1

 

 

 

(3.4

)

Unrealized depreciation included in earnings

 

 

(9.6

)

 

 

 

 

 

(0.2

)

 

 

(27.3

)

 

 

(2.2

)

 

 

(39.3

)

Accretion of discount

 

 

0.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.6

 

Purchases

 

 

187.5

 

 

 

 

 

 

0.9

 

 

 

54.2

 

 

 

2.0

 

 

 

244.6

 

Repayments and Sales

 

 

(139.6

)

 

 

(0.8

)

 

 

(5.3

)

 

 

(11.7

)

 

 

 

 

 

(157.4

)

Reductions to CLO equity cost value(1)

 

 

 

 

 

 

 

 

 

 

 

(18.8

)

 

 

 

 

 

(18.8

)

Non-cash interest and dividend income due to PIK

 

 

0.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.3

 

Transfers in and/or (out) of level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018(2)

 

$

282.7

 

 

$

 

 

$

0.9

 

 

$

146.8

 

 

$

14.5

 

 

$

445.0

 

Net change in unrealized (losses) gains on Level 3 investments still held as of December 31, 2018(2)

 

$

(9.5

)

 

$

 

 

$

 

 

$

(36.6

)

 

$

(2.3

)

 

$

(48.4

)

____________

(1)      Reduction to cost value on the Company’s CLO equity investments represents the difference between distributions received, or entitled to be received, of approximately $46.6 million and the effective yield interest income of approximately $27.8 million.

(2)      Totals may not sum due to rounding.

The following table shows the fair value of OXSQ’s portfolio of investments by asset class as of December 31, 2019 and 2018:

 

2019

 

2018

($ in millions)

 

Investments at
Fair Value

 

Percentage of
Total Portfolio

 

Investments at
Fair Value

 

Percentage of
Total Portfolio

Senior Secured Notes

 

$

240.5

 

65.9

%

 

$

282.7

 

63.5

%

CLO Debt

 

 

0.8

 

0.2

%

 

 

0.9

 

0.2

%

CLO Equity

 

 

120.6

 

33.1

%

 

 

146.8

 

33.0

%

Equity and Other Investments

 

 

2.8

 

0.8

%

 

 

14.5

 

3.3

%

Total(1)

 

$

364.8

 

100.0

%

 

$

445.0

 

100.0

%

____________

(1)      Totals may not sum due to rounding.

F-35

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 4. CASH, CASH EQUIVALENTS AND RESTRICTED CASH

At December 31, 2019 and December 31, 2018, respectively, cash, cash equivalents and restricted cash were as follows:

 

December 31,
2019

 

December 31,
2018

Cash

 

$

 

$

Cash Equivalents

 

 

14,410,486

 

 

13,905,059

Total Cash and Cash Equivalents

 

$

14,410,486

 

$

13,905,059

Restricted Cash

 

$

2,050,452

 

$

3,175,805

Total Cash, Cash Equivalents and Restricted Cash

 

$

16,460,938

 

$

17,080,864

NOTE 5. BORROWINGS

In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 200% (or 150% effective April 6, 2019) immediately after such borrowing. As of December 31, 2019 and 2018, the Company’s asset coverage for borrowed amounts was approximately 279% and 309% respectively.

The following are the Company’s outstanding principal amounts, carrying values and fair values of the Company’s borrowings as of December 31, 2019 and December 31, 2018. The fair value of the 6.25% Unsecured Notes is based upon the closing price on the last day of the period. The 6.25% Unsecured Notes are listed on the NASDAQ Global Select Market (trading symbol “OXSQZ”). The fair value of the 6.50% Unsecured Notes is based upon the closing price on the last day of the period. The 6.50% Unsecured Notes are listed on the NASDAQ Global Select Market (trading symbol “OXSQL”). The fair value of the Credit Facility represents the par amount.

 

As of

   

December 31, 2019

 

December 31, 2018

($ in millions)

 

Principal
Amount

 

Carrying
Value
(1)

 

Fair Value

 

Principal
Amount

 

Carrying
Value
(1)

 

Fair Value

6.50% Unsecured Notes

 

$

64.4

 

$

63.0

 

$

65.6

 

$

64.4

 

$

62.7

 

$

64.4

Credit Facility

 

 

28.1

 

 

28.1

 

 

28.1

 

 

85.7

 

 

85.5

 

 

85.7

6.25% Unsecured Notes

 

 

44.8

 

 

43.3

 

 

45.6

 

 

 

 

 

 

Total(2)

 

$

137.3

 

$

134.4

 

$

139.3

 

$

150.0

 

$

148.2

 

$

150.0

____________

(1)      Represents the aggregate principal amount outstanding less the unamortized deferred issuance costs. As of December 31, 2019, the total unamortized deferred issuance costs for the Credit Facility, 6.25% Unsecured Notes, and 6.50% Unsecured Notes was approximately $10,000, $1.5 million, and $1.4 million, respectively. As of December 31, 2018, the total unamortized deferred issuance costs for the Credit Facility and 6.50% Unsecured Notes was approximately $0.2 million and $1.7 million, respectively.

(2)      Totals may not sum due to rounding.

The weighted average stated interest rate and weighted average maturity on all our debt outstanding as of December 31, 2019 were 5.94% and 4.2 years, respectively, and as of December 31, 2018 were 5.64% and 3.1 years, respectively.

F-36

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 5. BORROWINGS (cont.)

The table below summarizes the components of interest expense for the years ended December 31, 2019, 2018 and 2017:

 

Year Ended December 31, 2019

($ in thousands)

 

Stated
Interest
Expense

 

Amortization of
Deferred Debt
Issuance Costs

 

Total

Credit Facility

 

$

3,043.3

 

$

74.1

 

$

3,117.4

6.25% Unsecured Notes

 

 

2,084.0

 

 

173.5

 

 

2,257.5

6.50% Unsecured Notes

 

 

4,184.1

 

 

324.7

 

 

4,508.8

Repo Facility

 

 

17.7

 

 

 

 

17.7

Total

 

$

9,329.1

 

$

572.3

 

$

9,901.4

 

Year Ended December 31, 2018

($ in thousands)

 

Stated
Interest
Expense

 

Amortization of
Deferred Debt
Issuance Costs

 

Total

Credit Facility

 

$

2,618.2

 

$

54.0

 

$

2,672.2

6.50% Unsecured Notes

 

 

4,184.1

 

 

324.7

 

 

4,508.8

Total

 

$

6,802.3

 

$

378.7

 

$

7,181.0

 

Year Ended December 31, 2017

($ in thousands)

 

Stated Interest
Expense

 

Note
Discount

 

Amortization of
Deferred Debt
Issuance Costs

 

Total

TICC CLO 2012-1 LLC Class A-1 Notes

 

$

623.8

 

$

25.4

 

$

 

$

649.2

TICC CLO 2012-1 LLC Class B-1 Notes

 

 

600.0

 

 

35.3

 

 

 

 

635.3

TICC CLO 2012-1 LLC Class C-1 Notes

 

 

878.4

 

 

59.4

 

 

 

 

937.8

TICC CLO 2012-1 LLC Class D-1 Notes

 

 

939.7

 

 

66.9

 

 

 

 

1,006.6

TICC CLO 2012-1 amortization of deferred debt

 

 

 

 

 

 

91.7

 

 

91.7

Convertible Notes

 

 

5,908.9

 

 

 

 

425.2

 

 

6,334.1

6.50% Unsecured Notes

 

 

3,010.2

 

 

 

 

233.9

 

 

3,244.1

Total

 

$

11,961.0

 

$

187.0

 

$

750.8

 

$

12,898.8

Notes Payable — 6.50% Unsecured Notes Due 2024

On April 12, 2017, the Company completed an underwritten public offering of approximately $64.4 million in aggregate principal amount of the 6.50% Unsecured Notes. The 6.50% Unsecured Notes mature on March 30, 2024, and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after March 30, 2020. The 6.50% Unsecured Notes bear interest at a rate of 6.50% per year, payable quarterly on March 30, June 30, September 30, and December 30 of each year, which commenced June 30, 2017.

The aggregate accrued interest payable on the 6.50% Unsecured Notes as of December 31, 2019 and December 31, 2018 was approximately $12,000. As of December 31, 2019 and December 31, 2018, the Company had unamortized deferred debt issuance costs relating to the 6.50% Unsecured Notes of approximately $1.4 million and $1.7 million, respectively. The deferred debt issuance costs are being amortized over the term of the 6.50% Unsecured Notes and are included in interest expense in the consolidated statements of operations. The cash paid

F-37

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 5. BORROWINGS (cont.)

and the effective annualized interest rate for the year ended December 31, 2019 were approximately $4.2 million and 7.00%, respectively. The cash paid and the effective annualized interest rate for the year ended December 31, 2018 were approximately $4.2 million and 7.00%, respectively.

Notes Payable — Credit Facility

On June 21, 2018, OXSQ Funding, a special purpose vehicle and wholly-owned subsidiary of OXSQ, entered into a Credit Facility with Citibank, N.A. Subject to certain exceptions, pricing under the Credit Facility is based on the London Interbank Offered Rate for an interest period equal to three months plus a spread of 2.25% per annum payable quarterly on March 21, June 21, September 21 and December 21. Pursuant to the terms of the credit agreement governing the Credit Facility, OXSQ Funding has borrowed approximately $95.2 million. The Credit Facility has a mandatory amortization schedule such that 15.0% of the principal amount outstanding as of June 21, 2018 will be due and payable on June 21, 2019. On each payment date occurring thereafter, an additional 6.25% of the remaining principal amount outstanding will be due and payable. On June 21, 2020, all remaining principal and accrued and unpaid interest will be due and payable.

The Credit Facility is collateralized by a pool of loans initially consisting of loans sold by OXSQ to OXSQ Funding. OXSQ may sell and contribute additional loans to OXSQ Funding from time to time. OXSQ will act as the collateral manager of the loans owned by OXSQ Funding, and has retained a residual interest through its ownership of OXSQ Funding.

On October 12, 2018, OXSQ Funding amended the Credit Facility with Citibank, N.A. Under the amended Credit Facility, an additional borrowing amount of approximately $37.3 million was made under the same terms as the existing credit agreement. The Company posted additional collateral with a principal amount of approximately $76.4 million. All other existing terms of the Credit Facility remain unchanged.

The company made partial principal repayments under the Credit Facility for the year ended December 31, 2019 and December 31, 2018 of approximately $57.6 million and $46.8 million, respectively. For the year ended December 31, 2019 and December 31, 2018, the Company recognized a net extinguishment loss of approximately $73,000 and $61,000, respectively, which consisted of unamortized deferred debt issuance costs. These costs are recorded within realized losses on extinguishment of debt in the consolidated statements of operations.

As of December 31, 2019, there were 14 investments in portfolio companies with a total fair value of approximately $173.2 million, collateralizing the Credit Facility. As of December 31, 2018, there were 19 investments in portfolio companies with a total fair value of approximately $244.1 million, collateralizing the Credit Facility. The pool of loans in OXSQ Funding must meet certain requirements, including asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.

The aggregate accrued interest payable on the Credit Facility as of December 31, 2019 and December 31, 2018 was approximately $0.2 million and $0.5 million, respectively. Deferred debt issuance costs consisted of fees and expenses incurred in connection with the Credit Facility. As of December 31, 2019 and December 31, 2018, the unamortized deferred debt issuance costs relating to the Credit Facility was approximately $10,000 and $157,000. This amount is being amortized and included in interest expense in the consolidated statements of operations over the term of the Credit Facility. The cash paid and effective annualized interest rate for the year ended December 31, 2019 was approximately $3.4 million and 4.80%, respectively. The cash paid and effective annualized interest rate for the year ended December 31, 2018 was approximately $2.1 million and 4.74%, respectively.

Notes Payable —6.25% Unsecured Notes Due 2026

On April 3, 2019, the Company completed an underwritten public offering of approximately $44.8 million in aggregate principal amount of 6.25% Unsecured Notes. The 6.25% Unsecured Notes will mature on April 30,

F-38

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 5. BORROWINGS (cont.)

2026, and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after April 30, 2022. The 6.25% Unsecured Notes bear interest at a rate of 6.25% per year payable quarterly on January 31, April 30, July 31, and October 31, of each year, commencing July 31, 2019.

The aggregate accrued interest payable on the 6.25% Unsecured Notes as of December 31, 2019 was approximately $0.5 million. As of December 31, 2019, the Company had unamortized deferred debt issuance costs of approximately $1.5 million relating to the 6.25% Unsecured Notes. The deferred debt issuance costs are being amortized over the term of the 6.25% Unsecured Notes and are included in interest expense in the consolidated statements of operations. The cash paid and the effective annualized interest rate for the year ended December 31, 2019 were approximately $1.6 million and 6.72%, respectively.

Repurchase Transaction Facility

On October 18, 2019, the Company entered into a $10 million repurchase 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 has a funding cost of 1-month LIBOR plus 2.05% per annum for each Reverse Repo transaction and is subject to a facility fee of 0.85% per annum on the full $10 million facility amount. The Repo Facility expires on October 18, 2020, subject to optional termination or extension that is mutually agreed. The Company accounts for these Reverse Repo transactions as secured financings for financial reporting purposes in accordance with GAAP. As of December 31, 2019, there was no outstanding principal, or securities sold under the Repo Facility. The Company accrued approximately $18,000 in undrawn fees as of December 31, 2019, which is classified as interest expense on the consolidated statement of operations.

Notes Payable — TICC CLO 2012-1 LLC

On August 23, 2012, the Company completed a $160 million debt securitization financing transaction, consisting of $120 million in secured notes and $40.0 million of the 2012 Subordinated Notes. On February 25, 2013 and May 28, 2013, TICC CLO 2012-1 issued additional secured notes totaling an aggregate of $120 million and 2012 Subordinated Notes totaling an aggregate of $40.0 million, which 2012 Subordinated Notes were purchased by OXSQ under the “accordion” feature of the debt securitization which allowed, under certain circumstances and subject to the satisfaction of certain conditions, for an increase in the amount of secured and subordinated notes. It is not necessary that the Company own all or any of the notes permitted by this feature, which may affect the accounting treatment of the debt securitization financing transaction. On August 25, 2016, November 25, 2016, February 27, 2017, and May 25, 2017, the Securitization Issuer repaid approximately $36.0 million, $74.7 million, $24.5 million, and $31.4 million of the class A-1 notes, respectively. On August 25, 2017, the Securitization Issuer repaid, in full, the remaining secured notes (classes A-1, B-1, C-1 and D-1) outstanding of approximately $73.4 million. During the quarter ended December 31, 2017, the Company, as collateral manager of TICC CLO 2012-1, dissolved TICC CLO 2012-1 pursuant to Delaware law by filing a certificate of cancellation with the Secretary of State in Delaware.

For the year ended December 31, 2017, the Company incurred debt extinguishment costs of approximately $3.1 million, which consisted of approximately $2.0 million in accelerated note discount expense and approximately $1.1 million in accelerated deferred debt issuance costs. The accelerated note discount expense and accelerated deferred debt issuance costs are recorded within realized losses on extinguishment of debt in the consolidated

F-39

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 5. BORROWINGS (cont.)

statements of operations. The realized loss on extinguishment of debt incurred in prior periods was reclassified from interest expense in the consolidated statements of operations to conform with the current period presentation for comparative purposes. The cash paid and the effective annualized interest rate for the year ended December 31, 2017 were $3.6 million and 5.33%, respectively.

Notes Payable — Convertible Notes

On September 26, 2012, the Company issued $105.0 million aggregate principal amount of convertible notes (the “Convertible Notes”), and an additional $10.0 million aggregate principal amount of the Convertible Notes was issued on October 22, 2012 pursuant to the exercise of the initial purchasers’ option to purchase additional Convertible Notes. The Convertible Notes bear interest at a rate of 7.50% per year, payable semi-annually in arrears on May 1 and November 1 of each year, commencing on May 1, 2013. The Convertible Notes are convertible into shares of OXSQ’s common stock based on an initial conversion rate of 87.2448 shares of its common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $11.46 per share of common stock. The conversion price for the Convertible Notes will be reduced for quarterly cash distributions paid to common shares to the extent that the quarterly distribution exceeds $0.29 cents per share, subject to adjustment. Deferred debt issuance costs represent fees and other direct incremental costs incurred in connection with the Convertible Notes. On December 2, 2016 and December 16, 2016, the Company repurchased $12.0 million and approximately $8.5 million of the Convertible Notes, respectively. On November 1, 2017, the Convertible Notes matured and were repaid in full (approximately $94.5 million) in accordance with their terms.

In connection with the repurchase of approximately $20.5 million of the Convertible Notes in December 2016, the Company recognized a net extinguishment loss of approximately $815,000, which consisted of approximately $716,000 from repurchasing the Convertible Notes at a premium to par and approximately $99,000 in previously unamortized deferred debt issuance costs. These costs are recorded within realized losses on extinguishment of debt in the consolidated statements of operations. The realized loss on extinguishment of debt incurred in prior periods was reclassified from interest expense in the consolidated statements of operations to conform with the current period presentation for comparative purposes. The cash paid and the effective annualized interest rate for the year ended December 31, 2017 were $7.1 million and 8.07%, respectively.

F-40

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 6. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted net increase in net assets resulting from net investment income per share for the years ended December 31, 2019, 2018 and 2017:

 

Year Ended
December 31,
2019

 

Year Ended
December 31,
2018

 

Year Ended
December 31,
2017

Net increase in net assets resulting from net investment income per common share – basic:

 

 

   

 

   

 

 

Net investment income

 

$

38,478,359

 

$

33,506,218

 

$

30,726,730

Weighted average common shares outstanding – basic

 

 

47,756,596

 

 

49,662,157

 

 

51,479,409

Net increase in net assets resulting from net investment income per common share – basic

 

$

0.81

 

$

0.67

 

$

0.60

Net increase in net assets resulting from net investment income per common share – diluted:

 

 

   

 

   

 

 

Net investment income, before adjustments

 

$

38,478,359

 

$

33,506,218

 

$

30,726,730

Adjustments for interest and deferred issuance costs on the Convertible Notes, and related impact on the Base Fees and Net Investment Income Incentive Fees(1)

 

 

 

 

 

 

Net investment income, as adjusted

 

$

38,478,359

 

$

33,506,218

 

$

30,726,730

Weighted average common shares outstanding – basic

 

 

47,756,596

 

 

49,662,157

 

 

51,479,409

Share adjustments for dilutive effect of the Convertible Notes(1)

 

 

 

 

 

 

Weighted average common shares outstanding – diluted

 

 

47,756,596

 

 

49,662,157

 

 

51,479,409

Net increase in net assets resulting from net investment income per common share – diluted(1)

 

$

0.81

 

$

0.67

 

$

0.60

The following table sets forth the computation of basic and diluted net (decrease) increase in net assets resulting from operations per share for the years ended December 31, 2019, 2018 and 2017:

 

Year Ended
December 31,
2019

 

Year Ended
December 31,
2018

 

Year Ended
December 31,
2017

Net increase in net assets resulting from operations per common share – basic:

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in net assets resulting from operations

 

$

(32,797,917

)

 

$

(9,213,373

)

 

$

43,609,671

Weighted average common shares outstanding – basic

 

 

47,756,596

 

 

 

49,662,157

 

 

 

51,479,409

Net (decrease) increase in net assets resulting from operations per common share – basic

 

$

(0.69

)

 

$

(0.19

)

 

$

0.85

Net (decrease) increase in net assets resulting from operations per common share – diluted:

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in net assets resulting from operations, before adjustments

 

$

(32,797,917

)

 

$

(9,213,373

)

 

$

43,609,671

Adjustments for interest and deferred issuance costs on the Convertible Notes, and related impact on the Base Fees and Net Investment Income Incentive Fees

 

 

 

 

 

 

 

 

4,724,234

Net (decrease) increase in net assets resulting from operations, as adjusted

 

$

(32,797,917

)

 

$

(9,213,373

)

 

$

48,333,905

Weighted average common shares outstanding – basic

 

 

47,756,596

 

 

 

49,662,157

 

 

 

51,479,409

Share adjustments for dilutive effect of the Convertible Notes

 

 

 

 

 

 

 

 

6,869,815

Weighted average common shares outstanding – diluted

 

 

47,756,596

 

 

 

49,662,157

 

 

 

58,349,224

Net increase (decrease) in net assets resulting from operations per common share – diluted

 

$

(0.69

)

 

$

(0.19

)

 

$

0.83

____________

(1)      Due to the anti-dilutive effect on the computation of diluted earnings per share for the year ended December 31, 2017, the adjustments for interest and deferred issuance costs on the Convertible Notes, and the related impact on the Base Fees and Net Investment Income Incentive Fees as well as share adjustments for dilutive effect of the Convertible Notes were excluded from the respective periods’ diluted earnings per share computation.

F-41

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 6. EARNINGS PER SHARE (cont.)

The following table represents the respective adjustments which were not made due to the anti-dilutive effect on the computation of diluted change in net assets resulting from net investment income per common share and the diluted change in net assets resulting from operations per common share for the years ended December 31, 2019, 2018, and 2017:

 

Year Ended
December 31,
201
9

 

Year Ended
December 31,
201
8

 

Year Ended
December 31,
201
7

Net increase in net assets resulting from net investment income per common share – diluted:

 

 

   

 

   

 

 

Adjustments for interest and deferred issuance costs on the Convertible Notes, and related impact on the Base Fees and Net Investment Income Incentive Fee

 

$

 

$

 

$

4,724,234

Share adjustments for dilutive effect of the Convertible Notes

 

 

 

 

 

 

6,869,815

Net increase in net assets resulting from operations per common share – diluted:

 

 

   

 

   

 

 

Adjustments for interest and deferred issuance costs on the Convertible Notes, and related impact on the Base Fees and Net Investment Income Incentive Fees

 

$

 

$

 

$

Share adjustments for dilutive effect of the Convertible Notes

 

 

 

 

 

 

NOTE 7. RELATED PARTY TRANSACTIONS

OXSQ pays Oxford Square Management a fee for its services under the Investment Advisory Agreement consisting of two components — a base management fee (the “Base Fee”) and an incentive fee. The cost of both the Base Fee payable to Oxford Square Management and any incentive fees earned by Oxford Square Management are ultimately borne by OXSQ’s common stockholders.

Base Management Fee

Through March 31, 2016, the Base Fee was calculated at an annual rate of 2.00%. Effective April 1, 2016, the Base Fee is currently calculated at an annual rate of 1.50%. The Base Fee is payable quarterly in arrears, and is calculated based on the average value of OXSQ’s gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any equity or debt capital raises, repurchases or redemptions during the current calendar quarter (however, no Base Fee will be payable on the cash proceeds received by the Company in connection with any share or debt issuances until such proceeds have been invested in accordance with its investment objective). Accordingly, the Base Fee will be payable regardless of whether the value of the Company’s gross assets has decreased during the quarter. The Base Fee for any partial quarter will be appropriately prorated.

The following table represents the Base Fee for the years ended December 31, 2019, 2018 and 2017, respectively:

 

Year ended
December 31,
201
9

 

Year ended
December 31,
201
8

 

Year ended
December 31,
201
7

Base Fee

 

$

6,704,467

 

$

7,309,435

 

$

8,140,010

The Base Fee payable to Oxford Square Management as of December 31, 2019 and 2018 was $1,480,653 and $2,052,373, respectively.

F-42

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 7. RELATED PARTY TRANSACTIONS (cont.)

Incentive Fee

The incentive fee has two parts: the “Net Investment Income Incentive Fee” and the “Capital Gains Incentive Fee”. 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 (including any accrued income that we have not yet received in cash and any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter minus OXSQ’s operating expenses accrued the calendar quarter (including the Base Fee, expenses payable under a separate agreement with Oxford Funds (the “Administration Agreement”), and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). “Pre-Incentive Fee Net Investment Income” includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind (“PIK”) interest and zero coupon securities), accrued income that the Company has not yet received in cash. Oxford Square Management will not be under any obligation to reimburse OXSQ for any part of the incentive fee it received that was based on accrued income that it never received as a result of a default by an entity on the obligation that resulted in the accrual of such income. “Pre-Incentive Fee Net Investment Income” does not include any realized gains, realized losses or unrealized appreciation or depreciation. Given that this portion of the incentive fee is payable without regard to any gain, loss or unrealized depreciation that may occur during the quarter, this portion of Oxford Square Management’s incentive fee may also be payable notwithstanding a decline in net asset value that quarter.

Effective April 1, 2016, a “Preferred Return Amount” is calculated on a quarterly basis by multiplying 1.75% by the Company’s net asset value at the end of the immediately preceding calendar quarter. The Net Investment Income Incentive Fee is then calculated as follows: (a) no Net Investment Income Incentive Fee is payable to Oxford Square Management in any calendar quarter in which the “Pre-Incentive Fee Net Investment Income” does not exceed the “Preferred Return Amount”; (b) 100% of the “Pre-Incentive Fee Net Investment Income” for such quarter, if any, that exceeds the “Preferred Return

Amount” but is less than or equal to a “Catch-Up Amount” determined on a quarterly basis by multiplying 2.1875% by OXSQ’s net asset value at the end of such calendar quarter; and (c) for any quarter in which the “Pre-Incentive Fee Net Investment Income” exceeds the “Catch-Up Amount,” the Net Investment Income Incentive Fee will be 20% of the amount of the “Pre-Incentive Fee Net Investment Income” for such quarter. There is no accumulation of amounts from quarter to quarter for the “Preferred Return Amount,” and accordingly there is no claw back of amounts previously paid to Oxford Square Management if the “Pre-Incentive Fee Net Investment Income” for subsequent quarters is below the quarterly “Preferred Return Amount,” and there is no delay of payment of incentive fees to Oxford Square Management if the “Pre-Incentive Fee Net Investment Income” for prior quarters is below the quarterly “Preferred Return Amount” for the quarter for which the calculation is being made.

In addition, effective April 1, 2016, the calculation of the Company’s Net Investment Income Incentive Fee is subject to a total return requirement, which provides that a Net Investment Income Incentive Fee will not be payable to Oxford Square Management except to the extent 20% of the “cumulative net increase in net assets resulting from operations” (which is the amount, if positive, of the sum of the “Pre-Incentive Fee Net Investment Income,” realized gains and losses and unrealized appreciation and depreciation) during the calendar quarter for which such fees are being calculated and the eleven (11) preceding quarters (or if shorter, the number of quarters since April 1, 2016) exceeds the cumulative Net Investment Income Incentive Fees accrued and/or paid for such eleven (11) preceding quarters (or if shorter, the number of quarters since April 1, 2016). Under the revised fee structure, under no circumstances will the aggregate fees earned from April 1, 2016 by Oxford Square Management in any quarterly period be higher than the aggregate fees that would have been earned prior to the adoption of these changes.

F-43

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 7. RELATED PARTY TRANSACTIONS (cont.)

From January 1, 2005 through March 31, 2016, the “Pre-Incentive Fee Net Investment Income,” which was expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, was compared to one-fourth of an annual hurdle rate that was determined as of the immediately preceding December 31st by adding 5.00% to the interest rate then payable on the most recently issued five-year U.S. Treasury Notes, up to a maximum annual hurdle rate of 10.00%. The annual hurdle rates for the 2019, 2018 and 2017 calendar years was 7.51%, 7.20%, and 6.93% respectively.

The following table represents the Net Investment Income Incentive Fees for each of the years ended December 31, 2019, 2018 and 2017, respectively:

 

Year ended
December 31,
201
9

 

Year ended
December 31,
201
8

 

Year ended
December 31,
201
7

Net Investment Income Incentive Fee

 

$

3,511,493

 

$

4,585,151

 

$

3,850,646

There was no Net Investment Income Incentive Fee payable to Oxford Square Management as of December 31, 2019. The Net Investment Income Incentive Fee payable to Oxford Square Management as of December 31, 2018 was approximately $1.2 million.

Capital Gains Incentive Fees

The Capital Gains Incentive Fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20% of our “Incentive Fee Capital Gains,” which consists of our realized capital gains for each calendar year, computed net of all realized capital losses and unrealized capital depreciation for that calendar year. For accounting purposes only, in order to reflect the theoretical Capital Gains Incentive Fee that would be payable for a given period as if all unrealized gains were realized, we will accrue a Capital Gains Incentive Fee based upon net realized gains and unrealized depreciation for that calendar year (in accordance with the terms of the Investment Advisory Agreement), plus unrealized appreciation on investments held at the end of the period. It should be noted that a fee so calculated and accrued would not necessarily be payable under the Investment Advisory Agreement, and may never be paid based upon the computation of Capital Gains Incentive Fees in subsequent periods. Amounts paid under the Investment Advisory Agreement will be consistent with the formula reflected in the Investment Advisory Agreement.

The amount of Capital Gains Incentive Fee expense related to the hypothetical liquidation of the portfolio (and assuming no other changes in realized or unrealized gains and losses) would only become payable to Oxford Square Management in the event of a complete liquidation of the Company’s portfolio as of period end and the termination of the Investment Advisory Agreement on such date. Also, it should be noted that the Capital Gains Incentive Fee expense fluctuates with the Company’s overall investment results.

There were no Capital Gains Incentive Fee based on hypothetical liquidation for the years ended December 31, 2019, 2018 and 2017.

Administration Agreement

The Company has also entered into the Administration Agreement with Oxford Funds under which Oxford Funds provides administrative services for OXSQ. The Company pays Oxford Funds an allocable portion of overhead and other expenses incurred by Oxford Funds in performing its obligations under the Administration Agreement, including a portion of the rent and the compensation of the chief financial officer, accounting staff and other administrative support personnel, which creates potential conflicts of interest that the Board of Directors

F-44

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 7. RELATED PARTY TRANSACTIONS (cont.)

must monitor. The Company also reimburses Oxford Funds for the costs associated with the functions performed by OXSQ’s Chief Compliance Officer that Oxford Funds pays on the Company’s behalf pursuant to the terms of an agreement between the Company and Alaric Compliance Services, LLC.

Oxford Square Management is controlled by Oxford Funds, its managing member. Charles M. Royce holds a minority, non-controlling interest in Oxford Square Management. Oxford Funds manages the business and internal affairs of Oxford Square Management. Jonathan H. Cohen, the Company’s Chief Executive Officer, as well as a Director, is the managing member of Oxford Funds. Saul B. Rosenthal, the Company’s President and Chief Operating Officer, is also the President and Chief Operating Officer of Oxford Square Management and a member of Oxford Funds. Messrs. Cohen and Rosenthal together control the equity interests in Oxford Funds.

For the years ended December 31, 2019, 2018 and 2017, OXSQ incurred approximately $0.8 million, $0.9 million and $0.9 million, respectively, in compensation expenses for the services of employees allocated to the administrative activities of OXSQ, pursuant to the Administrative Agreement with Oxford Funds. In addition, OXSQ incurred approximately $56,000, $26,000, and $79,000 for facility costs allocated under the Administrative Agreement for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019 and December 31, 2018, there were no amounts payable under the Administration Agreement.

NOTE 8. INVESTMENT INCOME

The following table sets forth the components of investment income for the years ended December 31, 2019, 2018 and 2017, respectively:

 

December 31,
2019

 

December 31,
2018

 

December 31,
2017

Interest Income

 

 

   

 

   

 

 

Stated interest income

 

$

26,701,382

 

$

24,403,191

 

$

23,640,789

Original issue discount and market discount income

 

 

819,595

 

 

613,073

 

 

1,003,086

Payment-in-kind interest income

 

 

271,642

 

 

290,600

 

 

233,067

Discount income derived from unscheduled remittances at par

 

 

207,664

 

 

148,599

 

 

67,214

Total interest income

 

 

28,000,283

 

 

25,455,463

 

 

24,944,156

Income from securitization vehicles and investments

 

 

25,244,866

 

 

27,837,032

 

 

33,274,392

Dividend Income – non-cash

 

 

7,710,805

 

 

 

 

Other income

 

 

   

 

   

 

 

Fee letters

 

 

884,493

 

 

664,061

 

 

1,368,132

Loan prepayment and bond call fees

 

 

315,000

 

 

1,130,741

 

 

719,012

All other fees

 

 

494,941

 

 

1,189,971

 

 

1,111,325

Total other income

 

 

1,694,434

 

 

2,984,773

 

 

3,198,469

Total investment income

 

$

62,650,388

 

$

56,277,268

 

$

61,417,017

The 1940 Act requires that a BDC offer significant managerial assistance to its portfolio companies. The Company may receive fee income for managerial assistance it renders to portfolio companies in connection with its investments. For the years ended December 31, 2019, 2018 and 2017, the Company received no fee income for managerial assistance.

F-45

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 9. COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company enters into a variety of undertakings containing a variety of warranties and indemnifications that may expose the Company to some risk of loss. The risk of future loss arising from such undertakings, while not quantifiable, is expected to be remote.

As of December 31, 2019, the Company had no commitments to purchase additional debt investments.

The Company is not currently subject to any material legal proceedings. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon its consolidated results of operations and financial condition.

NOTE 10. FINANCIAL HIGHLIGHTS

Financial highlights for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 are as follows:

 

Year Ended
December 31,
2019

 

Year Ended
December 31,
2018

 

Year Ended
December 31,
2017

 

Year Ended
December 31,
2016

 

Year Ended
December 31,
2015

Per Share Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value at beginning of year

 

$

6.60

 

 

$

7.55

 

 

$

7.50

 

 

$

6.40

 

 

$

8.64

 

Net investment income(1)(3)

 

 

0.81

 

 

 

0.67

 

 

 

0.60

 

 

 

0.52

 

 

 

0.66

 

Net realized and unrealized gains (losses)(2)(3)

 

 

(1.49

)

 

 

(0.91

)

 

 

0.25

 

 

 

1.62

 

 

 

(1.85

)

Net change in net asset value from operations

 

 

(0.68

)

 

 

(0.24

)

 

 

0.85

 

 

 

2.14

 

 

 

(1.19

)

Distributions per share from net investment income

 

 

(0.80

)

 

 

(0.73

)

 

 

(0.66

)

 

 

(1.06

)

 

 

(1.14

)

Distributions based on weighted average share impact

 

 

 

 

 

0.01

 

 

 

 

 

 

0.01

 

 

 

0.01

 

Tax return of capital distributions

 

 

 

 

 

(0.07

)

 

 

(0.14

)

 

 

(0.10

)

 

 

 

Total distributions(4)

 

 

(0.80

)

 

 

(0.79

)

 

 

(0.80

)

 

 

(1.15

)

 

 

(1.13

)

Effect of shares issued/repurchased, gross

 

 

 

 

 

0.08

 

 

 

 

 

 

0.11

 

 

 

0.08

 

Net asset value at end of year

 

$

5.12

 

 

$

6.60

 

 

$

7.55

 

 

$

7.50

 

 

$

6.40

 

Per share market value at beginning of year

 

$

6.47

 

 

$

5.74

 

 

$

6.61

 

 

$

6.08

 

 

$

7.53

 

Per share market value at end of year

 

$

5.44

 

 

$

6.47

 

 

$

5.74

 

 

$

6.61

 

 

$

6.08

 

Total return based on Market Value(5)

 

 

(4.14

)%

 

 

26.95

%

 

 

(2.01

)%

 

 

33.29

%

 

 

(4.35

)%

Total return based on Net Asset Value(6)

 

 

(10.26

)%

 

 

(1.99

)%

 

 

11.33

%

 

 

35.31

%

 

 

(12.73

)%

Shares outstanding at end of year

 

 

48,448,987

 

 

 

47,650,959

 

 

 

51,479,409

 

 

 

51,479,409

 

 

 

56,396,435

 

Ratios/Supplemental Data(8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net assets at end of period (000’s)

 

$

247,999

 

 

$

314,724

 

 

$

388,419

 

 

$

385,992

 

 

$

360,935

 

Average net assets (000’s)

 

$

289,373

 

 

$

369,258

 

 

$

385,947

 

 

$

343,328

 

 

$

487,894

 

Ratio of expenses to average
net assets

 

 

8.35

%

 

 

6.17

%

 

 

7.95

%

 

 

12.38

%

 

 

9.80

%

Ratio of net investment income to average net assets

 

 

13.30

%

 

 

9.07

%

 

 

7.96

%

 

 

7.80

%

 

 

8.12

%

Portfolio turnover rate(7)

 

 

12.75

%

 

 

35.18

%

 

 

43.02

%

 

 

25.73

%

 

 

24.96

%

____________

(1)      Represents per share net investment income for the period, based upon weighted average shares outstanding.

(2)      Net realized and unrealized gains include rounding adjustments to reconcile change in net asset value per share.

F-46

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 10. FINANCIAL HIGHLIGHTS (cont.)

(3)      During the first quarter of 2015, the Company identified a non-material error in its accounting for income from CLO equity investments. Prospectively as of January 1, 2015, the Company records income from its CLO equity investments using the effective yield method in accordance with the accounting guidance in ASC 325-40, Beneficial Interests in Securitized Financial Assets, based upon an estimation of an effective yield to maturity utilizing assumed cash flows. An out-of-period adjustment to Net Investment Income Incentive Fees, in the amount of $2.4 million, or $0.04 per share, is reflected in the year ended December 31, 2015. Prior period amounts are not materially affected.

During the quarter ended September 30, 2015, the Company recorded an out of period adjustment related to a miscalculation of discount accretion which increased interest income and increased investment cost, by approximately $1.4 million. For the year ended December 31, 2015, approximately $1.1 million, or $0.02 per share, of the adjustment related to prior years. The increase in the investment cost has a corresponding effect on the investment’s unrealized depreciation of the same amount. Management concluded the adjustment was not material to previously filed financial statements.

(4)      Management monitors available taxable earnings, including net investment income and realized capital gains, to determine if a tax return of capital may occur for the year. To the extent the Company’s taxable earnings fall below the total amount of the Company’s distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to the Company’s stockholders. The ultimate tax character of the Company’s earnings cannot be determined until tax returns are prepared after the end of the fiscal year.

(5)      Total return based on market value equals the increase or decrease of ending market value over beginning market value, plus distributions, assuming distribution reinvestment prices obtained under the Company’s distribution reinvestment plan, excluding any discounts divided by the beginning market value per share.

(6)      Total return based on net asset value equals the increase or decrease of ending net asset value over beginning net asset value, plus distributions, divided by the beginning net asset value.

(7)      Portfolio turnover rate is calculated using the lesser of the annual cash investment sales and debt repayments or annual cash investment purchases over the average of the total investments at fair value.

(8)      The following table provides supplemental performance ratios measured for the years ended December 31, 2019, 2018, 2017, 2016 and 2015:

 

Year Ended
December 31,
2019

 

Year Ended
December 31,
2018

 

Year Ended
December 31,
2017

 

Year Ended
December 31,
2016

 

Year Ended
December 31,
2015

Ratio of expenses to average net assets:

   

 

   

 

   

 

   

 

   

 

Expenses before incentive fees

 

7.14

%

 

4.92

%

 

6.95

%

 

11.57

%

 

10.00

%

Net Investment Income Incentive Fees

 

1.21

%

 

1.24

%

 

1.00

%

 

0.81

%

 

(0.19

)%

Capital Gains Incentive Fees

 

%

 

%

 

%

 

%

 

%

Ratio of expenses, excluding interest expense, to average net assets

 

4.93

%

 

4.21

%

 

4.61

%

 

7.37

%

 

5.73

%

F-47

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 11. DISTRIBUTIONS

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 2017 fiscal year through 2019:

Date Declared

 

Record Date

 

Payment Date

 

Total
Distributions

 

GAAP Net
Investment
Income

 

Distributions in
excess of/
(less than)
GAAP net
investment
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

(1)

 

$

0.81

(5)

 

$

(0.01

)(5)

           

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2018

         

 

 

 

 

 

 

 

 

 

 

 

October 26, 2018

 

December 17, 2018

 

December 31, 2018

 

$

0.20

 

 

$

0.18

 

 

$

0.02

 

July 26, 2018

 

September 14, 2018

 

September 28, 2018

 

 

0.20

 

 

 

0.18

 

 

 

0.02

 

April 24, 2018

 

June 15, 2018

 

June 29, 2018

 

 

0.20

 

 

 

0.15

 

 

 

0.05

 

February 22, 2018

 

March 16, 2018

 

March 30, 2018

 

 

0.20

 

 

 

0.17

 

 

 

0.03

 

Total (2018)

         

$

0.80

(2)

 

$

0.67

(5)

 

$

0.13

(5)

           

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2017

         

 

 

 

 

 

 

 

 

 

 

 

October 27, 2017

 

December 15, 2017

 

December 29, 2017

 

$

0.20

 

 

$

0.15

 

 

$

0.05

 

February 27, 2017

 

September 15, 2017

 

September 29, 2017

 

 

0.20

 

 

 

0.13

 

 

 

0.07

 

February 27, 2017

 

June 16, 2017

 

June 30, 2017

 

 

0.20

 

 

 

0.16

 

 

 

0.04

 

February 27, 2017

 

March 16, 2017

 

March 31, 2017

 

 

0.20

 

 

 

0.16

 

 

 

0.04

 

Total (2017)

         

$

0.80

(3)

 

$

0.60

 

 

$

0.20

 

____________

(1)      The tax characterization of cash distributions for the year ended December 31, 2019 will not be known until the tax return for such year is finalized. For the year ended December 31, 2019, 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 2019 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, 2018 includes a tax return of capital of approximately $0.26 per share for tax purposes.

F-48

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 11. DISTRIBUTIONS (cont.)

(3)      Cash distributions for the year ended December 31, 2017 includes a tax return of capital of approximately $0.50 per 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.

The tax character of distributions declared and paid in 2019 represented, on an estimated basis, $38,364,085 from ordinary income. The tax character of distributions declared and paid in 2018 represented, on an estimated basis, $36,151,218 from ordinary income, and $3,329,807 from tax return of capital. The tax character of distributions declared and paid in 2017 represented, on an estimated basis, $33,752,176 from ordinary income, and $7,431,351 from tax return of capital.

GAAP requires adjustments to certain components of net assets to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net asset value per share. For 2019, 2018 and 2017, the permanent differences between financial and tax reporting are noted below. These adjustments were the result of book/tax differences in the treatment of unscheduled prepayments, book/tax differences in the treatment of prepayment penalty fees, book/tax differences in the treatment of extinguishment fees, book/tax differences in the treatment of CLO equity investments, and adjustment to certain components of net assets from those originally published in quarterly and annual reports to conform to the current period presentation for comparative purposes.

 

December 31,

   

2019

 

2018

 

2017

Adjustment to accumulated net investment income

 

$

5,119,302

 

 

$

20,054,560

 

 

$

21,576,301

 

Adjustment to accumulated net realized gains/losses

 

 

4,440,273

 

 

 

23,981,110

 

 

 

3,745,321

 

Adjustment to total distributable earnings/(accumulated losses)

 

$

9,559,575

 

 

$

44,035,670

 

 

$

25,321,622

 

Adjustment to capital in excess of par value

 

$

(9,559,575

)

 

$

(44,035,670

)

 

$

(25,321,622

)

We have adopted an “opt out” distribution reinvestment plan for our common stockholders. As a result, if we make a cash distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the distribution reinvestment plan so as to receive cash distributions. During the years ended December 31, 2018, 2017 and 2016, the Company did not issue any shares of common stock to stockholders in connection with the distribution reinvestment plan.

On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Act”) was enacted which changed various technical rules governing the tax treatment of regulated investment companies. The changes are generally effective for taxable years beginning after the date of enactment. Under the Act, the Company will be permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term losses rather than being considered all short-term as under previous law.

The Company has available $81,296,397 of capital losses which can be used to offset future capital gains. All of these losses are not subject to expiration under the Act, representing current year long term capital loss carryforward. Under the current law, capital losses related to securities realized after October 31 and prior to the Company’s fiscal year end may be deferred as occurring the first day of the following year. During the taxable year ended December 31, 2019, the fund utilized $685,484 of its capital loss carryforward available from prior years.

F-49

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 11. DISTRIBUTIONS (cont.)

As of December 31, 2019, 2018 and 2017, the estimated components of distributable earnings / (accumulated losses) on a tax basis were as follow:

 

December 31,

   

2019

 

2018

 

2017

Distributable ordinary income

 

$

12,112,994

 

 

$

 

 

$

 

Distributable long-term capital gains (capital loss carry forward)

 

 

(81,296,397

)

 

 

(83,390,350

)

 

 

(102,612,125

)

Unrealized appreciation (depreciation) on investments

 

 

(135,137,493

)

 

 

(57,715,367

)

 

 

(36,241,715

)

Other timing differences

 

 

(4,353

)

 

 

(1,617,105

)

 

 

(2,540,061

)

Total accumulated losses

 

$

(204,325,249

)

 

$

(142,722,822

)

 

$

(141,393,901

)

The 2019 amounts will be finalized before filing the federal income tax return.

NOTE 12. SHARE ISSUANCE AND REPURCHASE PROGRAMS

On August 1, 2019, the Company entered into an Equity Distribution Agreement with Ladenburg Thalmann & Co. through which the Company may offer for sale, from time to time, up to $150.0 million of the Company’s common stock through an At-the-Market (“ATM”) offering. The Company sold a total of 774,803 shares of common stock pursuant to the ATM during the year ended December 31, 2019. The total amount of capital raised under the ATM during the year ended December 31, 2019 was approximately $4.4 million.

On February 5, 2018, the Board authorized a program for the purpose of repurchasing up to $25.0 million worth of the Company’s common stock. Under that repurchase program, the Company was authorized, but not obligated, to repurchase outstanding common stock in the open market from time to time through December 31, 2018, provided that repurchases comply with the prohibitions under our Insider Trading Policies and Procedures and the guidelines specified in Rule 10b-18 of the Securities Exchange Act of 1934, as amended, including certain price, market volume and timing constraints. Further, any repurchases were to be conducted in accordance with the 1940 Act. During the year ended December 31, 2018, the Company repurchased approximately $25.0 million shares worth of outstanding common stock. During the year ended December 31, 2019, the Company was not authorized to repurchase any shares of outstanding common stock.

NOTE 13. SELECTED QUARTERLY DATA (UNAUDITED)

 

Year Ended December 31, 2019

   

Quarter Ended
December 31

 

Quarter Ended
September 30

 

Quarter Ended
June 30

 

Quarter Ended
March 31

Total Investment Income

 

$

13,429,323

 

 

$

14,083,050

 

 

$

20,912,901

 

 

$

14,225,114

Net Investment Income

 

 

8,397,875

 

 

 

8,937,187

 

 

 

12,779,309

 

 

 

8,363,988

Net (Decrease)/Increase in Net Assets resulting from Operations

 

 

(4,900,715

)

 

 

(33,110,464

)

 

 

(7,536,690

)

 

 

12,749,952

Net Increase in Net Assets resulting from Net Investment Income, per common share, basic and diluted

 

$

0.18

 

 

$

0.19

 

 

$

0.27

 

 

$

0.18

Net (Decrease)/Increase in Net Assets resulting from Operations, per common share, basic and diluted(1)

 

$

(0.10

)

 

$

(0.69

)

 

$

(0.16

)

 

$

0.27

F-50

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 13. SELECTED QUARTERLY DATA (UNAUDITED) (cont.)

 

Year Ended December 31, 2018

   

Quarter Ended
December 31

 

Quarter Ended
September 30

 

Quarter Ended
June 30

 

Quarter Ended
March 31

Total Investment Income

 

$

15,193,294

 

 

$

15,218,452

 

$

12,518,722

 

$

13,346,800

Net Investment Income

 

 

8,482,607

 

 

 

8,612,504

 

 

7,688,011

 

 

8,723,096

Net (Decrease) Increase in Net Assets resulting from Operations

 

 

(34,117,656

)

 

 

6,512,309

 

 

6,901,911

 

 

11,490,063

Net Increase in Net Assets resulting from Net Investment Income, per common share, basic and diluted

 

$

0.18

 

 

$

0.18

 

$

0.15

 

$

0.17

Net Increase in Net Assets resulting from Operations, per common share, basic and diluted(1)

 

$

(0.71

)

 

$

0.13

 

$

0.14

 

$

0.22

 

Year Ended December 31, 2017

   

Quarter Ended
December 31

 

Quarter Ended
September 30

 

Quarter Ended
June 30

 

Quarter Ended
March 31

Total Investment Income

 

$

13,441,687

 

$

14,497,697

 

$

17,012,153

 

$

16,465,480

Net Investment Income

 

 

7,628,828

 

 

6,767,753

 

 

8,046,907

 

 

8,283,424

Net Increase in Net Assets resulting from Operations

 

 

16,421,797

 

 

6,016,019

 

 

9,117,896

 

 

12,053,959

Net Increase in Net Assets resulting from Net Investment Income, per common share, basic and diluted(1)

 

$

0.15

 

$

0.13

 

$

0.16

 

$

0.16

Net Increase in Net Assets resulting from Operations, per common share, basic

 

$

0.32

 

$

0.12

 

$

0.18

 

$

0.23

Net Increase in Net Assets resulting from Operations, per common share, diluted

 

$

0.31

 

$

0.12

 

$

0.18

 

$

0.23

____________

(1)      Due to the anti-dilutive effect on the computation of diluted earnings per share, the adjustments for interest and deferred issuance costs on the Convertible Notes, and the related impact on the Base Fees and Net Investment Income Incentive Fees as well as weighted average common shares outstanding adjustments for the dilutive effect of the Convertible Notes were excluded from the quarters ended December 31, 2017, September 30, 2017, June 30, 2017, and March 31, 2017.

NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS

In August 2018, the U.S. Securities and Exchange Commission (“SEC”) adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification which amends certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The amendments are intended to facilitate the disclosure of information to investors and simplify compliance. The final rule is effective for all filings on or after November 5, 2018. Management has adopted the amendments and included the required disclosures in the Company’s consolidated financial statements herein. The effect of the adoption of the simplification rules on financial statements was limited to the modification and removal of certain disclosures.

In March 2017, the FASB issued ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”) which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. ASU 2017-08 does not require any accounting change for debt securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Management has adopted these amendments

F-51

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS (cont.)

as currently required and they are reflected in the Company’s consolidated financial statements and related disclosures. The adoption did not have a material impact on the Company’s consolidated financial statements and disclosures.

In June 2016, the FASB issued ASU 2016-13Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends the financial instruments impairment guidance so that an entity is required to measure expected credit losses for financial assets based on historical experience, current conditions and reasonable and supportable forecasts. As such, an entity will use forward-looking information to estimate credit losses. ASU 2016-13 also amends the guidance in FASB ASC Subtopic No. 325-40Investments-Other, Beneficial Interests in Securitized Financial Assets, related to the subsequent measurement of accretable yield recognized as interest income over the life of a beneficial interest in securitized financial assets under the effective yield method. ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We plan to adopt these amendments starting the interim period ended March 31, 2020. Upon adoption total investment income is expected to increase approximately $0.4 million for the quarter ended March 31, 2020. Ultimately, the extent of the impact of adoption of this ASU on the Company’s consolidated financial statements may vary and will depend on, among other things, the economic environment, completion of the Company’s models and judgement on the date of adoption.

NOTE 15. RISKS AND UNCERTAINTIES

The U.S. capital markets have recently experienced periods of extreme volatility and disruption. Disruptions in the capital markets tend to increase the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. The Company believes these conditions may reoccur in the future. A prolonged period of market illiquidity may have an adverse effect on the Company’s business, financial condition and results of operations. Adverse economic conditions could also increase the Company’s funding costs, limit the Company’s access to the capital markets or result in a decision by lenders not to extend credit to the Company. These events could limit the Company’s investment originations, limit the Company’s ability to grow and negatively impact the Company’s operating results.

Many of the companies in which the Company has made or will make investments may be susceptible to adverse economic conditions, which may affect the ability of a company to repay OXSQ’s loans or engage in a liquidity event such as a sale, recapitalization, or initial public offering. Therefore, the Company’s nonperforming assets may increase, and the value of the Company’s portfolio may decrease during this period. Adverse economic conditions also may decrease the value of any collateral securing some of the Company’s loans and the value of its equity investments. Adverse economic conditions could lead to financial losses in the Company’s portfolio and a decrease in its revenues, net income, and the value of the Company’s assets.

A portfolio company’s failure to satisfy financial or operating covenants imposed by the Company or other lenders could lead to defaults and, potentially, termination of the portfolio company’s loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the debt securities that the Company holds. The Company may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. In addition, if a portfolio company goes bankrupt, even though the Company may have structured its investment as senior debt or secured debt, depending on the facts and circumstances, including the extent to which the Company actually provided significant “managerial assistance,” if any, to that portfolio company, a bankruptcy court might re-characterize the Company’s debt holding and subordinate all or a portion of the Company’s claim to that of other creditors. These events could harm the Company’s financial condition and operating results.

F-52

OXFORD SQUARE CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019

NOTE 15. RISKS AND UNCERTAINTIES (cont.)

As a BDC, the Company is required to carry its investments at fair value as determined in good faith by or under the direction of its Board of Directors. Decreases in the fair values of the Company’s investments are recorded as unrealized depreciation. Depending on market conditions, the Company could incur substantial losses in future periods, which could have a material adverse impact on its business, financial condition and results of operations.

NOTE 16. CONCENTRATION OF CREDIT RISK

The Company places its cash and cash equivalents with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit. In addition, the Company’s portfolio may be concentrated in a limited number of portfolio companies, which will subject the Company to a risk of significant loss if any of these companies defaults on its obligations under any of its debt securities that the Company holds or if those sectors experience a market downturn.

NOTE 17. SUBSEQUENT EVENTS

The following distributions payable to stockholders are shown below:

Per Share Distribution
Amount Declared

 

Record Dates

 

Payable Dates

 $0.067

 

January 17, 2020

 

January 31, 2020

 $0.067

 

February 14, 2020

 

February 28, 2020

 $0.067

 

March 17, 2020

 

March 31, 2020

 $0.067

 

April 15, 2020

 

April 30, 2020

 $0.067

 

May 14, 2020

 

May 29, 2020

 $0.067

 

June 15, 2020

 

June 30, 2020

The Company’s management evaluated subsequent events through the date of issuance of these Consolidated Financial Statements and noted no other events that necessitate adjustments to or disclosure in the financial statements.

F-53

Item 9. Changes in and Disagreements with Independent Registered Public Accounting Firm on Accounting and Financial Disclosure

None.

Item 9A.     Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of December 31, 2019 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act). Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b) Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act and for the assessment of the effectiveness of internal control over financial reporting. Management’s Report on Internal Control Over Financial Reporting, which appears on page F-1 of this Form 10-K, is incorporated by reference herein.

(c) Changes in Internal Control Over Financial Reporting

Management did not identify any change in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.     Other Information

Not applicable.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Director and Executive Officer Information

The following table sets forth the names, ages and positions held by each of our directors and executive officers, followed by a brief biography of each individual, including the business experience of each individual during the past five years and the specific qualifications that led to the conclusion that each individual should serve as a director.

Name

 

Age

 

Position

 

Director Since

 

Term Expires

Interested Directors

               

Jonathan H. Cohen

 

55

 

Chief Executive Officer

 

2003

 

2021

Charles M. Royce

 

80

 

Director

 

2003

 

2020

Independent Directors

               

Steven P. Novak

 

72

 

Chairman of the Board of Directors

 

2003

 

2020

Richard W. Neu

 

64

 

Director

 

2016

 

2022

George Stelljes III

 

58

 

Director

 

2016

 

2021

Executive Officers

               

Saul B. Rosenthal

 

51

 

President and Chief Operating Officer

       

Bruce L. Rubin

 

60

 

Chief Financial Officer, Corporate Secretary and Treasurer

       

Gerald Cummins

 

64

 

Chief Compliance Officer

       

Jonathan H. Cohen has served as Chief Executive Officer of both OXSQ and Oxford Square Management, and as the managing member of Oxford Funds, since 2003. Mr. Cohen has also served as Chief Executive Officer and Director of Oxford Lane Capital Corp. (NasdaqGS:OXLC), a registered closed-end fund, and as Chief Executive Officer of Oxford Lane Management, since 2010. Since 2015 and 2018, respectively, Mr. Cohen has also served as the Chief Executive Officer of each of Oxford Bridge Management, LLC, or “Oxford Bridge Management,” the investment adviser to Oxford Bridge, LLC and Oxford Bridge II, LLC (collectively, the “Oxford Bridge Funds”), and, Oxford Gate Management, LLC, or “Oxford Gate Management,” the investment adviser to Oxford Gate Master Fund, LLC, Oxford Gate, LLC, and Oxford Gate (Bermuda) LLC, (collectively the “Oxford Gate Funds”) The Oxford Bridge Funds and the Oxford Gate Funds are private investment funds. Previously, Mr. Cohen managed technology equity research groups at Wit Capital, Merrill Lynch, UBS and Smith Barney. Mr. Cohen is member of the Board of Trustees of Connecticut College. Mr. Cohen received a B.A. in Economics from Connecticut College and an M.B.A. from Columbia University. Mr. Cohen’s depth of experience in managerial positions in investment management, securities research and financial services, as well as his intimate knowledge of our business and operations, gives our Board of Directors valuable industry-specific knowledge and expertise on these and other matters.

Steven P. Novak currently serves as the Chairman of the Board of Directors of Quisk, Inc. an early stage mobile payments company, in the process of liquidating its assets. Mr. Novak also served on the Board of Directors of CyberSource Corporation, a payment processing and fraud management company, until its July 2010 acquisition by Visa, Inc. In the course of his tenure at CyberSource Corporation, he served as Chairman of the Audit and Nominating Committees and as Lead Independent Director. Mr. Novak previously served as President of Palladio Capital Management, LLC and as the Principal and Managing Member of the General Partner of Palladio Partners, LP, an equities hedge fund, from July 2002 until July 2009. Mr. Novak received a Bachelor of Science degree from Purdue University and an M.B.A. from Harvard University. A Chartered Financial Analyst, Mr. Novak’s financial expertise from his experience as a financial manager and varied roles on the boards of both publicly-traded and privately-held companies qualifies him to serve as chairman of our Board of Directors and provides our Board of Directors with particular technology-related knowledge and the perspective of a knowledgeable corporate leader.

Charles M. Royce currently serves as Chairman of the Board of Managers of Royce & Associates, LLC. Prior to 2017, Mr. Royce served as Chief Executive Officer of Royce & Associates, LLC since 1972. He also manages or co-manages eight of Royce & Associates, LLC’s open- and closed-end registered funds. Mr. Royce serves on the

77

Board of Trustees of The Royce Funds. Mr. Royce’s history with us, familiarity with our investment platform, and extensive knowledge of the financial services industry and the investment valuation process in particular qualify him to serve as a member of our Board of Directors.

Richard W. Neu currently serves on the board of directors, including on the audit committee, the compensation committee and as a lead director, of Tempur Sealy International, Inc., a manufacturer of mattresses and bedding products. Mr. Neu also currently serves on the board of directors, as chair of the audit committee and as a member of the executive committee of Huntington Bancshares Incorporated, a bank holding company. Until the sale of the company in 2012, he was the lead director and a member of the audit committee and governance committee of Dollar Thrifty Automotive Group, Inc., a car rental business, having served as the chairman of the Dollar Thrifty board of directors from 2010 through 2011. Mr. Neu also served as a director of MCG Capital Corporation, a business development company, from 2007 until its sale in 2015, and during this period served as chairman of the board from 2009 to 2015 and as Chief Executive Officer from November 2011 to November 2012. Mr. Neu served from 1985 to 2004 as Chief Financial Officer of Charter One Financial, Inc., a major regional bank holding company, and a predecessor firm, and as a director of Charter One Financial, Inc. from 1992 to August 2004. Mr. Neu previously worked for KPMG as a senior audit manager. Mr. Neu received a B.B.A. from Eastern Michigan University with a major in accounting. Mr. Neu was selected to serve as a director on our board of directors due to his extensive knowledge and experience handling complex financial and operational issues through his service as both a director and executive officer of a variety of public companies.

George “Chip” Stelljes III is currently the managing partner of St. John’s Capital, LLC, a vehicle used to make private equity investments. From 2001 to 2013, Mr. Stelljes held various senior positions with the Gladstone Companies, including serving as the chief investment officer, president and a director of Gladstone Capital Corporation and Gladstone Investment Corporation, both of which are business development companies, of Gladstone Commercial Corporation, a real estate investment trust, and of their registered investment adviser, Gladstone Management Corporation. From 1999 to 2001, Mr. Stelljes was a managing member of Camden Partners, a private equity firm which finances high growth companies in communications, education, healthcare and business services sectors. From 1997 to 1999, Mr. Stelljes was a managing director and partner of Columbia Capital, a venture capital firm focused on investments in communications and information technology. From 1989 to 1997, Mr. Stelljes held various positions, including executive vice president and principal, with the Allied Capital companies. From 2001 through 2012, Mr. Stelljes served as a general partner and investment committee member of Patriot Capital and Patriot Capital II, which are private equity funds. Mr. Stelljes currently serves on the board of directors of Intrepid Capital Corporation, an asset management firm. Mr. Stelljes is also currently the chairman of the board of directors of Bluestone Community Development Fund, a closed-end investment company that operates as an interval fund. He is also a former board member and regional president of the National Association of Small Business Investment Companies. Mr. Stelljes holds an MBA from the University of Virginia and a BA in Economics from Vanderbilt University. Mr. Stelljes was selected to serve as a director on our board of directors due to his more than twenty-five years of experience in the investment analysis, management, and advisory industries.

Saul B. Rosenthal has served as President since 2004 of OXSQ and Oxford Square Management, and is a member of Oxford Funds. In addition, Mr. Rosenthal has served as President and a Director of Oxford Lane Capital Corp. (NasdaqGS:OXLC), a registered closed-end fund, and as President of Oxford Lane Management, since 2010. Mr. Rosenthal has also served as President of Oxford Bridge Management, the investment adviser to the Oxford Bridge, Funds and Oxford Gate Management, the investment advisor to Oxford Gate Funds, since 2015 and 2018, respectively. Mr. Rosenthal was previously an attorney at the law firm of Shearman & Sterling LLP. Mr. Rosenthal serves on the board of the National Museum of Mathematics. Mr. Rosenthal received a B.S., magna cum laude, from the Wharton School of the University of Pennsylvania, a J.D. from Columbia University Law School, where he was a Harlan Fiske Stone Scholar, and a LL.M. (Taxation) from New York University School of Law.

Bruce L. Rubin has served as the Company’s Controller since 2005, the Company’s Senior Vice President and Treasurer since 2009, the Company’s Chief Accounting Officer since August 2015 and the Company’s Chief Financial Officer and Secretary since August 2015. Mr. Rubin has also served as Oxford Lane Capital Corp.’s Chief Financial Officer and Secretary since August 2015, and as its Treasurer and Controller since its initial public offering in 2011. Mr. Rubin also currently serves as the Chief Financial Officer and Secretary of Oxford Lane Management, LLC, Oxford Square Management, Oxford Funds, Oxford Bridge Management, LLC and Oxford Gate Management, LLC. From 1995 to 2003, Mr. Rubin was the Assistant Treasurer & Director of Financial Planning of the New York Mercantile Exchange, Inc., the largest physical commodities futures exchange in the world and

78

has extensive experience with Sarbanes-Oxley, treasury operations and SEC reporting requirements. From 1989 to 1995, Mr. Rubin was a manager in financial operations for the American Stock Exchange, where he was primarily responsible for budgeting matters. Mr. Rubin began his career in commercial banking as an auditor primarily of the commercial lending and municipal bond dealer areas. Mr. Rubin received his BBA in Accounting from Hofstra University where he also obtained his M.B.A. in Finance.

Gerald Cummins has served as the Company’s Chief Compliance Officer since June 2015 pursuant to an agreement between the Company and Alaric Compliance Services, LLC, a compliance consulting firm. Mr. Cummins also currently serves as the Chief Compliance Officer of Oxford Square Management, Oxford Lane Capital Corp., Oxford Lane Management, LLC, Oxford Funds LLC, Oxford Bridge Management, LLC, and since 2018 Oxford Gate Management, LLC. Mr. Cummins has been a Director of Alaric Compliance Services, LLC since June 2014 and in that capacity he also serves as the Chief Compliance Officer to a private equity firm. Prior to joining Alaric Compliance Services, LLC, Mr. Cummins was a consultant for Barclays Capital Inc. from 2012 to 2013, where he participated in numerous compliance projects on pricing and valuation, compliance assessments, and compliance policy and procedure development. Prior to his consulting work at Barclays, Mr. Cummins was from 2010 to 2011 the Chief Operating Officer and the Chief Compliance Officer for BroadArch Capital and from 2009 to 2011 the Chief Financial Officer and Chief Compliance Officer to its predecessor New Castle Funds, a long-short equity asset manager. Prior to that, Mr. Cummins spent 25 years at Bear Stearns Asset Management, where he was a Managing Director and held senior compliance, controllers and operations risk positions. Mr. Cummins graduated with a B.A. in Mathematics from Fordham University.

Code of Business Conduct and Ethics

We have adopted a code of business conduct and ethics (the “code”) which applies to, among others, our senior officers, including our Chief Executive Officer and our Chief Financial Officer, as well as every officer, director and employee of OXSQ. Our code can be accessed via our website at http://www.oxfordsquarecapital.com. We intend to disclose amendments to or waivers from a required provision of the code on Form 8-K. We intend to disclose any substantive amendments to, or waivers from, this code of ethics within four business days of the waiver or amendment through a posting on our website.

Nomination of Directors

There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors implemented since the filing of our Proxy Statement for our 2019 Annual Meeting of Stockholders.

Audit Committee

The Audit Committee operates pursuant to a charter approved by our Board of Directors, copy of which is available on our website at www.oxfordsquarecapital.com. The charter sets forth the responsibilities of the Audit Committee. The Audit Committee’s responsibilities include recommending the selection of our independent registered public accounting firm, reviewing with such independent registered public accounting firm the planning, scope and results of their audit of our financial statements, pre-approving the fees for services performed, reviewing with the independent registered public accounting firm the adequacy of internal control systems, reviewing our annual financial statements and periodic filings, and receiving the audit reports covering our financial statements. The Audit Committee is presently composed of five persons: Messrs. Novak, Neu and Stelljes, all of whom are considered independent under the rules promulgated by the NASDAQ Global Stock Market. Our Board of Directors has determined that Messrs. Novak and Neu are each an “audit committee financial expert” as that term is defined under Item 407 of Regulation S-K of the Exchange Act. Messrs. Novak, Neu and Stelljes each meet the current independence and experience requirements of Rule 10A-3 of the Exchange Act and, in addition, are each not an “interested person” of OXSQ as defined in Section 2(a)(19) of the 1940 Act. Mr. Neu currently serves as Chairman of the Audit Committee. The Audit Committee met on four occasions during 2019.

79

Item 11. Executive Compensation

Compensation of Chief Executive Officer and Other Executive Officers

None of our officers receive direct compensation from OXSQ. As a result, we do not engage any compensation consultants. Mr. Cohen, our Chief Executive Officer, and Mr. Rosenthal, our President and Chief Operating Officer, through their ownership interest in Oxford Funds, the managing member of Oxford Square Management, are entitled to a portion of any profits earned by Oxford Square Management, which includes any fees payable to Oxford Square Management under the terms of our Amended Investment Advisory Agreement, less expenses incurred by Oxford Square Management in performing its services under the Amended Investment Advisory Agreement. Messrs. Cohen and Rosenthal do not receive any additional compensation from Oxford Square Management in connection with the management of our portfolio.

The compensation of our Chief Financial Officer and Corporate Secretary is paid by our administrator, Oxford Funds, LLC, subject to reimbursement by us of an allocable portion of such compensation for services rendered by our Chief Financial Officer and Corporate Secretary to OXSQ. The allocable portion of such compensation that is reimbursed to Oxford Funds, LLC by us is based on an estimate of the time spent by our Chief Financial Officer and Corporate Secretary and other administrative personnel in performing their respective duties for us in accordance with the Administration Agreement. For the fiscal year ended December 31, 2019, we accrued approximately $0.8 million for the allocable portion of compensation expenses incurred by Oxford Funds, LLC on our behalf for our Chief Financial Officer, our Treasurer and Controller, and other administrative support personnel, pursuant to our Administration Agreement with Oxford Funds, LLC. Mr. Cummins is a Director of Alaric Compliance Services, LLC, and performs his functions as our Chief Compliance Officer under the terms of an agreement between us and Alaric Compliance Services, LLC. For the fiscal year ended December 31, 2019, we accrued approximately $115,000 for the fees paid to Alaric Compliance Services, LLC.

Director Compensation

Each independent director receives an annual fee of $90,000. The Chairman of the Board of Directors receives an additional annual fee of $30,000 for his service as Chairman of the Board of Directors. In addition, the independent directors receive $4,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each Board of Directors meeting, $1,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each Valuation Committee meeting, $1,500 plus reimbursement of reasonable out of-pocket expenses incurred in connection with attending each Audit Committee meeting, $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each Nominating and Corporate Governance Committee meeting, $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each Compensation Committee meeting. The Chairman of the Audit Committee also receives an additional annual fee of $10,000 for his service as chair of the Audit Committee. The Chairman of the Valuation Committee also receives an additional annual fee of $7,500 for his service as chair of the Valuation Committee. The Chairman of the Nominating and Corporate Governance Committee also receives an additional annual fee of $5,000 for his service as chair of the Nominating and Corporate Governance Committee. The Chairman of the Compensation Committee also receives an additional annual fee of $5,000 for his service as chair of the Compensation Committee. No compensation was paid to directors who are interested persons of OXSQ as defined in the 1940 Act.

The following table sets forth compensation of our directors for the year ended December 31, 2019.

Name

 

Fees Earned or
Paid in Cash
(1)

 

All Other
Compensation
(2)

 

Total

Interested Directors

 

 

       

 

 

Jonathan H. Cohen

 

 

 

 

 

Charles M. Royce

 

 

 

 

 

Independent Directors

 

 

       

 

 

Steven P. Novak

 

$

155,000

 

 

$

155,000

Richard W. Neu

 

$

135,000

 

 

$

135,000

George Stelljes III

 

$

127,500

 

 

$

127,500

____________

(1)      For a discussion of the independent directors’ compensation, see above.

(2)      We do not maintain a stock or option plan, non-equity incentive plan or pension plan for our directors.

80

Compensation Committee

The Compensation Committee operates pursuant to a charter approved by our Board of Directors, a copy of which is available on our website at www.oxfordsquarecapital.com. The charter sets forth the responsibilities of the Compensation Committee. The Compensation Committee is responsible for annually reviewing and recommending for approval to our Board of Directors the Investment Advisory Agreement and the Administration Agreement. The Compensation Committee is also responsible for reviewing and approving the compensation of the Independent Directors, including the Chairman of the Board of Directors. In addition, although we do not directly compensate our executive officers currently, to the extent that we do so in the future, the Compensation Committee would also be responsible for reviewing and evaluating their compensation and making recommendations to the board of directors regarding their compensation. Lastly, the Compensation Committee would produce a report on our executive compensation practices and policies for inclusion in our proxy statement if required by applicable proxy rules and regulations and, if applicable, make recommendations to the board of directors on our executive compensation practices and policies. The Compensation Committee has the authority to engage compensation consultants and to delegate their duties and responsibilities to a member or to a subcommittee of the Compensation Committee. The Compensation Committee is presently composed of three persons: Messrs. Novak, Neu and Stelljes, all of whom are considered independent under the rules of the NASDAQ Global Select Market and are not “interested persons” of Oxford Square Capital Corp. as that term is defined in Section 2(a)(19) of the 1940 Act. Mr. Novak serves as Chairman of the Compensation Committee. The Compensation Committee met one time during 2019.

Compensation Committee Interlocks and Insider Participation

During fiscal year 2019 none of the Company’s executive officers served on the board of directors (or a compensation committee thereof or other board committee performing equivalent functions) of any entities that had one or more executive officers serve on the Compensation Committee of the Company or on the Board of Directors of the Company. No current or past executive officers of the Company or its affiliates serve on the Company’s Compensation Committee.

Compensation Committee Report

Currently, none of our executive officers are compensated by the Company and as such the Compensation Committee is not required to produce a report on executive officer compensation for inclusion in our annual report on Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth, as of February 25, 2020, the beneficial ownership of each current director, the director nominees, the Company’s executive officers, each person known to us to beneficially own 5% or more of the outstanding shares of our common stock, and the executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (“SEC”) and includes voting or investment power with respect to the securities. Ownership information for those persons who beneficially own 5% or more of our shares of common stock is based upon Schedule 13G filings by such persons with the SEC and other information obtained from such persons, if available.

Unless otherwise indicated, the Company believes that each beneficial owner set forth in the table has sole voting and investment power and has the same address as the Company. The Company’s current address is 8 Sound Shore Drive, Suite 255, Greenwich, Connecticut 06830.

81

Name of Beneficial Owner

 

Number of
Shares
Beneficially
Owned
(1)

 

Percentage of
Class
(2)

Interested Directors

   

 

   

 

Jonathan H. Cohen(3)

 

1,405,214

 

 

2.9

%

Charles M. Royce(4)

 

1,342,180

 

 

2.7

%

Independent Directors

   

 

   

 

Steven P. Novak(5)

 

30,540

 

 

*

 

Richard W. Neu

 

50,000

 

 

*

 

George Stelljes III

 

22,000

 

 

*

 

Executive Officers

   

 

   

 

Saul B. Rosenthal(3)

 

1,251,092

 

 

2.6

%

Bruce L. Rubin(6)

 

9,030

 

 

*

 

Gerald Cummins

 

 

 

 

Executive Officers and Directors as a Group

 

4,109,396

(7)

 

8.4

%

____________

*        Represents less than one percent

(1)      Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act, as amended (the “Exchange Act”). Assumes no other purchases or sales of our common stock since the information most recently available to us. This assumption has been made under the rules and regulations of the SEC and does not reflect any knowledge that we have with regard to the present intent of the beneficial owners of our common stock listed in this table. Any fractional shares owned directly or beneficially have been rounded down for purposes of this table.

(2)      Based on a total of 48,990,575 shares of our common stock issued and outstanding on February 25, 2020.

(3)      Includes 660 shares held by Oxford Funds, which may be deemed to be beneficially owned by Messrs. Cohen and Rosenthal by virtue of their ownership interests therein.

(4)      Mr. Royce may be deemed to beneficially own 1,047,966 shares held by Royce Family Investments, LLC and 294,214 shares held by Royce Family Fund, Inc. Mr. Royce disclaims beneficial ownership of any shares directly held by Royce Family Fund, Inc. The address for both of these entities is 745 Fifth Avenue, New York, New York 10151.

(5)      These shares are held by Mr. Novak’s spouse, which Mr. Novak may be deemed to beneficially own.

(6)      Mr. Rubin may be deemed to beneficially own 818 shares held by his children. Mr. Rubin disclaims beneficial ownership of any shares directly held by his children.

(7)      The 660 shares held by Oxford Funds, described in footnote 3 above, are included in the number of shares held by each of Mr. Cohen and Mr. Rosenthal, but are only counted once in the total held by the executive officers and directors as a group.

Set forth below is the dollar range of equity securities beneficially owned by each of our directors as of February 25, 2020.

Name of Director

 

Dollar Range of
Equity Securities
Beneficially
Owned
(1)(2)

Interested Directors

   

Jonathan H. Cohen

 

Over $100,000

Charles M. Royce

 

Over $100,000

Independent Directors

   

Steven P. Novak

 

Over $100,000

Richard W. Neu

 

Over $100,000

George Stelljes III

 

Over $100,000

____________

(1)      The dollar ranges are: None, $1 – $10,000, $10,001 – $50,000, $50,001 – $100,000, or Over $100,000.

(2)      The dollar range of equity securities beneficially owned in us is based on the closing price for our common stock of $5.41 on February 25, 2020 on the NASDAQ Global Select Market. Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Exchange Act.

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Item 13. Certain Relationships and Related Transactions, and Director Independence

Transactions with Related Persons

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 of Directors, 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 Bridge Management, LLC, the investment adviser to the Oxford Bridge Funds, and Oxford Gate Management, LLC, the investment adviser to the Oxford Gate Funds. Oxford Funds is the managing member of each of Oxford Bridge Management, LLC and Oxford Gate Management, LLC. In addition, Bruce L. Rubin serves as the Chief Financial Officer and Secretary, and Gerald Cummins serves as the Chief Compliance Officer, respectively, of each of Oxford Bridge Management, LLC and Oxford Gate Management, LLC.

Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and President, respectively, of Oxford Lane Capital Corp., a non-diversified closed-end management investment company that invests primarily in equity and junior debt tranches of CLO vehicles, and its investment adviser, Oxford Lane Management, LLC. Oxford Funds provides Oxford Lane Capital Corp. with office facilities and administrative services pursuant to an administration agreement and also serves as the managing member of Oxford Lane Management, LLC. In addition, Bruce L. Rubin serves as the Chief Financial Officer, Treasurer and Corporate Secretary of Oxford Lane Capital Corp. and Chief Financial Officer and Treasurer of Oxford Lane Management, LLC, and Mr. Cummins serves as the Chief Compliance Officer of Oxford Lane Capital Corp. and Oxford Lane Management, LLC.

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., the Oxford Bridge Funds and the Oxford Gate Funds, respectively, on the other hand.

Oxford Square Management, Oxford Lane Management, LLC, Oxford Bridge Management, LLC and Oxford Gate Management, LLC are subject to a written policy with respect to the allocation of investment opportunities among the Company, Oxford Lane Capital Corp., the Oxford Bridge Funds and the Oxford Gate Funds. Where investments are suitable for more than one entity, the allocation policy generally provides that, depending on size and subject to current and anticipated cash availability, the absolute size of the investment as well as its relative size compared to the total assets of each entity, current and anticipated weighted average costs of capital, among other factors, an investment amount will be determined by the adviser to each entity. If the investment opportunity is sufficient for each entity to receive its investment amount, then each entity receives the investment amount; otherwise, the investment amount is reduced pro rata. On June 14, 2017, the Securities and Exchange Commission issued an order permitting the Company and certain of its affiliates to complete negotiated co-investment transactions in portfolio companies, subject to certain conditions (the “Order”). Subject to satisfaction of certain conditions to the Order, the Company and certain of its affiliates are now permitted, together with any future BDCs, registered closed-end funds and certain private funds, each of whose investment adviser is the Company’s investment adviser or an investment adviser controlling, controlled by, or under common control 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.

83

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 of Directors reviews these procedures on an annual basis.

We have also adopted a Code of Business Conduct and Ethics which applies to, among others, 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 Ethics. As required by the NASDAQ Global Select Market corporate governance listing standards, the Audit Committee of our Board of Directors is also required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K).

Review, Approval or Ratification of Transactions with Related Persons

We have also adopted a Code of Business Conduct and Ethics which applies to, among others, 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 Ethics. As required by the NASDAQ Global Select Market corporate governance listing standards, the Audit Committee of our Board of Directors is also required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K).

Director Independence

In accordance with rules of the NASDAQ Stock Market, our Board of Directors annually determines each director’s independence. We do not consider a director independent unless our Board of Directors has determined that he or she has no material relationship with us. We monitor the relationships of our directors and officers through a questionnaire each director completes no less frequently than annually and updates periodically as information provided in the most recent questionnaire changes.

In order to evaluate the materiality of any such relationship, our Board of Directors uses the definition of director independence set forth in the rules promulgated by the NASDAQ Stock Market. Rule 5605(a)(2) provides that a director of a BDC, shall be considered to be independent if he or she is not an “interested person” of OXSQ, as defined in Section 2(a)(19) of the 1940 Act.

The Board of Directors has determined that each of the directors is independent and has no relationship with us, except as a director and stockholder, with the exception of Jonathan H. Cohen, as a result of his position as our Chief Executive Officer, and Charles M. Royce, as a result of his ownership of a minority, non-controlling interest in our investment adviser, Oxford Square Management.

84

Item14. Principal Accountant Fees and Services

Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP served as the Company’s independent registered public accounting firm for the years ended December 31, 2019 and December 31, 2018. PricewaterhouseCoopers LLP has advised us that neither the firm nor any present member or associate of it has any material financial interest, direct or indirect, in the Company or its affiliates.

For the years ended December 31, 2019 and December 31, 2018, the Company incurred the following fees for services provided by PricewaterhouseCoopers LLP, including expenses:

 

Fiscal Year Ended
December 31,
201
9

 

Fiscal Year Ended
December 31,
201
8

Audit Fees

 

$

975,301

 

$

738,000

Audit-Related Fees

 

 

 

 

Tax Fees

 

 

61,500

 

 

61,500

All Other Fees

 

 

 

 

Total Fees:

 

$

1,036,801

 

$

799,500

Audit Fees.    Audit fees consist of fees billed for professional services rendered for the audit of our year-end financial statements, including reviews of interim financial statements, and services that are normally provided by PricewaterhouseCoopers LLP in connection with statutory and regulatory filings and services provided in connection with securities offerings.

Audit-Related Fees.    Audit-related services consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include attest services that are not required by statute or regulation and consultations concerning financial accounting and reporting standards.

Tax Fees.    Tax fees consist of fees billed for professional services for tax compliance. These services include assistance regarding federal, state, and local tax compliance.

All Other Fees.    All other fees would include fees for products and services other than the services reported above.

Pre-Approval Policy.

The Audit Committee has established a pre-approval policy that describes the permitted audit, audit-related, tax and other services to be provided by PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm. The policy requires that the Audit Committee pre-approve the audit and non-audit services performed by the independent auditor in order to assure that the provision of such service does not impair the auditor’s independence.

Any requests for audit, audit-related, tax and other services that have not received general pre-approval must be submitted to the Audit Committee for specific pre-approval, irrespective of the amount, and cannot commence until such approval has been granted. Normally, pre-approval is provided at regularly scheduled meetings of the Audit Committee. However, the Audit Committee may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated shall report any pre-approval decisions to the Audit Committee at its next scheduled meeting. The Audit Committee does not delegate its responsibilities to pre-approve services performed by the independent registered public accounting firm to management.

During the year ended December 31, 2019, the Audit Committee pre-approved 100% of non-audit services in accordance with the pre-approval policy described above.

85

86

b. Exhibits

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:

3.1

 

Articles of Incorporation (Incorporated by reference to the Registrant’s Registration Statement on Form N-2 (File No. 333-109055), filed on September 23, 2003).

3.2

 

Articles of Amendment (Incorporated by reference to Current Report on Form 8-K filed December 3, 2007).

3.3

 

Articles of Amendment (Incorporated by reference to the Registrant’s current report on Form 8-K, filed on March 20, 2018).

3.4

 

Articles of Amendment (Incorporated by reference to the Registrant’s current report on Form 8-K, filed on March 20, 2018).

3.5

 

Third Amended and Restated Bylaws (Incorporated by reference to the Registrant’s report on Form 10-Q filed on November 7, 2016).

4.1

 

Form of Share Certificate (Incorporated by reference to the Registrant’s Registration Statement on Form N-2 (File No. 333-109055), filed on September 23, 2003).

4.2

 

Form of Base Indenture (Incorporated by reference to Exhibit d.4 to the Registrant’s Pre-Effective Amendment No. 2 to its Registration Statement on Form N-2 (File No. 333-183605), filed on January 11, 2013).

4.3

 

First Supplemental Indenture, dated April 12, 2017, relating to the 6.50% Notes due 2024, by and between the Registrant and U.S. Bank National Association, as trustee (Incorporated by reference to Exhibit d.6 to the Registrant’s Post-Effective Amendment No. 1 to its Registration Statement on Form N-2 (File No. 333-202672), filed on April 12, 2017).

4.4

 

Form of Global Note with respect to the 6.50% Notes due 2024 (Incorporated by reference to Exhibit 4.3 hereto, and Exhibit A therein).

4.5

 

Form of Second Supplemental Indenture relating to the 6.25% Notes due 2026, by and between the Registrant and U.S. Bank National Association, as trustee (Incorporated by reference to Registrant’s Post-Effective Amendment No. 1 to Registration Statement on Form N-2 (File No. 333-229337) filed on April 3, 2019).

4.6

 

Form of Global Note with respect to the 6.25% Notes due 2026 (Incorporated by reference to Exhibit 4.5 hereto, and Exhibit A therein)

4.7

 

In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, certain instruments respecting long-term debt of the Registrant have been omitted but will be furnished to the SEC upon request

4.8

 

Description of registrant’s securities*

10.1

 

Investment Advisory Agreement between Registrant and Oxford Square Management, LLC (Incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K filed on July 1, 2011).

10.2

 

Custodian Agreement between Registrant and U.S. Bank National Association (Incorporated by reference to Exhibit 10.2 to the Registrant’s report on Form 10-Q, filed on November 6, 2014).

10.3

 

Amended and Restated Administration Agreement between Registrant and Oxford Funds, LLC (Incorporated by reference to Exhibit 10.3 to the Registrant’s quarterly report on Form 10-Q filed on May 10, 2012).

10.4

 

Second Amended and Restated Distribution Reinvestment Plan (Incorporated by reference to Exhibit 10.4 to the Registrant’s report on Form 10-K filed on March 4, 2015).

10.5

 

Oxford Square Management, LLC’s Fee Waiver Letter, dated March 9, 2016 (Incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K, filed on March 10, 2016).

87

10.6

 

Form of Credit and Security Agreement among Oxford Square Funding 2018, LLC, as borrower, the lenders from time to time parties thereto, Citibank, N.A., as administrative agent, The Bank of New York Mellon Trust Company, National Association, as collateral agent and as collateral custodian, and Oxford Square Capital Corp., as collateral manager, dated June 21, 2018 (Incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K, filed on June 22, 2018).

10.7

 

Form of Sale, Contribution And Master Participation Agreement by and between Oxford Square Funding 2018, LLC, as the buyer and Oxford Square Capital Corp., as the seller, dated June 21, 2018 (Incorporated by reference to Exhibit 10.2 to the Registrant’s report on Form 8-K, filed on June 22, 2018).

10.8

 

Form Collateral Administration Agreement among Oxford Square Funding 2018, LLC, as borrower, Oxford Square Capital Corp., as collateral manager, and The Bank of New York Mellon Trust Company, National Association, as collateral administrator, dated June 21, 2018 (Incorporated by reference to Exhibit 10.3 to the Registrant’s report on Form 8-K, filed on June 22, 2018).

10.9

 

First Amendment to the Credit and Security Agreement among Oxford Square Funding 2018, LLC, as borrower, Oxford Square Capital Corp., as equity holder and collateral manager, and Citibank, N.A., as lender and administrative agent, dated October 12, 2018 (Incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K, filed on October 12, 2018).

10.10

 

Sale, Contribution and Master Participation Agreement by and between Oxford Square Funding 2018, LLC, as the buyer and Oxford Square Capital Corp., as the seller, dated October 12, 2018 (Incorporated by reference to Exhibit 10.2 to the Registrant’s report on Form 8-K, filed on October 12, 2018).

14.1

 

Code of Business Conduct and Ethics. (Incorporated by reference to Exhibit 14.1 to the Registrant’s report on Form 8-K, filed on March 2, 2017.)

21.1

 

Subsidiaries of Registrant and jurisdiction of incorporation/organization: Oxford Square Funding 2018, LLC — Delaware.

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*

32.1

 

Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.*

32.2

 

Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.*

____________

*        Filed herewith.

c. Financial statement schedule

88

SCHEDULE 12 – 14

OXSQ CAPITAL CORP.
INVESTMENTS IN AND ADVANCES TO AFFILIATES
(AMOUNTS IN THOUSANDS)

Name of Issuer

 

Title of Issue or
Nature of
Indebtedness

 

Amount of
Interest or
Distributions
Credited to
Income
(2)

 

Value as of
December 31,
201
8

 

Gross
Additions
(3)

 

Gross
Reductions
(4)

 

Net Change in
Unrealized
Appreciation
/
Depreciation

 

Value as of
December 31,
201
9

AFFILIATED INVESTMENT:

     

 

   

 

   

 

   

 

   

 

 

 

 

 

 

Unitek Global Systems, Inc.

 

Common Stock(1)

 

$

 

$

149.3

 

$

 

$

 

$

(149.3

)

 

$

   

Series B Super Senior Preferred Stock(5)

 

 

612.6

 

 

2,161.8

 

 

612.6

 

 

 

 

(578.4

)

 

 

2,196.0

   

Series B Senior Preferred Stock(5)

 

 

1,773.0

 

 

3,963.2

 

 

1,773.0

 

 

 

 

(5,115.4

)

 

 

620.8

   

Series B Preferred Stock(5)

 

 

5,325.2

 

 

8,217.9

 

 

5,325.2

 

 

 

 

(13,543.1

)

 

 

Total Affiliated Investment

     

 

7,710.8

 

 

14,492.2

 

 

7,710.8

 

 

 

 

(19,386.2

)

 

 

2,816.8

Total Control Investment

     

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL CONTROL AND AFFILIATED INVESTMENTS

     

$

7,710.8

 

$

14,492.2

 

$

7,710.8

 

$

 

$

(19,386.2

)

 

$

2,816.8

____________

(1)      Investment is non-income producing.

(2)      Represents the total amount of interest or distributions credited to income for the portion of the year an investment was an affiliate investment.

(3)      Gross additions include increases in investments resulting from new portfolio investments, paid-in-kind interest or distributions, the amortization of discounts and fees.

(4)      Gross reductions include decreases in investments resulting from principal collections related to investment repayments or sales, the amortization of premiums and acquisition costs.

(5)      Effective June 26, 2019, the Company entered into an Exchange Agreement with UniTek Global Services, Inc. (the “Exchange Agreement”), to receive 2,371,211 shares of Series B Super Senior Preferred Stock, 4,352,199 shares of Series B Senior Preferred Stock and 10,323,434 shares of Series B Preferred Stock (collectively, “Preferred Stock”) in exchange for all Series A shares of each respective Preferred Stock tranche that was held by OXSQ. This exchange resulted in the capitalization of approximately $6.3 million of cumulative PIK dividends which are added to the cost basis of each respective Preferred Stock tranche. This amount is recognized as dividend income — non-cash in the consolidated statement of operations.

89

Item 16. Form 10-K Summary.

None.

90

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

OXFORD Square CAPITAL CORP.

Date: February 26, 2020

 

/s/ Jonathan H. Cohen

   

Jonathan H. Cohen
Chief Executive Officer
(Principal Executive Officer)

Date: February 26, 2020

 

/s/ Bruce L. Rubin

   

Bruce L. Rubin
Chief Financial Officer
(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.

Date: February 26, 2020

 

/s/ Steven P. Novak

   

Steven P. Novak
Chairman of the Board of Directors

Date: February 26, 2020

 

/s/ Jonathan H. Cohen

   

Jonathan H. Cohen
Chief Executive Officer and Director
(Principal Executive Officer)

Date: February 26, 2020

 

/s/ Richard W. Neu

   

Richard W. Neu
Director

Date: February 26, 2020

 

/s/ Charles M. Royce

   

Charles M. Royce
Director

Date: February 26, 2020

 

/s/ George Stelljes III

   

George Stelljes III
Director

91