UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


Form 10-K


(Mark One) xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2021


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


COMMISSION FILE NUMBER: 814-01185


Hancock Park Corporate Income, Inc.


(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Maryland81-0850535(State or jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.)10 S. Wacker Drive, Suite 2500Chicago, Illinois60606(Address of principal executive office)(Zip Code)


REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:


(847) 734-2000


SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of Each ClassTrading SymbolName of Each Exchange on Which RegisteredNoneNoneNone





SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:


Common Stock, par value $0.001 per share


(Title of class)





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


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 x


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 periods as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES x 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 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and  “emerging growth” company in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ̈Accelerated filer ̈Non-accelerated filerxSmaller reporting company ̈Emerging growth companyx


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. x


Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐


There is no established market for the registrants common stock. On March 14, 2022 there were 2,020,361 shares outstanding of the Registrant’s common stock, $0.001 par value.







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TABLE OF CONTENTS


PagePART 1Item 1.Business5Item 1A.Risk Factors29Item 1B.Unresolved Staff Comments64Item 2.Properties64Item 3.Legal Proceedings64Item 4.Mine Safety Disclosures64PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities65Item 6.Reserved66Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations66Item 7A.Quantitative and Qualitative Disclosures about Market Risk87Item 8.Financial Statements and Supplementary Data89Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure132Item 9A.Controls and Procedures132Item 9B.Other Information132Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections132PART IIIItem 10.Directors, Executive Officers and Corporate Governance133Item 11.Executive Compensation139Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters140Item 13.Certain Relationships and Related Transactions, and Director Independence140Item 14.Principal Accounting Fees and Services144PART IVItem 15.Exhibits and Financial Statement Schedules145Item 16.Form 10-K Summary147Signatures148





The name Hancock Park Corporate Income, Inc., our logo and other trademarks of Hancock Park Corporate Income, Inc. are the property of Hancock Park Corporate Income, Inc. All other trademarks or trade names referred to in this Annual Report on Form 10-K are the property of their respective owners.





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Defined Terms


We have used “we,” “us,” “our,” “our company,” and “the Company” to refer to Hancock Park Corporate Income, Inc. in this report. We also have used several other terms in this report, which are explained or defined below: TermExplanation or Definition1940 ActInvestment Company Act of 1940, as amendedAdministration AgreementAdministration agreement between the Company and OFS Services, dated July 15, 2016Advisers ActThe Investment Advisers Act of 1940, as amendedAdvisorsOFS Advisor and CIM CapitalAdvisory AgreementsThe Investment Advisory Agreement and Sub-Advisory AgreementAffiliated AccountAn account, other than the Company, managed by OFS Advisor or an affiliate of OFS AdvisorAffiliated FundCertain other funds, including other BDCs and registered investment companies managed by OFS Advisor or by registered investment advisers controlling, controlled by, or under common control with, OFS AdvisorAmended Expense Support AgreementAmended and Restated Expense Support and Conditional Reimbursement Agreement, dated as of August 3, 2020, by and among the Company, OFS Advisor and CIM CapitalAnnual Distribution RequirementDistributions to our stockholders, for each taxable year, of at least 90% of our ICTIASCAccounting Standards Codification, as issued by the FASBASC Topic 820ASC Topic 820, "Fair Value Measurement"ASC Topic 946ASC Topic 946, "Financial Services-Investment Companies"ASUAccounting Standards Updates, as issued by the FASBBDCBusiness Development Company under the 1940 ActBLABusiness Loan Agreement, as amended, with Pacific Western Bank, as lender, which provides the Company with a senior secured revolving credit facilityBoardThe Company's board of directorsCCOCCO Capital, LLC, a Delaware limited liability company and the Company's dealer managerCIM CapitalCIM Capital IC Management, LLC, an affiliate of OFS AdvisorCLOCollateralized Loan ObligationCodeInternal Revenue Code of 1986, as amendedCompanyHancock Park Corporate Income, Inc. and its consolidated subsidiariesContractual Issuer ExpensesSalaries and direct expenses of OFS Advisor’s employees, employees of their affiliates and others while engaged in offering and other contractually-defined activitiesDealer Manager AgreementBroker dealer management agreement dated August 3, 2020 by and among the Company, OFS Advisor, International Assets Advisory, LLC and CCO, and amended and restated on February 2, 2022EBITDAEarnings before interest, taxes, depreciation, and amortizationESAsThe Prior Expense Support Agreement, the Amended Expense Support Agreement and Second Amended Expense Support AgreementExchange ActSecurities Exchange Act of 1934, as amendedFASBFinancial Accounting Standards BoardFunding IOFS Funding I, LLC, a wholly-owned subsidiary of OFSAM and an affiliate of OFS AdvisorGAAPAccounting principles generally accepted in the United StatesHPCI-MBHPCI-MB, Inc., a wholly owned subsidiary taxed under subchapter C of the Code and generally holds the equity investments of the Company that are taxed as pass-through entitiesICTIInvestment company taxable income, which is generally net ordinary income plus net short-term capital gains in excess of net long-term capital lossesIndicative PricesMarket quotations, prices from pricing services or bids from brokers or dealersInvestment Advisory AgreementInvestment Advisory and Management Agreement between the Company and OFS Advisor, dated July 15, 2016


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IRSInternal Revenue ServiceLIBORLondon Interbank Offered RateNAVNet asst value. NAV is calculated as consolidated total assets less consolidated total liabilities, and can be expressed in the aggregate or on a per share basis.Net Loan FeesThe cumulative amount of fees, such as origination fees, discounts, premiums and amendment fees that are deferred and recognized as income over the life of the loanOCCIOFS Credit Company, Inc., a Delaware corporation and a non-diversified, closed-end management investment company for whom OFS Advisor serves as investment adviserOfferingContinuous offering of up to $200,000,000 of shares of the Company's common stockOFSThe collective activities and operations of OFSAM, its subsidiaries, and certain affiliatesOFS AdvisorOFS Capital Management, LLC, a wholly-owned subsidiary of OFSAM and registered investment advisor under the Advisers ActOFSCOrchard First Source Capital, Inc., a wholly owned subsidiary of OFSAMOFS CapitalOFS Capital Corporation, a Delaware corporation and publicly-traded BDC for whom OFS Advisor serves as investment adviserOFS ServicesOFS Capital Services, LLC, a wholly-owned subsidiary of OFSAM and affiliate of OFS AdvisorOFSAMOrchard First Source Asset Management, LLC, a full-service provider of capital and leveraged finance solutions to U.S. corporationsOrderAn exemptive relief order from the SEC to permit us to co-invest in portfolio companies with Affiliated Funds in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditionsPIKPayment-in-kind, non-cash interest or dividends payable as an addition to the loan or equity security producing the incomePortfolio Company InvestmentA debt or equity investment in a portfolio company. Portfolio Company Investments exclude Structured Finance NotesPrime RateUnited States Prime interest ratePrior Expense Support AgreementExpense Support and Conditional Reimbursement Agreement dated July 15, 2016, between the Company and OFS AdvisorPWB Credit FacilitySenior secured revolving credit facility between the Company and Pacific Western Bank, as lenderReunderwriting AnalysisA discount rate estimation method based upon a hypothetical recapitalization of the entity given its current operating performance and current market conditionRICRegulated investment company under the CodeSECUnited States Securities and Exchange CommissionSecond Amended Expense Support AgreementSecond Amended and Restated Expense Support and Conditional Reimbursement Agreement dated February 2, 2022, between the Company and OFS Advisor, agreed to and accepted by CIM CapitalSecurities ActSecurities Act of 1933, as amendedSOFRSecured Overnight Financing RateStaffing AgreementStaffing Agreement between the Company and OFSC dated November 7, 2012Structured Finance NotesCLO mezzanine debt, CLO subordinated debt and CLO loan accumulation facility positionsSub-Advisory AgreementSub-Advisory Agreement dated as of August 3, 2020, by and between OFS Advisor and CIM Capital, which was terminated on February 2, 2022Synthetic Rating AnalysisA discount rate estimation method that assigns a surrogate debt rating to the entity based on known industry standards for assigning such ratings and then estimates the discount rate based on observed market yields for actual rated debtTransaction PriceThe price in an arm's length transaction involving the same securityUnsecured NoteAn agreement, as amended, with the HCM Master Fund Limited, an exempted company incorporated with limited liability under the laws of the Cayman Island in which the Company sold in a private placement an unsecured note in an aggregate principal amount of $15,000,000


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PART I


As used in this annual report on Form 10-K, except as otherwise indicated, the terms “Hancock Park,” “the Company,” “we,” “us,” and “our” refer to Hancock Park Corporate Income, Inc.




Item 1.    Business


GENERAL


We are an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a BDC under the 1940 Act. We were formed on December 8, 2015, as a corporation under the laws of Maryland. Our investment objective is to provide our stockholders with both current income and capital appreciation primarily through debt investments and, to a lesser extent, equity investments. Our investment strategy focuses primarily on middle-market companies in the United States. We use the term “middle-market” to refer to companies that may exhibit one or more of the following characteristics: number of employees between 150 and 2,000; revenues between $15 million and $300 million; annual EBITDA, between $5 million and $50 million; generally, private companies owned by private equity firms or owners/operators; and enterprise value between $10 million and $500 million. For additional information about how we define the middle-market, see "—Investment Criteria/Guidelines."


Our investment strategy focuses primarily on investments in middle-market companies in the United States, including investments in senior secured loans, which are comprised of first-lien, second-lien and unitranche loans, as well as investments in subordinated loans and, to a lesser extent, warrants and other equity securities. Our investments may be directly originated or may be purchased in the U.S. leveraged loan market for Broadly Syndicated Loans (as defined below). As a BDC, we must not acquire any assets other than “qualifying assets” as specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our assets, are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized in the United States. Conversely, we may invest up to 30% of our portfolio in opportunistic investments not otherwise eligible under applicable regulations. Specifically, as part of this 30% basket, we may consider investments in investment funds that are operating pursuant to certain exceptions to the 1940 Act and in advisers to similar investment funds, as well as in debt of middle-market companies located outside of the United States, and debt and equity of public companies that do not meet the definition of eligible portfolio companies because their market capitalization of publicly traded equity securities exceeds the levels provided for in the 1940 Act. We have made, and may continue to make, opportunistic investments in Structured Finance Notes and other non-qualifying assets consistent with our investment strategy. As of December 31, 2021 and 2020, approximately 77% and 90%, respectively, of our investments were qualifying assets.


We intend to raise up to $200,000,000 through the Offering in reliance on exemptions from the registration requirements of the Securities Act. In addition, on August 1, 2016, we and OFS Advisor entered into a dealer manager agreement with International Assets Advisory, LLC ("IAA”), which was subsequently amended in each of May 2017 and June 2019. On August 3, 2020, the Dealer Manager Agreement was amended and restated to include CCO, as an additional dealer manager for the Offering. From August 3, 2020 through August 31, 2020, CCO and IAA served as “co-dealer managers” and, effective September 1, 2020, IAA assigned and transferred all of IAA’s rights, obligations, interests and benefits under the Dealer Manager Agreement to CCO. On February 2, 2022, the Company entered into the Second Amended Dealer Manager Agreement. Under the Second Amended Dealer Manager Agreement, CCO will provide certain sales, promotional and marketing services to the Company in connection with the Offering, and the Company will pay CCO an aggregate dealer manager fee of an amount up to 3.0% of the gross proceeds from sales of the Company’s common stock in the Offering (the “Dealer Manager Fee”). CCO may, in its discretion, reallow a portion of the Dealer Manager Fee to participating broker-dealers in support of the Offering. Placement activities are conducted by CCO and participating broker dealers who solicit subscriptions to purchase shares of our common stock.  From May 19, 2017 through June 30, 2019, OFS Advisor paid the dealer manager fee on sales of shares of our common stock in the Offering. We now pay the dealer manager fee on sales of shares of our common stock in the Offering, resulting in fewer proceeds to us compared to when OFS Advisor paid the dealer manager fees. Previous payments of dealer manager fees by OFS Advisor are not subject to reimbursement by us. On August 30, 2016, Funding I purchased 74,074 shares of our common stock in the Offering for gross proceeds of $1,000,000, or $13.50 per share. No selling commissions or dealer manager fees were paid in connection with this purchase. Since commencing operations on August 30, 2016, we have sold a total of 2,494,397 shares of common stock for net gross proceeds of $34,634,638.


Our investment activities are managed by OFS Advisor and supervised by our Board, a majority of whom are independent of us, OFS Advisor and its affiliates. Under the Investment Advisory Agreement we have agreed to pay OFS Advisor an annual base management fee based on the average value of our total assets (other than cash and cash equivalents but including assets purchased with borrowed funds and including assets owned by any consolidated entity) as well as an incentive fee based on our investment performance. OFS Advisor also serves as the investment adviser to CLO funds and other assets,


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including OFS Capital, a publicly traded BDC with an investment strategy similar to the Company's. Effective August 3, 2020, OFS Advisor engaged CIM Capital to provide sub-advisory services to us pursuant to the Sub-Advisory Agreement. On February 2, 2022, OFS Advisor and CIM Capital entered into an agreement to terminate the Sub-Advisory Agreement (the “Termination Agreement”). See “—Management and Other Agreements–Investment Sub-Advisory Agreement.” See “—Risks Related to OFS Advisor and its Affiliates.”


Also, we have entered into an Administration Agreement with OFS Services. Under our Administration Agreement, we have agreed to reimburse OFS Services for our allocable portion (subject to the review and approval of our Board) of overhead and other expenses incurred by OFS Services in performing its obligations under the Administration Agreement. See “Management and Other Agreements–Administration Agreement.”


A BDC is generally not permitted to incur indebtedness unless immediately after such borrowing it has an asset coverage ratio for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, Section 61(a)(2) of the 1940 Act permits BDCs to be subject to a minimum asset coverage ratio of 150%, if specific conditions are satisfied, when issuing senior securities (i.e., the amount of debt may not exceed 66 2/3% of the value of our assets).


On November 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 application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, and we extended to each of our stockholders as of November 6, 2018, an offer to repurchase the equity securities held by such stockholder as of November 6, 2018, with 25% of such equity securities to be repurchased in each of the four quarters following November 6, 2018. As a result, the asset coverage ratio test applicable to us was decreased from 200% to 150%, effective November 6, 2019.


We may borrow money when the terms and conditions available are favorable to do so and are aligned with our investment strategy and portfolio composition. The use of borrowed funds or the proceeds of preferred stock to make investments would have its own specific benefits and risks, and all of the costs of borrowing funds or issuing preferred stock would be borne by holders of our common stock.


We have elected to be treated for U.S. federal income tax purposes, and to qualify annually thereafter, for tax treatment as a RIC under the Code. To qualify as a RIC, we must, among other things, meet certain source-of-income and assets diversification requirements. Pursuant to these elections, we generally are not required to pay corporate-level U.S. federal income taxes on any income we distribute to our stockholders.


About OFS and Our Advisor


OFS is a full-service provider of capital and leveraged finance solutions to U.S. companies. As of December 31, 2021, OFS had 50 full-time employees. OFS is headquartered in Chicago, Illinois and also has offices in New York, New York and Los Angeles, California.


Our investment activities are managed by OFS Advisor, our investment adviser. OFS Advisor is responsible for sourcing potential investments, conducting research and diligence on potential investments and equity sponsors, analyzing investment opportunities, structuring our investments and monitoring our investments and portfolio companies on an ongoing basis.  As our investment adviser, OFS Advisor allocates investment opportunities among us and any other clients in accordance with its allocation policy. See “Regulation — Exemptive Relief”. OFS Advisor is a registered investment adviser under the Advisers Act and a wholly owned subsidiary of OFSAM.


Our relationship with OFS Advisor is governed by and dependent on the Investment Advisory Agreement and may be subject to conflicts of interest. See “Item 1A. Risk Factors — Risks Related to Our Business and Structure  — We have potential conflicts of interest related to obligations that OFS Advisor or its affiliates may have to other clients.” OFS Advisor provides us with advisory services in exchange for a base management fee and incentive fee; see “Management and Other Agreements—Investment Advisory Agreement”. The base management fee is based on our total assets (other than cash and cash equivalents. Our management fee includes assets purchased with borrowed funds and assets owned by any consolidated entity; therefore, OFS Advisor will benefit when we incur debt or use leverage. Our Board is charged with protecting our interests by monitoring how OFS Advisor addresses these and other conflicts of interest associated with its management services and compensation. While our Board is not expected to review or approve each borrowing or incurrence of leverage, our independent directors periodically review OFS Advisor’s services and fees as well as its portfolio management decisions and portfolio performance.


Under the Staffing Agreement, OFSC makes experienced investment professionals available to OFS Advisor and provides OFS Advisor with access to the senior investment personnel of OFS and its affiliates. The Staffing Agreement also provides OFS Advisor with access to deal flow generated by OFS and its affiliates in the ordinary course of their businesses and commits the members of OFS Advisor’s investment committees to serve in that capacity. See “Item 1A. Business — Conflicts


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of Interest” and “Item 1A. Risk Factors — Risks Related to Our Business and Structure  — We may have additional conflicts related to other arrangements with OFS Advisor or its affiliates.”


OFS Advisor capitalizes on the deal origination and sourcing, credit underwriting, due diligence, investment structuring, execution, portfolio management and monitoring experience of OFS’s professionals. The senior management team of OFS, including Bilal Rashid and Jeffrey A. Cerny, provides services to OFS Advisor. These managers have developed a broad network of contacts within the investment community, and possess an average of over 20 years of experience investing in debt and equity securities of middle-market companies. In addition, these managers have extensive experience investing in assets that constitute our primary focus and have expertise in investing across all levels of the capital structure of middle-market companies.


Competitive Strengths and Core Competencies


Deep Management Team Experienced in All Phases of Investment Cycle and Across All Levels of the Capital Structure. We are managed by OFS Advisor, which has access to the resources and expertise of OFS’s investment professionals through the Staffing Agreement with OFSC. As of December 31, 2021, OFS’s credit and investment professionals (including all investment committee members) employed by OFSC had an average of over 15 years of investment experience with strong institutional backgrounds.


Significant Investment Capacity. The net proceeds of equity and debt offerings and borrowing capacity under our credit facilities should provide us with a substantial amount of capital available for deployment into new investment opportunities in our targeted asset class.


Scalable Infrastructure Supporting the Entire Investment Cycle. We believe that our loan acquisition, origination and sourcing, underwriting, administration and management platform is scalable (that is, it can be expanded on a cost-efficient basis within a timeframe that meets the demands of business growth). Our platform extends beyond origination and sourcing and includes a regimented credit monitoring system. We believe that our careful approach, which involves ongoing review and analysis by an experienced team of professionals, should enable us to identify problems early and to assist borrowers before they face difficult liquidity constraints.


Extensive Loan Sourcing Capabilities. OFS Advisor gives us access to the deal flow of OFS. We believe OFS’s 20-year history as a middle-market lending platform, extensive relationships with potential borrowers and other lenders, and its market position make it a leading lender to many sponsors and other deal sources, especially in the currently under-served lending environment.


Structuring with a High Level of Service and Operational Orientation. We provide client-specific and creative financing structures to our portfolio companies. Based on our experience in lending to, and investing in, middle-market companies, we believe that the middle-market companies we target, as well as sponsor groups we may pursue, require a higher level of service, creativity and knowledge than has historically been provided by other service providers more accustomed to participating in commodity-like loan transactions.


Rigorous Credit Analysis and Approval Procedures. OFS Advisor utilizes an established, disciplined investment process of OFS for reviewing lending opportunities, structuring transactions and monitoring investments. Using a disciplined approach to lending, OFS Advisor seeks to minimize credit losses through effective underwriting, comprehensive due diligence investigations, structuring and, where appropriate, the implementation of restrictive debt covenants.


Sub-Advisor


Effective August 3, 2020, OFS Advisor engaged CIM Capital to serve as our sub-adviser in accordance with the Sub-Advisory Agreement. Pursuant to the terms of the Sub-Advisory Agreement, CIM Capital evaluated and advised us on private capital market strategy, including market trends and terms, provided financial and strategic planning advice and analysis, interpreted market demand for products, assisted in establishing our operational readiness and selecting and negotiating engagements with third-party service providers, and coordinateed the dissemination of customary information to interested parties.


On February 2, 2022, OFS Advisor and CIM Capital entered into the Termination Agreement pursuant to which the Sub-Advisory Agreement was terminated as of February 2, 2022.


Our Administrator


OFS Services, an affiliate of OFS Advisor, provides the administrative services necessary for us to operate. OFS Services furnishes us with office facilities and equipment, necessary software licenses and subscriptions and clerical, bookkeeping and recordkeeping services at such facilities. OFS Services oversees our financial reporting as well as prepares our reports to stockholders and all other reports and materials required to be filed with the SEC or any other regulatory authority. OFS Services also manages the determination and publication of our NAV, the preparation and filing of our tax returns, and


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generally monitors the payment of our expenses and the performance of administrative and professional services rendered to us by others. OFS Services may retain third parties to assist in providing administrative services to us. To the extent that OFS Services outsources any of its functions, we will directly pay the fees associated with such services.


Market Opportunity


Our investment strategy is focused primarily on investments in middle-market companies in the United States. We find the middle-market attractive for the following reasons:


Large Target Market. According to the National Center for the Middle Market, as of the fourth quarter of 2021 there were approximately 200,000 companies in the United States with annual revenues between $10.0 million and $1.0 billion. We believe that these middle-market companies represent a significant growth segment of the U.S. economy and often require substantial capital investments to grow.


Specialized Lending Requirements with High Barriers to Entry. We believe that several factors render many U.S. financial institutions ill-suited to lend to U.S. middle-market companies. For example, based on the experience of our management team, lending to private middle-market companies in the United States (a) is generally more labor-intensive than lending to larger companies due to the smaller size of each investment and the fragmented nature of information for such companies, (b) requires due diligence and underwriting practices consistent with the demands and economic limitations of the middle-market and (c) may also require more extensive ongoing monitoring by the lender. As a result, middle-market companies historically have been served by a limited segment of the lending community. As a result of the unique challenges facing lenders to middle-market companies, we believe that there are high barriers to entry that a new lender must overcome.


Robust Demand for Debt Capital. We believe that private equity firms have significant committed but uncalled capital, a large portion of which is still available for investment in the United States. Subject to market conditions, we expect the large amount of unfunded buyout commitments will drive demand for leveraged buyouts over the next several years, which should, in turn, create leveraged lending opportunities for us.


Investment Criteria/Guidelines


Our investment objective is to generate current income and capital appreciation by investing primarily in middle-market companies in the United States. We focus on investments in senior secured loans, including first lien, second lien, and unitranche loans, as well as subordinated loans and, to a lesser extent, warrants and other equity securities. In particular, we believe that structured equity debt investments (i.e., typically senior secured unitranche loans, often with warrant coverage, and often in companies with no financial sponsor) represent a strong relative value opportunity offering the borrower the convenience of dealing with one lender, which may result in a higher blended rate of interest to us than we might expect to receive under a traditional multi-tranche structure. We expect that our investments in the equity securities of portfolio companies, such as warrants, preferred stock, common stock and other equity interests, will principally be made in conjunction with our debt investments. Generally, we do not expect to make investments in companies or securities that OFS Advisor determines to be distressed investments (such as discounted debt instruments that have either experienced a default or have a significant potential for default), other than follow-on investments in portfolio companies of ours. We intend to continue to generate strong risk-adjusted net returns by assembling a diversified portfolio of investments across a broad range of industries.


We target U.S. middle-market companies through OFS’s access to a network of financial institutions, private equity sponsors, investment banks, consultants and attorneys, and our proprietary database of borrowers developed over OFS’s more than 20 years in lending to middle-market companies. A typical targeted borrower will exhibit certain of the following characteristics:


• number of employees between 150 and 2,000;


• revenues between $15 million and $300 million;


• annual EBITDA between $5 million and $50 million;


• private companies owned by private equity firms or owners/operators;


• enterprise value between $10 million and $500 million;


• effective and experienced management teams;


• defensible market share;


• solid historical financial performance, including a steady stream of cash flow;


• high degree of recurring revenue;


• diversity of customers, markets, products and geography; and


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• differentiated products or services.


While we believe that the characteristics listed above are important in identifying and investing in prospective portfolio companies, not all of these criteria will be met by each prospective portfolio company.


Due Diligence and Investment Process Overview


We employ a thorough and disciplined underwriting and due diligence process that is conducted in accordance with established credit policies and procedures and focused on investment recovery. Our process involves a comprehensive analysis of a prospective portfolio company’s market, operational, financial, and legal position, as well as its future prospects. In addition to our own analysis, we may use the services of third parties for environmental reviews, quality of earnings reports, industry surveys, background checks on key managers, and insurance reviews.


We seek to invest in companies that have experienced and incentivized management teams, stable and predictable cash flows, and defensible market positions. We underwrite our investments with the expectation that we will hold them for a number of years, and we structure and document our investments accordingly.


Our due diligence and underwriting process typically addresses the following elements (although certain elements may not be included in every due diligence undertaking):


• Prospective Portfolio Company Characteristics: focusing on primary drivers of the company’s revenues and cash flows, including its key products and services; customer and supplier concentrations, and contractual relationships; depth, breadth, and quality of company management, as well as the extent to which the management team is appropriately compensated with equity incentives; and any regulatory, labor, or litigation matters impacting the company.


• Industry and Competitive Overview: including industry size and the company’s position within it; growth potential and barriers to entry; governmental, regulatory, or technological issues potentially affecting the industry; and cyclicality or seasonality risks associated with the industry.


• Financial Analysis: involving an understanding of the company’s historical financial results, focusing on actual operating trends experienced over time, in order to forecast future performance, including in various sensitized performance scenarios; attention to projected cash flows, debt service coverage, and leverage multiples under such scenarios; and an assessment of enterprise valuations and debt repayment/investment recovery prospects given such sensitized performance scenarios.


• Investment Documentation: focusing on obtaining the best legal protections available to us given our position within the capital structure, including, as appropriate, financial covenants; collateral liens and stock pledges; review of loan documents of other of the prospective portfolio company’s creditors; and negotiation of inter-creditor agreements.


Portfolio Review/Risk Monitoring


We view active portfolio monitoring as a vital part of our investment process, and we benefit from a portfolio management system developed by OFS that includes daily, weekly, monthly, and quarterly components, and that involves comprehensive review of the performance of each of our portfolio companies. As part of the portfolio management process, OFS Advisor performs ongoing risk assessments on each of our investments and assigns each debt investment a credit rating based on OFS’s internal ratings scale.


We categorize debt investments into the following risk categories based on relevant information about the ability of borrowers to service their debt:


1 (Low Risk) – The debt investment has mostly satisfactory asset quality and liquidity, as well as good leverage capacity. It maintains predictable and strong cash flows from operations. The trends and outlook for the portfolio company's operations, balance sheet, and industry are neutral to favorable. Collateral, if appropriate, has maintained value and would be capable of being liquidated on a timely basis. Overall a debt investment with a 1 risk rating is considered to be of investment grade quality.


2 (Below Average Risk) – The debt investment has acceptable asset quality, moderate excess liquidity, and modest leverage capacity. It could have some financial/non-financial weaknesses which are offset by strengths; however, the credit demonstrates an ample current cash flow from operations. The trends and outlook for the portfolio company's operations, balance sheet, and industry are generally positive or neutral to somewhat negative. Collateral, if appropriate, has maintained value and would be capable of being liquidated successfully on a timely basis.


3 (Average) – The debt investment has acceptable asset quality, somewhat strained liquidity, and minimal leverage capacity. It is at times characterized by acceptable cash flows from operations. Under adverse market conditions, the debt


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service could pose difficulties for the borrower. The trends and conditions of the portfolio company's operations and balance sheet are neutral to slightly negative.


4 (Special Mention) – The debt investment has not lost, and is not expected to lose, principal or interest but it possesses credit deficiencies or potential weaknesses which deserve management’s close and continued attention. The portfolio company’s operations and/or balance sheet have demonstrated an adverse trend or deterioration which, while serious, has not reached the point where the liquidation of debt is jeopardized. These weaknesses are generally considered correctable by the borrower in the normal course of business but may weaken the asset or inadequately protect our credit position if not checked or corrected.


5 (Substandard) – The debt investment is protected inadequately by the current enterprise value or paying capacity of the obligor or of the collateral, if any. The portfolio company has well-defined weaknesses based upon objective evidence, such as recurring or significant decreases in revenues and cash flows. These assets are characterized by the possibility that we may sustain loss if the deficiencies are not corrected. The possibility that liquidation would not be timely (e.g., bankruptcy or foreclosure) requires a Substandard classification even if there is little likelihood of loss.


6 (Doubtful) – The debt investment has all the weaknesses inherent in those classified as Substandard, with the additional factor that the weaknesses are pronounced to the point that collection or liquidation in full, on the basis of currently existing facts, conditions and values, is deemed uncertain. The possibility of loss on a Doubtful asset is high but, because of certain important and reasonably specific pending factors which may strengthen the asset, its classification as an estimated loss is deferred until its more exact status can be determined.


7 (Loss) – The debt investment is considered almost fully uncollectible and of such little value that its continuance as an asset is not warranted. It is generally a credit that is no longer supported by an operating company, a credit where the majority of our assets have been liquidated or sold and a few assets remain to be sold over many months or even years, or a credit where the remaining collections are expected to be minimal.


As of December 31, 2021, we had debt investments in 23 Portfolio Companies, totaling $33,252,656 at fair value, all of which were rated 3.


Investment Committees


OFS Advisor’s Pre-Allocation Investment Committee, Broadly Syndicated Investment Committee, Structured Credit Investment Committee, and Middle-Market Investment Committee (collectively, the “Advisor Investment Committees”) are responsible for the overall asset allocation decisions and the evaluation and approval of investments of OFS Advisor’s advisory clients.


The Middle-Market Investment Committee, comprised of Richard Ressler (Chairman), Jeffrey A. Cerny, Kyde Sharp and Bilal Rashid, is responsible for the evaluation and approval of all debt and equity investments made by us.


The process employed by the Advisor Investment Committees, including the Middle-Market Investment Committee, is intended to bring the diverse experience and perspectives of the committee members to the investment process. The Middle-Market Investment Committee serves to provide investment consistency and adherence to our core investment philosophy and policies. The Middle-Market Investment Committee also determines appropriate investment sizing and implements ongoing monitoring requirements of our investments.


In certain instances, management may seek the approval of our board of directors prior to the making of an investment. In addition to reviewing investments, the meetings of the Middle-Market Investment Committee serve as a forum to discuss credit views and outlooks. Potential transactions and deal flow are reviewed on a regular basis. Members of the investment team are encouraged to share information and views on credits with members of the Middle-Market Investment Committee early in their analysis. We believe this process improves the quality of the analysis and assists the deal team members in working efficiently.


The Structured Credit Investment Committee, comprised of Messrs. Ressler (Chairman), Rashid and Cerny, and Glen Ostrander and Kenneth A. Brown, is responsible for the evaluation and approval of all the structured finance investments made by us.


Investments


We pursue an investment strategy focused primarily on investments in middle-market companies in the United States. We focus on investments in loans, in which OFS Advisor’s investment professionals have expertise, including investments in first-lien, unitranche, second-lien, and mezzanine loans and, to a lesser extent, on warrants and other equity securities. We seek to create a diverse portfolio by making investments in the securities of middle-market companies that we expect to range generally from $3.0 million to $25.0 million each, although we expect this investment size will vary proportionately with the size of our capital base.


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Structure of Investments


We anticipate that our loan portfolio will contain investments of the following types with the following typical characteristics:


Senior Secured First-Lien Loans. First-lien senior secured loans obtain security interests in the assets of these portfolio companies as collateral in support of the repayment of these loans (in certain cases, subject to a payment waterfall). The collateral takes the form of first-priority liens on specified assets of the portfolio company borrower and, typically, first-priority pledges of the ownership interests in the borrower. Our first lien loans may provide for moderate loan amortization in the early years of the loan, with the majority of the amortization deferred until loan maturity.


Senior Secured Unitranche Loans. Unitranche loans are loans that combine both senior and subordinated debt into one loan under which the borrower pays a single blended interest rate that is intended to reflect the relative risk of the secured and unsecured components. We typically structure our unitranche loans as senior secured loans. We obtain security interests in the assets of these portfolio companies as collateral in support of the repayment of these loans. This collateral takes the form of first-priority liens on the assets of a portfolio company and, typically, first-priority pledges of the ownership interests in the company. We believe that unitranche lending represents a significant growth opportunity for us, offering the borrower the convenience of dealing with one lender, which may result in a higher blended rate of interest to us than we might realize in a traditional multi-tranche structure. Unitranche loans typically provide for moderate loan amortization in the initial years of the facility, with the majority of the amortization deferred until loan maturity. Unitranche loans generally allow the borrower to make a large lump sum payment of principal at the end of the loan term, and there is a risk of loss if the borrower is unable to pay the lump sum or refinance the amount owed at maturity. In many cases, we will be the sole lender, or we, together with our affiliates, will be the sole lender, of unitranche loans, which can afford us additional influence with a borrower in terms of monitoring and, if necessary, remediation in the event of underperformance.


Senior Secured Second-lien Loans. Second-lien senior secured loans obtain security interests in the assets of these portfolio companies as collateral in support of the repayment of such loans. This collateral typically takes the form of second-priority liens on the assets of a portfolio company, and we may enter into an inter-creditor agreement with the holders of the portfolio company’s first-lien senior secured debt. These loans typically provide for no contractual loan amortization in the initial years of the facility, with all amortization deferred until loan maturity. These loans are categorized as Senior Secured Loans in our consolidated schedule of investments included in the financial statements included elsewhere in this prospectus supplement.


Broadly Syndicated Loans . Broadly Syndicated Loans (whose features are similar to those described under “Senior Secured First-Lien Loans” and “Senior Secured Second-Lien Loans” above) are typically originated and structured by banks on behalf of large corporate borrowers with employee counts, revenues, EBITDAs and enterprise values larger than the middle-market characteristics described above. The proceeds of Broadly Syndicated Loans are often used for leveraged buyout transactions, mergers and acquisitions, recapitalizations, refinancings, and financing capital expenditures. Broadly Syndicated Loans are typically distributed by the arranging bank to a diverse group of investors primarily consisting of: CLOs; senior secured loan and high yield bond mutual funds; closed-end funds, hedge funds, banks and insurance companies; and finance companies. A borrower must comply with various covenants contained in a loan agreement or note purchase agreement between the borrower and the holders of the Broadly Syndicated Loan (the “Loan Agreement”). In a typical Broadly Syndicated Loan, an administrative agent (the “Agent”) administers the terms of the Loan Agreement. In such cases, the Agent is normally responsible for the collection of principal and interest payments from the borrower and the apportionment of these payments to the credit of all institutions that are parties to the Loan Agreement. We will generally rely upon the Agent or an intermediate participant to receive and forward to us our portion of the principal and interest payments on the Broadly Syndicated Loan. Additionally, we normally will rely on the Agent and the other loan investors to use appropriate credit remedies against the borrower. The Agent is typically responsible for monitoring compliance with covenants contained in the Loan Agreement based upon reports prepared by the borrower. The Agent may monitor the value of the collateral and, if the value of the collateral declines, may accelerate the Broadly Syndicated Loan, may give the borrower an opportunity to provide additional collateral or may seek other protection for the benefit of the participants in the Broadly Syndicated Loan. The Agent is compensated by the borrower for providing these services under a Loan Agreement, and such compensation may include special fees paid upon structuring and funding the Broadly Syndicated Loan and other fees paid on a continuing basis. The Broadly Syndicated Loans in which we invest may include loans that are considered “covenant-lite” loans, because of their lack of a full set of financial maintenance covenants.


The loans referenced above are categorized as Senior Secured Loans in our consolidated schedule of investments included in "Part II, Item 8. Financial Statements and Supplementary Data."


Subordinated (“Mezzanine”) Loans. These investments are typically structured as unsecured, subordinated loans that typically provide for relatively high, fixed interest rates that provide us with significant current interest income. These loans typically will have interest-only payments (often representing a combination of cash pay and payment-in-kind ("PIK") interest)


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in the early years, with amortization of principal deferred to maturity. Mezzanine loans generally allow the borrower to make a large lump sum payment of principal at the end of the loan term, and there is a risk of loss if the borrower is unable to pay the lump sum or refinance the amount owed at maturity. Mezzanine investments are generally more volatile than secured loans and may involve a greater risk of loss of principal. Mezzanine loans often include a PIK feature (meaning a feature allowing for the payment of interest in the form of additional principal amount of the loan instead of in cash), which effectively operates as negative amortization of loan principal, thereby increasing credit risk exposure over the life of the loan. These loans are categorized as Subordinated Loans in our consolidated schedule of investments included in the financial statements included elsewhere in this prospectus supplement.


Equity Securities. Equity securities typically consist of either a direct minority equity investment in common or membership/partnership interests or preferred stock of a portfolio company, and are typically not control-oriented investments. Our preferred equity investments typically contain a fixed dividend yield based on the par value of the equity security. Preferred equity dividends may be paid in cash at a stipulated date, usually quarterly, and are participating and/or cumulative. We may structure such equity investments to include provisions protecting our rights as a minority-interest holder, as well as a “put,” or right to sell such securities back to the issuer, upon the occurrence of specified events. In many cases, we may also seek to obtain registration rights in connection with these equity interests, which may include demand and “piggyback” registration rights, which grants us the right to register our equity interest when either the portfolio company or another investor in the portfolio company files a registration statement with the SEC to issue securities. Our equity investments typically are made in connection with debt investments to the same portfolio companies.


Warrants. In some cases, we may receive nominally priced warrants to buy a minority equity interest in the portfolio company in connection with a loan. As a result, as a portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We may structure such warrants to include provisions protecting our rights as a minority-interest holder, as well as a put to sell such securities back to the issuer, upon the occurrence of specified events. In many cases, we may also seek to obtain registration rights in connection with these equity interests, which may include demand and “piggyback” registration rights.


Structured Finance Notes. Structured finance notes include the mezzanine and subordinated debt positions of a CLO. Subordinated debt (colloquially referred to as “CLO equity securities”) and mezzanine debt, represent beneficial interests in portfolios consisting primarily of below-investment-grade senior secured loans with a large number of distinct underlying U.S. borrowers across various industry sectors. The subordinated debt tranches of CLOs are unrated, represent the first loss position in a CLO structure, are typically leveraged 9 to 13 times which translates to approximately 11% to 8% of a CLO’s capital structure, respectively. The leverage can magnify our gains and losses on such investments. CLO subordinated debt positions are entitled to recurring distributions which are generally equal to the residual cash flow of payments received from underlying securities less contractual payments to more senior CLO debt holders and fund expenses. Economically, CLO subordinated debt is equity-like in that it represents the residual interest in the CLO assets that bears the ultimate risk of loss and receives the benefits of success, but lacks features enabling its holders to direct the operations of the entity typically associated with equity instruments. Mezzanine debt is typically the tranches immediately senior to the subordinated debt, is usually rated BB to B, and represents approximately 4% to 7% of a CLO’s capital structure. Mezzanine debt tranches represent the second loss position, and can become the residual interest if assets are insufficient to retire the mezzanine tranche at par. This category of investments also includes loan accumulation facilities (colloquially referred to as “CLO warehouses”), which are short- to medium-term finance vehicles intended to aggregate loans for inclusion in a future CLO portfolio. Loan accumulation facilities are typically financed through income notes, representing the first-loss and residual interests in the vehicle, and senior debt. The senior debt of loan accumulation facilities typically leverages the income notes between three and six times prior to a CLO’s pricing and launch. Income notes of loan accumulation facilities have economic risks similar to those applicable to CLOs subordinated debt insomuch as they pay returns equal to the income earned on the underlying portfolio less costs and fees incurred on senior financing and bear losses on a first-dollar basis, but lack many of the contractual protections associated with a CLO indenture. Investing in a CLO warehouse does not create an obligation to participate in the CLO contemplated by the warehouse; however, we  have historically participated in the CLOs resultant from our CLO warehouse investments. Participation in a CLO warehouse investment may afford us the opportunity to enhance our returns through fee sharing agreements with the CLO collateral managers.


General Structuring Considerations. We tailor the terms of each investment to the facts and circumstances of the transaction and the prospective portfolio company, negotiating a structure that protects our rights and manages our risk while creating incentives for the portfolio company to achieve its business plan and improve its operating results. We seek to limit the downside potential of our investments by:


• selecting investments that we believe have a very low probability of loss;


• requiring a total return on our investments (including both interest and potential equity appreciation) that we believe will compensate us appropriately for credit risk; and


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• negotiating covenants in connection with our investments that afford our portfolio companies as much flexibility in managing their businesses as possible, consistent with the preservation of our capital. Such restrictions may include affirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights, including either observation or rights to a seat on the board of directors under some circumstances.


We expect to hold most of our investments to maturity or repayment, but we may sell some of our investments earlier if a liquidity event occurs, such as a sale, recapitalization or worsening of the credit quality of the portfolio company.


Competition


Our primary competitors include public and private funds, other BDCs, commercial and investment banks, commercial finance companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical, and marketing resources than we do. Some competitors may have 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. Further, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC, or to the distribution and other requirements we must satisfy to maintain our RIC status.


We expect to continue to use the expertise of the investment professionals of OFS to whom we have access to assess investment risks and determine appropriate pricing for our investments in portfolio companies. In addition, we expect that the relationships of the senior members of OFS and its affiliates will enable us to learn about, and compete effectively for, financing opportunities with attractive middle-market companies in the industries in which we seek to invest. See "Item 1A. Risk Factors—We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses" for additional information concerning the competitive risks we face.


Administration


We do not have any direct employees, and our day-to-day investment operations are managed by OFS Advisor. We have a chief executive officer, chief financial officer, chief compliance officer, chief accounting officer, corporate secretary and, to the extent necessary, our Board may elect to appoint additional officers going forward. Our officers are employees of OFSC, an affiliate of OFS Advisor, and a portion of the compensation paid to our officers is paid by us pursuant to the Administration Agreement. All of our executive officers are also officers of OFS Advisor.


MANAGEMENT AND OTHER AGREEMENTS


Investment Advisory Agreement


OFS Advisor is registered as an investment adviser under the Advisers Act and  a wholly owned subsidiary of OFSAM. Pursuant to the Investment Advisory Agreement with and subject to the overall supervision of our Board and in accordance with the 1940 Act, OFS Advisor provides investment advisory services to us. Under the terms of the Investment Advisory Agreement, OFS Advisor:


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


• assists us in determining what securities we purchase, retain or sell;


• identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); and


• executes, closes, services and monitors the investments we make.


Certain personnel of OFS, including experienced investment professionals and members of the Advisor Investment Committees (including Mr. Ressler, who is currently the Chairman of the Middle-Market Investment Committee) conduct activities on our behalf directly through, and under the supervision of, OFS Advisor. OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to us.


Management and Incentive Fee


OFS Advisor receives a fee from us, consisting of two components—a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.25% and based on the average value of the Company’s total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) at the end of the two most recently completed calendar quarters, adjusted for any share issuances or repurchases during the quarter. The base management fee is payable quarterly in arrears and prorated for any partial quarter based on the number of days in the quarter.


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The incentive fee has two parts. The first part of the incentive fee (the "Income Incentive Fee") is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding calendar quarter. “Pre-incentive fee net investment income” means interest income, dividend income and any other income (including any other fees such as commitment, origination and sourcing, structuring, diligence and consulting fees or other fees that we receive from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest or dividend feature (such as original issue discount, or "OID", debt instruments with PIK interest, equity investments with accruing or PIK dividend, and zero coupon securities), accrued income that we have not yet received in cash.


Pre-incentive fee net investment income does not include any realized gains, realized losses, unrealized capital appreciation or unrealized capital depreciation. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a quarter where we incur a loss. For example, if we receive pre-incentive fee net investment income in excess of the hurdle rate (as defined below) for a quarter, we will pay the applicable incentive fee even if we have incurred a loss in that quarter due to realized capital losses or unrealized investment depreciation.


Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter, is compared to a fixed “hurdle rate” of 1.75% per quarter. If market interest rates rise, we may be able to invest our funds in debt instruments that provide for a higher return, which would increase our pre-incentive fee net investment income and make it easier for OFS Advisor to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income. There is no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle rate, and there is no delay of payment if prior quarters are below the quarterly hurdle rate. Pre-incentive fee net investment income fees are prorated for any partial quarter based on the number of days in such quarter.


We pay OFS Advisor an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:


• no incentive fee in any calendar quarter in which the pre-incentive fee net investment income does not exceed the hurdle rate;


• 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter. We refer to this portion of our pre-incentive fee net investment income (which exceeds the hurdle rate but is less than 2.1875%) as the “catch-up” provision. The catch-up is meant to provide OFS Advisor with 20.0% of the pre-incentive fee net investment income as if a hurdle rate did not apply if this pre-incentive fee net investment income exceeds 2.1875% in any calendar quarter; and


• 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter.


The following is a graphical representation of the calculation of the income-related portion of the incentive fee:





Quarterly Incentive Fee Based on Net Investment Income





The second part of the incentive fee (the “Capital Gains 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 is calculated at the end of each applicable year by subtracting (a) the sum of our cumulative aggregate realized capital losses and our aggregate unrealized capital depreciation from (b) our cumulative aggregate realized capital gains. If such amount is positive at the end of such year, then the Capital Gains Fee for such year is equal to 20.0% of such amount, less the aggregate amount of Capital Gains Fees paid in all prior years. If such amount is negative, then there is no Capital Gains Fee for such year. The Company


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accrues the Capital Gains Fee if, on a cumulative basis, the sum of net realized capital gains and (losses) plus net unrealized appreciation and (depreciation) is positive.


The cumulative aggregate realized capital gains are calculated as the sum of the differences, if positive, between (a) the net sales price of each investment in our portfolio when sold and (b) the accreted or amortized cost basis of such investment.


The cumulative aggregate realized capital losses are calculated as the sum of the amounts by which (a) the net sales price of each investment in our portfolio when sold is less than (b) the accreted or amortized cost basis of such investment.


The aggregate unrealized capital depreciation is calculated as the sum of the differences, if negative, between (a) the valuation of each investment in our portfolio as of the applicable Capital Gains Fee calculation date and (b) the accreted or amortized cost basis of such investments. Unrealized capital appreciation is accrued, but not paid until said appreciation is realized. We accrue the Capital Gains Fee if, on a cumulative basis, the sum of the net realized capital gains (and losses) plus net unrealized appreciation (and depreciation) is positive. The Capital Gains Fee for any partial year is prorated based on the number of days in such year.


The base management fee is payable quarterly in arrears and was $562,903, $542,416, and $405,282 for the years ended December 31, 2021, 2020, and 2019, respectively.


Examples of Incentive Fee Calculation


Example 1—Income Related Portion of Incentive Fee:


Assumptions


◦ Hurdle rate (1) = 1.75%


◦ Management fee (2) = 0.3125%


◦ Other estimated expenses (legal, accounting, custodian, transfer agent, etc.) (3) = 0.20%


(1) Represents a quarter of the 7.0% annualized hurdle rate.


(2) Represents a quarter of the 1.25% annualized management fee.


(3) Excludes estimated offering expenses.


Alternative 1


Additional Assumptions


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


• Pre-incentive fee net investment income (investment income – (management fee + other expenses)) = 0.7375%


Pre-incentive fee net investment income does not exceed the hurdle rate, therefore there is no incentive fee.


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Alternative 2


Additional Assumptions


• Investment income (including interest, dividends, fees, etc.) = 2.60%


• Pre-incentive fee net investment income (investment income – (management fee + other expenses)) = 2.0875%


Pre-incentive fee net investment income exceeds hurdle rate, therefore there is an incentive fee.


Incentive Fee=100% × “Catch-Up” + the greater of 0%AND(20% × (pre-incentive fee net investment income – 2.1875%))=(100% × (2.0875% – 1.75%)) + 0%=100% × 0.3375%=0.3375%


Alternative 3


Additional Assumptions


• Investment income (including interest, dividends, fees, etc.) = 3.30%


• Pre-incentive fee net investment income (investment income – (management fee + other expenses)) = 2.7875%


Pre-incentive fee net investment income exceeds hurdle rate, therefore there is an incentive fee.


Incentive Fee=100% × “Catch-Up” + the greater of 0%AND(20% × (pre-incentive fee net investment income – 2.1875%))=(100% × (2.1875% – 1.75%)) + (20% × (2.7875% – 2.1875%))=0.4375% + (20% × 0.60%)=0.4375% + 0.12%=0.5575%


Example 2—Capital Gains Portion of Incentive Fee:


Alternative 1


Assumptions


• Year 1: $20 million investment made in Company A (“Investment A”), and $30 million investment made in Company B (“Investment B”)


• Year 2: Investment A is sold for $50 million and fair market value (“FMV”) of Investment B determined to be $32 million


• Year 3: FMV of Investment B determined to be $25 million


• Year 4: Investment B sold for $31 million


The capital gains portion of the incentive fee, if any, would be:


• Year 1: None (no sales transactions)


• Year 2: $6 million (20% multiplied by $30 million realized capital gains on sale of Investment A)


• Year 3: None; $5 million (20% multiplied by $30 million cumulative realized capital gains less $5 million cumulative unrealized capital depreciation) less $6 million (Capital Gains Fee paid in Year 2)


• Year 4: $200,000; $6.2 million (20% multiplied by $31 million cumulative realized capital gains) less $6 million (Capital Gains Fee paid in Year 2)


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Alternative 2


Assumptions


• Year 1: $20 million investment made in Company A (“Investment A”), $30 million investment made in Company B (“Investment B”) and $25 million investment made in Company C (“Investment C”)


• Year 2: Investment A sold for $50 million, FMV of Investment B determined to be $25 million and FMV of Investment C determined to be $25 million


• Year 3: FMV of Investment B determined to be $27 million and Investment C sold for $30 million


• Year 4: FMV of Investment B determined to be $35 million


• Year 5: Investment B sold for $20 million


The capital gains portion of the incentive fee, if any, would be:


• Year 1: None (no sales transactions)


• Year 2: $5 million (20% multiplied by $30 million realized capital gains on Investment A less $5 million unrealized capital depreciation on Investment B)


• Year 3: $1.4 million; $6.4 million (20% multiplied by $32 million ($35 million cumulative realized capital gains on Investment A and Investment C less $3 million cumulative unrealized capital depreciation on Investment B)) less $5 million (Capital Gains Fee paid in Year 2)


• Year 4: $0.6 million; $7 million (20% multiplied by $35 million (cumulative realized capital gains on Investment A and Investment C)) less $6.4 million (cumulative Capital Gains Fee paid in all prior years)


• Year 5: None; $5 million (20% multiplied by $25 million ($35 million cumulative realized capital gains on Investments A and C less $10 million realized capital losses on Investment B)) less $7 million (cumulative Capital Gains Fee paid in all prior years))


Incentive fee expense, which only included Income Incentive Fees, was $339,609, $277,399, and $195,720 for the years ended December 31, 2021, 2020 and 2019, respectively.


Payment of Our Expenses


Prior to August 3, 2020, OFS Advisor paid the costs related to our organization and the Offering. From August 3, 2020 through February 1, 2022, CIM Capital, was responsible for bearing costs relating to the Offering. On February 2, 2022, OFS Advisor and CIM Capital entered into the Termination Agreement and, beginning February 2, 2022, OFS Advisor resumed responsibility for costs relating to the Offering.


Offering costs consist of costs incurred by OFS Advisor and its affiliates on our behalf for legal, accounting, printing and other offering expenses, including costs associated with technology integration between our systems and those of participating broker-dealers, permissible due diligence reimbursements, marketing expenses, employments costs and direct expenses of OFS Advisor or its affiliate’s employees, employees of their affiliates and others while engaged in marketing our common stock, which include the development of marketing materials and marketing presentations and training and educational meetings and generally coordinating the marketing process for us.


For so long as the Investment Advisory Agreement is in effect, we will reimburse OFS Advisor for the organization and offering expenses incurred by OFS Advisor on our behalf in an amount up to 1.5% of the gross proceeds raised by us in the Offering. Our obligation to reimburse OFS Advisor for the organization and offering costs incurred by OFS Advisor on our behalf will terminate three years from the date on which each such expense was incurred.


All investment professionals of OFS Advisor and/or its affiliates, when and to the extent engaged in providing investment advisory and management services to us, and the compensation and routine overhead expenses of personnel allocable to these services to us, are provided and paid for by OFS Advisor and not by us. We bear all other out-of-pocket costs and expenses of our operations and transactions.


Duration and Termination


Unless terminated earlier as described below, the Investment Advisory Agreement will remain in effect from year to year if approved annually by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, and, in either case, if also approved by a majority of our directors who are not “interested persons” as defined in the 1940 Act. The Investment Advisory Agreement automatically terminates in the event of its assignment, as defined in the 1940 Act, by OFS Advisor and may be terminated by either party without penalty upon not less than 60 days’ written notice to the


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other. The holders of a majority of our outstanding voting securities may also terminate the Investment Advisory Agreement without penalty upon not less than 60 days’ written notice.


Expense Support Agreement


OFS Advisor previously provided us expense support under the Prior Expense Support Agreement, pursuant to which OFS Advisor paid us a portion of our operating expenses (an “Expense Support Payment”) for each quarter in which we declared a distribution to our stockholders. From August 3, 2020 through February 1, 2022, pursuant to the Amended Expense Support Agreement, CIM Capital provided us with ongoing expense support. On February 2, 2022, pursuant to the Second Amended Expense Support Agreement, OFS Advisor resumed making Expense Support Payments. The ESAs are designed to ensure no portion of our distribution to stockholders will be paid from Offering proceeds, and will provide for expense reduction payments to us in any quarterly period our cumulative distributions to stockholders exceeds our cumulative distributable ordinary income and net realized gains.


The Second Amended Expense Support Agreement also provides for reimbursement of these payments by us to OFS Advisor, including Expense Support Payments previously made by CIM Capital, conditioned upon our maintenance of our historic distribution rate and our realization of an unsupported “other operating expenses” ratio below historic levels of supported expense ratios for the period(s) to be reimbursed. For this purpose, “other operating expenses” means all of our operating expenses, excluding organizational and offering expenses, base management fees and incentive fees, distribution and stockholder servicing fees, financing fees and interest, and brokerage commissions and extraordinary expenses. In addition, all reimbursement payments shall be deemed to relate to the earliest unreimbursed expense payments made by the Advisors to us within three years prior to the last business day of the quarter in which such reimbursement payment obligation is incurred.


The Second Expense Support Agreement may be terminated by OFS Advisor, without payment of any penalty, upon written notice to us. In addition, the Second Expense Support Agreement will automatically terminate in the event of (i) our termination of the  Investment Advisory Agreement, or (ii) our dissolution or liquidation. The expense reimbursement may not be made for the purpose or effect of increasing the amount of the incentive fee to be paid by us to OFS Advisor. OFS Advisor will not be entitled to reimbursement if our distribution rate is lower than the distribution rate made at the time the expenses were reimbursed or if the other operating expense ratio at the time of reimbursement exceeds the expense ratio that was in effect at the time the expenses were reimbursed.


Sub-Advisory Agreement


Effective August 3, 2020, OFS Advisor engaged CIM Capital to serve as our sub-adviser in accordance with the Sub-Advisory Agreement. Pursuant to the terms of the Sub-Advisory Agreement, CIM Capital evaluated and advised us on private capital market strategy, including market trends and terms, provided financial and strategic planning advice and analysis, interpreted market demand for products, assisted in establishing our operational readiness and selecting and negotiating engagements with third-party service providers, and coordinated the dissemination of customary information to interested parties.


On February 2, 2022, OFS Adviser and CIM Capital entered into the Termination Agreement pursuant to which the Sub-Advisory Agreement was terminated as of February 2, 2022.


Administration Agreement


Pursuant to the Administration Agreement, OFS Services, an affiliate of OFS Advisor, provides the administrative services necessary for us to operate. OFS Services furnishes us with office facilities and equipment, necessary software licenses and subscriptions and clerical, and bookkeeping and record keeping services at such facilities. Under the Administration Agreement, OFS Services performs, or oversees the performance of, our required administrative services, which includes maintenance of financial records necessary for the production of reports to our stockholders and all other reports and materials required to be filed with the SEC or any other regulatory authority. In addition, OFS Services assists us in determining and publishing our NAV, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, general supervision of the payment of our expenses, and the performance of administrative and professional services rendered to us by others. Under the Administration Agreement, OFS Services provides managerial assistance on our behalf to certain portfolio companies that accept our offer to provide such assistance. Payments under the Administration Agreement are equal to an amount based upon our allocable portion (subject to the review and approval of our Board) of OFS Services’ overhead in performing its obligations under the Administration Agreement, including rent, information technology, and our allocable portion of the cost of our officers, including our chief executive officer, chief financial officer, chief compliance officer, chief accounting officer, and their respective staffs. The Administration Agreement may be renewed annually with the approval of our Board, including a majority of our directors who are not “interested persons.” The Administration Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party. To the extent that OFS Services outsources any of its functions, we pay the fees associated with such functions at cost without incremental profit to OFS Services.


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We incurred administration fee expenses of $750,568, $842,972 and $675,155 for the years ended December 31, 2021, 2020 and 2019, respectively.


Indemnification


The Investment Advisory Agreement and the Administration Agreement both provide that OFS Advisor, OFS Services and their affiliates’ respective officers, directors, members, managers, stockholders and employees are entitled to indemnification from us from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement or the Administration Agreement, except where attributable to willful misfeasance, bad faith or gross negligence in the performance of such person’s duties or reckless disregard of such person’s obligations and duties under the Investment Advisory Agreement or the Administration Agreement.


Nothing in the Investment Advisory Agreement or Administration Agreement will be construed to provide for the indemnification of any party or any limitation on the liability of any party that would, in either case, be in violation of applicable law, but such provisions shall otherwise be construed so as to effectuate the provisions of the Investment Advisory Agreement or the Administration Agreement to the fullest extent permitted by applicable law.


Board Approval of the Investment Advisory and Administrative Agreements


Our Board, including our independent directors, approved the continuation of the Investment Advisory Agreement at a meeting held on April 1, 2021. In reaching a decision to approve the Investment Advisory Agreement, the board of directors reviewed a significant amount of information and considered, among other things:


• the nature, quality and extent of the advisory and other services to be provided to us by OFS Advisor;


• the fee structures of comparable externally managed BDCs that engage in similar investing activities;


• our projected operating expenses and expense ratio compared to BDCs with similar investment objectives;


• any existing and potential sources of indirect income to OFS Advisor from its relationship with us and the profitability of that relationship, including through the Investment Advisory Agreement;


• information about the services to be performed and the personnel performing such services under the Investment Advisory Agreement; and


• the organizational capability and financial condition of OFS Advisor and its affiliates.


Based on the information reviewed and the discussion thereof, the Board, including a majority of the non-interested directors, concluded that the investment advisory fee rates are reasonable in relation to the services to be provided and approved the Investment Advisory Agreement as being in the best interests of our stockholders.


The Administration Agreement was originally approved by our Board on March 31, 2016, became effective on July 15, 2016, and was continued on April 1, 2021.


REGULATION


General


We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers or sub-advisers), principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act.


In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by “a majority of our outstanding voting securities” as defined in the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (a) 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 (b) more than 50% of the outstanding voting securities of such company. We do not anticipate any substantial change in the nature of our business.


We generally cannot issue and sell our common stock at a price below net asset value per share. We may, however, issue and sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current NAV of our common stock if (1) our Board determines that such sale is in our best interests and the best interests of our stockholders, and (2) our stockholders have approved our policy and practice of making such sales within the preceding 12 months. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our Board, closely approximates the market value of such securities.


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We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our board of directors who are not interested persons and, in some cases, prior approval by the SEC.


The 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting the BDC to do so. On August 4, 2020, we received the Order from the SEC to permit us to co-invest in portfolio companies with certain Affiliated Funds in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions. The Order superseded a previous co-investment order we received on October 12, 2016 and provides us with greater flexibility to enter into co-investment transactions with Affiliated Funds. We are generally permitted to co-invest with Affiliated Funds if under the terms of the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching by us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies. As a result of exemptive relief, there could be significant overlap in the Company’s investment portfolio and the investment portfolios of OFS Capital and/or other portfolio funds established by OFS Advisor that could avail themselves of the exemptive relief.


In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs with exemptive orders, through December 31, 2020, we were permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates that are private funds, even if such other funds had not previously invested in such existing portfolio company. Without this order, such Affiliated Funds that are private funds would not be able to participate in such co-investments with us unless the Affiliated Funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the conditional exemptive order expired on December 31, 2020, the SEC’s Division of Investment Management has indicated that until March 31, 2022, it will not recommend enforcement action, to the extent that any BDC with an existing co-investment order continues to engage in certain transactions described in the conditional exemptive order, pursuant to the same terms and conditions described therein.


We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an “underwriter” as that term is defined in the Securities Act. Our intention is to not write (sell) or buy put or call options to manage risks associated with the publicly traded securities of our portfolio companies, except that we may enter into hedging transactions to manage the risks associated with interest rate fluctuations. However, we may purchase or otherwise receive warrants to purchase the common stock of our portfolio companies in connection with acquisition financing or other investments. Similarly, in connection with an acquisition, we may acquire rights to require the issuers of acquired securities or their affiliates to repurchase them under certain circumstances. We also do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Prior to January 19, 2021, except for registered money market funds, we generally were prohibited from acquiring more than 3% of the voting stock of any registered investment company, investing more than 5% of the value of our total assets in the securities of one investment company, or investing more than 10% of the value of our total assets in the securities of more than one investment company without obtaining exemptive relief from the SEC. However, the SEC adopted new rules, which became effective on January 19, 2021, that allow us to acquire the securities of other investment companies in excess of the 3%, 5%, and 10% limitations without obtaining exemptive relief  if we comply with certain conditions. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses as they will be indirectly responsible for the costs and expenses of such companies. None of our investment policies are fundamental and may be changed without stockholder approval.


Qualifying Assets


Under the 1940 Act, a BDC may not acquire any asset other than those listed in section 55(a) of the 1940 Act, which are referred to as “qualifying assets,” unless, at the time of acquisition, qualifying assets represent at least 70% of the company’s total assets, as defined by the 1940 Act. The principal categories of qualifying assets relevant to our business include:


(a) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer that:


• is organized under the laws of, and has its principal place of business in, the United States;


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• is not an investment company (other than a small business investment company wholly-owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and


• satisfies any of the following:


◦ does not have any class of securities listed on a national securities exchange or has any class of securities listed on a national securities exchange subject to a $250 million market capitalization maximum; or


◦ is controlled by a BDC or a group of companies including a BDC, the BDC actually exercises a controlling influence over the management or policies of the eligible portfolio company, and, as a result, the BDC has an affiliated person who is a director of the eligible portfolio company; or


◦ is a small and solvent company having total assets of not more than $4 million and capital surplus of not less than $2 million;


(b) Securities of any eligible portfolio company which we control;


(c) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident to such a private transaction, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities, was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements;


(d) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company;


(e) Securities received in exchange for or distributed on or with respect to securities described above, or pursuant to the exercise of warrants or rights relating to such securities; and


(f) Cash, cash equivalents, U.S. government securities or high-quality debt securities that mature in one year or less from the date of investment.


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.


The regulations defining qualifying assets may change over time. We may adjust our investment focus as needed to comply with and/or take advantage of any regulatory, legislative, administrative or judicial actions in this area.


Managerial Assistance to Portfolio Companies


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 the types of securities described in (a), (b) or (c) under "Qualifying Assets" above. However, in order to count portfolio securities as qualifying assets for the purpose of the 70% test, the BDC must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance. Where the BDC purchases such securities in conjunction with one or more other persons acting together, the BDC will satisfy this test if one of the other persons in the group makes available such managerial assistance, although this may not be the sole method by which the BDC satisfies the requirement to make available managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.


Temporary Investments


In addition to investing in other types of qualifying assets, as described above, our investments may include cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt investments that mature in one year or less from the date of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets, as defined by the 1940 Act, are qualifying assets or temporary investments. We may invest in highly rated commercial paper, U.S. Government agency notes, and U.S. Treasury bills or repurchase agreements relating to such securities that are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price that is greater than the purchase price by an amount that reflects an agreed-upon interest rate. Consequently, repurchase agreements are functionally similar to loans. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, the 1940 Act and certain diversification tests in order to qualify as a RIC for U.S. federal income tax purposes typically require us to limit the amount we invest with any one counterparty. Accordingly, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. OFS Advisor monitors the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.


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Warrants and Options


Under the 1940 Act, a BDC is subject to restrictions on the amount of warrants, options, restricted stock or rights to purchase shares of capital stock that it may have outstanding at any time. Under the 1940 Act, we may generally only offer warrants provided that (i) the warrants expire by their terms within ten years, (ii) the exercise or conversion price is not less than the current market value at the date of issuance, (iii) our stockholders authorize the proposal to issue such warrants, and our board of directors approves such issuance on the basis that the issuance is in the best interests of Hancock Park and its stockholders and (iv) if the warrants are accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities accompanying them has been publicly distributed. The 1940 Act also provides that the amount of our voting securities that would result from the exercise of all outstanding warrants, as well as options and rights, at the time of issuance may not exceed 25% of our outstanding voting securities. In particular, the amount of capital stock that would result from the conversion or exercise of all outstanding warrants, options or rights to purchase capital stock cannot exceed 25% of the BDC’s total outstanding shares of capital stock.


Senior Securities


A BDC generally is not permitted to incur indebtedness unless immediately after such borrowing it has an asset coverage ratio for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, Section 61(a)(2) of the 1940 Act provides that a BDC may reduce its asset coverage ratio, provided that certain conditions are met.


BDCs, like the Company, that do not have shares of common stock listed on a national securities exchange, may take advantage of the modified asset coverage ratio if stockholders representing at least a majority of the votes cast, when quorum is met, approve a proposal to do so. If we were to receive such stockholder approval, we would be permitted to increase our leverage capacity on the first day after such approval. Alternatively, we could increase the maximum amount of leverage we may incur to an asset coverage ratio of 150% if the “required majority” (as defined in Section 57(o) of the 1940 Act) of the independent members of our Board approved such increase with such approval becoming effective after one year. In either case, we would be required to extend to our stockholders, as of the date of such approval the opportunity to sell the shares of common stock that they hold (with 25% of such stockholders’ eligible shares being repurchased in each of the four calendar quarters following the calendar quarter in which the approval occurs) and we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks related to leverage.


On November 6, 2018, the Company’s Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved a proposal to permit the Company to reduce the minimum asset coverage ratio applicable to it from 200% to 150%, as permitted by Section 61(a)(2) of the 1940 Act and we extended to each of our stockholders as of November 6, 2018, an offer to repurchase the equity securities held by such stockholder as of November 6, 2018, with 25% of such equity securities to be repurchased in each of the four quarters following November 6, 2018. As a result, the asset coverage ratio test applicable to the Company decreased from 200% to 150%, effective November 6, 2019.


We may borrow money when the terms and conditions available are favorable to do so and are aligned with our investment strategy and portfolio composition. The use of borrowed funds or the proceeds of preferred stock to make investments would have its own specific benefits and risks, and all of the costs of borrowing funds or issuing preferred stock would be borne by holders of our common stock.


For a discussion of the risks associated with leverage, see “Item 1A. Risk Factors–Risks Related to BDCs". Regulations governing our operation as a BDC affect our ability to and the way in which we raise additional capital. As a BDC, we will need to raise additional capital, which will expose us to risks, including the typical risks associated with leverage.”


Exemptive Relief


We are generally prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our Board who are not interested persons and, in some cases, prior approval by the SEC. The SEC has interpreted the BDC prohibition on transactions with affiliates to prohibit all “joint transactions” between entities that share a common investment adviser. Further, the 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting the BDC to do so.


On August 4, 2020, we received exemptive relief from the SEC to permit us to co-invest in portfolio companies with certain Affiliated Funds in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions. The Order superseded a previous co-investment order we received on October 12, 2016 and provides us with greater flexibility to enter into co-investment transactions with Affiliated Funds. We are generally permitted to co-invest with Affiliated Funds if under the terms of the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the


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consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.


In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs with exemptive orders, through December 31, 2020, we were permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates that are private funds, even if such other funds had not previously invested in such existing portfolio company. Without this order, such affiliated funds that are private funds would not be able to participate in such co-investments with us unless the Affiliated Funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the conditional exemptive order has expired, the SEC’s Division of Investment Management has indicated that until March 31, 2022, it will not recommend enforcement action, to the extent that any BDC with an existing coinvestment order continues to engage in certain transactions described in the conditional exemptive order, pursuant to the same terms and conditions described therein.


The staff of the SEC has granted no-action relief permitting purchases of a single class of privately placed securities provided that the adviser negotiates no term other than price and certain other conditions are met. As a result, unless under the Order, we only expect to co-invest on a concurrent basis with certain funds advised by OFS Advisor when each of us will own the same securities of the issuer and when no term is negotiated other than price. Any such investment would be made, subject to compliance with existing regulatory guidance, applicable regulations and OFS Advisor’s allocation policy. If opportunities arise that would otherwise be appropriate for us and for another fund advised by OFS Advisor to invest in different securities of the same issuer, OFS Advisor will need to decide which fund will proceed with the investment. The decision by OFS Advisor to allocate an opportunity to another entity could cause us to forego an investment opportunity that we otherwise would have made. Moreover, except in certain circumstances, we will be unable to invest in any issuer in which another fund advised by OFS Advisor has previously invested.  As a result of exemptive relief, there could be significant overlap in the Company’s investment portfolio and the investment portfolios of OFS Capital and/or other portfolio funds established by the Advisor that could avail themselves of the exemptive relief.


Other


We are subject to periodic examination by the SEC for compliance with the Exchange Act and the 1940 Act.


We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us 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.


We and OFS Advisor each have adopted and implemented written policies and procedures reasonably designed to prevent violation of relevant federal securities laws, will review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and have designated a chief compliance officer to be responsible for administering the policies and procedures.


Our internet address is www.hancockparkbdc.com . We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.


Codes of Ethics


We and OFS Advisor have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements. Our code of ethics is available, free of charge, on our website at www.hancockparkbdc.com .


Proxy Voting Policies and Procedures


We have delegated our proxy voting responsibility to OFS Advisor. The proxy voting policies and procedures of OFS Advisor are set out below. The guidelines are reviewed periodically by OFS Advisor and our directors who are not “interested persons,” and, accordingly, are subject to change. For purposes of these proxy voting policies and procedures described below, “we,” “our” and “us” refer to OFS Advisor.


Introduction


As an investment adviser registered under the Advisers Act, we have a fiduciary duty to act solely in the best interests of our clients. As part of this duty, we recognize that we must vote client securities in a timely manner free of conflicts of interest and in the best interests of our clients.


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


Proxy Policies


We vote proxies relating to our portfolio securities in what we perceive to be the best interest of our clients. We review on a case-by-case basis each proposal submitted to a stockholder vote to determine its effect on the portfolio securities held by our clients. In most cases we will vote in favor of proposals that we believe are likely to increase the economic value of the underlying portfolio securities held by our clients. Although we will generally vote against proposals that may have a negative effect on our clients’ portfolio securities, we may vote for such a proposal if there exist compelling long-term reasons to do so.


Our proxy voting decisions are made by those senior officers who are responsible for monitoring each of our clients’ investments. To ensure that our vote is not the product of a conflict of interest, we require that (1) anyone involved in the decision-making process disclose to our 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 (2) employees involved in the decision-making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from interested parties. Where conflicts of interest may be present, we will disclose such conflicts to our client, including with respect to the Company, those directors who are not interested persons and we may request guidance from such persons on how to vote such proxies for their account.


Proxy Voting Records


You may obtain information about how we voted proxies for the Company, free of charge, by making a written request for proxy voting information to: Hancock Park Corporate Income, Inc., 10 S. Wacker Drive, Suite 2500, Chicago, Illinois 60606, Attention: Investor Relations, or by calling the Company at (847) 734-2060. The SEC also maintains a website at http://www.sec.gov that contains such information.


Privacy Principles


We are committed to maintaining the privacy of our stockholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.


Generally, we do not receive any nonpublic personal information relating to our stockholders, although certain nonpublic personal information of our stockholders may become available to us. We do not disclose any nonpublic personal information about our stockholders or former stockholders to anyone, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third-party administrator).


We restrict access to nonpublic personal information about our stockholders to employees of OFS Advisor and its affiliates with a legitimate business need for the information. We maintain physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our stockholders.


Emerging Growth Company


We are an emerging growth company as defined in the JOBS Act and are eligible to take advantage of certain specified reduced disclosure and other requirements that are otherwise generally applicable to public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). We expect to remain an emerging growth company for up to five years following the completion of our initial public offering or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) December 31 of the fiscal year that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the preceding three-year period. In addition, we will take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.


Material U.S. Federal Income Tax Considerations


Election to be Taxed as a RIC


We have elected to be taxed as a RIC under Subchapter M of the Code. As a RIC, we are not required to pay corporate-level U.S. federal income taxes on any income that we distribute to our stockholders from our otherwise taxable earnings and profits. To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements, as described below. In addition, to receive RIC tax treatment, we must meet the Annual Distribution Requirement. The excess of net long-term capital gains over net short-term capital losses, if any ("Net Capital


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Gains"), are not a component of the Annual Distribution Requirement, but impacts taxable income if not distributed as discussed below.


Taxation as a RIC


If we:


• maintain our qualification 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 ICTI or Net Capital Gains we distribute to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any ICTI or Net Capital Gain not distributed (or deemed distributed) to our stockholders.


We are also 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 (both long-term and short-term) for the one-year period ending October 31 in that calendar year (or, if we so elect, for that calendar year) and (3) any income and gains recognized, but not distributed, in preceding years and on which we paid no U.S. federal income tax (the “Excise Tax Avoidance Requirement”). We may choose to retain a portion of our ordinary income and/or capital gain net income in any year and pay the 4% U.S. federal excise tax on the retained amounts.


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


• continue to qualify as a BDC under the 1940 Act at all times during each taxable year;


• derive in each taxable year at least 90% of our gross income from dividends, interest, certain payments with respect to loans of stock and securities, gains from the sale or other disposition of stock, securities, or foreign currencies and other income (including but not limited to gains from options, futures or forward contracts) derived with respect to our business of investing in such stock, securities or currencies, and net income derived from interests in “qualified publicly traded partnerships,” as such term is defined in the Code (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, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of our assets and 10% of the outstanding voting securities of such 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 we control (as determined under applicable tax rules) and that are engaged in the same, similar or related trades or businesses or of one or more qualified publicly traded partnerships (the “Diversification Tests”).


We may invest in partnerships, including qualified publicly traded partnerships, which may result in our being subject to state, local or foreign income taxes, franchise taxes, or withholding liabilities.


We are required to recognize ICTI in circumstances in which we have not received a corresponding payment in cash. For example, we hold debt obligations that are treated under applicable tax rules as issued with OID and debt instruments with PIK interest, and we must include in ICTI each year the portion of the OID and PIK interest that accrues for that year (as it accrues over the life of the obligation), irrespective of whether the cash representing such income is received by us in that taxable year. The continued recognition of non-cash ICTI may cause difficulty in meeting the Annual Distribution Requirement. We may be required to sell investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital, or forgo new investment opportunities to meet this requirement. 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.


We are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, 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.  Moreover, 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.


Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things, (1) treat dividends that would otherwise qualify for the dividends received deduction or constitute


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qualified dividend income as ineligible for such treatment, (2) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (3) convert lower-taxed long-term capital gain into higher-taxed short-term capital gain or ordinary income, (4) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (5) cause us to recognize income or gain without receipt of a corresponding distribution of cash, (6) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (7) adversely alter the characterization of certain complex financial transactions and (8) produce income that will not be considered "qualifying income" for purposes of the 90% Income Test. We will monitor our transactions and may make certain tax elections to mitigate the potential adverse effect of these provisions, but there can be no assurance that any adverse effects of these provisions will be mitigated.


Our investments in Structured Finance Notes are “passive foreign investment company” (“PFIC”) investments, which can subject us 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 dividend to our stockholders. Additional charges in the nature of interest generally would also be imposed on us for the deemed delay in our reporting of such excess distribution and the earning of such income by underlying PFIC. However, we have elected, and expect to continue to elect, to treat our investments in PFICs as a “qualified electing funds” under the Code (a “QEF”), and 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. In lieu of a QEF election, we may in the future 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 its 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 stock 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 4% U.S. federal excise tax.


Although the Code generally provides that the income inclusions from a QEF will be ‘‘good income’’ for purposes of the 90% Income Test to the extent that the QEF 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 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 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. Accordingly, under current law, we believe that the income inclusions from a QEF would be ‘‘good income’’ for purposes of the 90% Income Test.  However, no guarantee can be made that the IRS would not assert that such income would not be ‘‘good income’’ for purposes of the 90% Income Test to the extent that we do not receive timely distributions of such income from the QEF. If such income were not considered ‘‘good income’’ for purposes of the 90% Income Test, we may fail to qualify as a RIC.


The IRS and U.S. Treasury Department have issued proposed regulations that provide that the income inclusions from a QEF 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 these regulations are finalized, we will carefully monitor our investments to avoid disqualification as a RIC.


Some of the income and fees that we recognize may result in income that will not be "qualifying income" for the 90% Income Test. In order to ensure that such income and fees do not disqualify us as a RIC for a failure to satisfy the 90% Income Test, we may recognize such income and fees directly or indirectly through one or more entities taxed as corporations for U.S. federal income tax purposes. Such corporations are required to pay U.S. corporate income tax on their earnings, which ultimately reduces our return on such income and fees. We have invested in equity investments through HPCI-MB, our subsidiary taxed as a C-Corporation, to prevent related non-qualifying income from adversely affecting our RIC status. As of December 31, 2021 and 2020, equity investments held in HPCI-MB had an aggregate fair value of $274,408 and $939,000, respectively.


Failure to Qualify as a RIC


If we are unable to maintain our qualification as a RIC, we will be subject to tax on all of our ICTI and Net Capital Gains at regular corporate rates; we will not receive a dividend deduction for any distributions to our stockholders. Distributions would not be required, and any distributions would be taxable to our stockholders as ordinary dividend income that would, for qualifying non-corporate U.S. stockholders, be eligible for the current 20% maximum rate to the extent of our current and accumulated earnings and profits (subject to limitations under the Code). Subject to certain limitations under the Code, corporate distributions would be eligible for the dividends-received deduction. Distributions in 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 (reducing that basis accordingly), and any remaining distributions would be treated as a capital gain. To qualify again to be taxed as a RIC in a subsequent year, we would be required to distribute to our stockholders our earnings and profits attributable to non-RIC years. In addition, if we failed to qualify as a RIC for a period greater than two taxable years, then we would be


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required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if we had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of five years, in order to qualify as a RIC in a subsequent year.


Conflicts of Interests


We generally are prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our independent directors and, in some cases, of the SEC. Those transactions include purchases and sales, and so-called “joint” transactions, in which we and one or more of our affiliates engage in certain types of profit-making activities. Any person that owns, directly or indirectly, five percent or more of our outstanding voting securities will be considered an affiliate for purposes of the 1940 Act, and we generally are prohibited from engaging in purchases from, sales of assets to, or joint transactions with, such affiliates, absent the prior approval of our independent directors. Additionally, without the approval of the SEC, we are prohibited from engaging in purchases from, sales of assets to, or joint transactions with, any of our officers, directors, and employees, and advisors (and any control affiliates).


We may, however, invest alongside certain related parties or their respective other clients in certain circumstances where doing so is consistent with current law and SEC staff interpretations. For example, we may invest alongside such accounts consistent with guidance promulgated by the SEC staff permitting us and such other accounts to purchase interests in a single class of privately placed securities so long as certain conditions are met, including that OFS Advisor, acting on our behalf and on behalf of other clients, negotiates no term other than price. Co-investment with such other accounts is not permitted or appropriate under this guidance when there is an opportunity to invest in different securities of the same issuer or where the different investments could be expected to result in a conflict between our interests and those of other accounts.


Conflicts Related to Portfolio Investments


Conflicts may arise when we make an investment in conjunction with an investment being made by an Affiliated Account, or in a transaction where an Affiliated Account has already made an investment. Investment opportunities are, from time to time, appropriate for more than one account in the same, different or overlapping securities of a portfolio company’s capital structure. Conflicts arise in determining the terms of investments, particularly where these accounts may invest in different types of securities in a single portfolio company. Questions arise as to whether payment obligations and covenants should be enforced, modified or waived, or whether debt should be restructured, modified or refinanced.


We may invest in debt and other securities of companies in which Affiliated Accounts hold those same securities or different securities, including equity securities.  In the event that such investments are made by us, our interests will at times conflict with the interests of such Affiliated Accounts, particularly in circumstances where the underlying company is facing financial distress.  Decisions about what action should be taken, particularly in troubled situations, raise conflicts of interest, including, among other things, whether or not to enforce claims, whether or not to advocate or initiate a restructuring or liquidation inside or outside of bankruptcy, and the terms of any work-out or restructuring.  The involvement of Affiliated Accounts at both the equity and debt levels could inhibit strategic information exchanges among fellow creditors, including among us or Affiliated Accounts.  In certain circumstances, we or an Affiliated Account may be prohibited from exercising voting or other rights and may be subject to claims by other creditors with respect to the subordination of their interest.


In the event that we or an Affiliated Account has a controlling or significantly influential position in a portfolio company, that account may have the ability to elect some or all of the board of directors of such a portfolio company, thereby controlling the policies and operations of such portfolio company, including the appointment of management, future issuances of securities, payment of dividends, incurrence of debt and entering into extraordinary transactions.  In addition, a controlling account is likely to have the ability to determine, or influence, the outcome of operational matters and to cause, or prevent, a change in control of such a company.  Such management and operational decisions may, at times, be in direct conflict with other accounts that have invested in the same portfolio company that do not have the same level of control or influence over the portfolio company.


If additional capital is necessary as a result of financial or other difficulties, or to finance growth or other opportunities, the accounts may or may not provide such additional capital, and if provided each account will supply such additional capital in such amounts, if any, as determined by OFS Advisor.  In addition, a conflict arises in allocating an investment opportunity if the potential investment target could be acquired by us, an Affiliated Account, or a portfolio company of an Affiliated Account.  Investments by more than one account of OFS Advisor or its affiliates in a portfolio company also raise the risk of using assets of an account of OFS Advisor or its affiliates to support positions taken by other accounts of OFS Advisor or its affiliates, or that an account may remain passive in a situation in which it is entitled to vote.  In addition, there may be differences in timing of entry into, or exit from, a portfolio company for reasons such as differences in strategy, existing portfolio or liquidity needs, different account mandates or fund differences, or different securities being held. These variations in timing may be detrimental to us.


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The application of our or an Affiliated Account's governing documents and the policies and procedures of OFS Advisor are expected to vary based on the particular facts and circumstances surrounding each investment by two or more accounts, in particular when those accounts are in different classes of an issuer’s capital structure (as well as across multiple issuers or borrowers within the same overall capital structure) and, as such, there may be a degree of variation and potential inconsistencies, in the manner in which potential or actual conflicts are addressed.


Co-Investment with Affiliates


On August 4, 2020, we received the Order from the SEC to permit us to co-invest in portfolio companies with certain Affiliated Funds in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions. The Order superseded a previous co-investment order we received on October 12, 2016 and provides us with greater flexibility to enter into co-investment transactions with Affiliated Funds. We are generally permitted to co-invest with Affiliated Funds if under the terms of the Order, a "required majority" (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.


In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs with exemptive orders, through December 31, 2020, we were permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates that are private funds, even if such other funds had not previously invested in such existing portfolio company. Without this order, such Affiliated Funds that are private funds would not be able to participate in such co-investments with us unless the Affiliated Funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the conditional exemptive order expired on December 31, 2020, the SEC’s Division of Investment Management has indicated that until March 31, 2022, it will not recommend enforcement action, to the extent that any BDC with an existing co-investment order continues to engage in certain transactions described in the conditional exemptive order, pursuant to the same terms and conditions described therein.


When we invest alongside Affiliated Accounts, OFS Advisor will, to the extent consistent with applicable law, regulatory guidance, or the Order, allocate investment opportunities in accordance with its allocation policy. Under this allocation policy, if two or more investment vehicles with similar or overlapping investment strategies are in their investment periods, an available opportunity will be allocated based on the provisions governing allocations of such investment opportunities in the relevant organizational, offering or similar documents, if any, for such investment vehicles. In the absence of any such provisions, OFS Advisor will consider the following factors and the weight that should be given with respect to each of these factors:


• investment guidelines and/or restrictions, if any, set forth in the applicable organizational, offering or similar documents for the investment vehicles;


• the status of tax restrictions and tests and other regulatory restrictions and tests;


• risk and return profile of the investment vehicles;


• suitability/priority of a particular investment for the investment vehicles;


• if applicable, the targeted position size of the investment for the investment vehicles


• level of available cash for investment with respect to the investment vehicles;


• total amount of funds committed to the investment vehicles; and


• the age of the investment vehicles and the remaining term of their respective investment periods, if any.


When not relying on the Order, priority as to opportunities will generally be given to clients that are in their “ramp-up” period, or the period during which the account has yet to reach sufficient scale such that its investment income covers its operating expenses, over the accounts that are outside their ramp-up period but still within their investment or re-investment periods. However, application of one or more of the factors listed above, or other factors determined to be relevant or appropriate, may result in the allocation of an investment opportunity to a fund no longer in its ramp-up period over a fund that is still within its ramp-up period.


In situations where co-investment with Affiliated Accounts is not permitted or appropriate, OFS Advisor will need to decide which account will proceed with the investment. The decision by OFS Advisor to allocate an opportunity to another entity could cause us to forego an investment opportunity that we otherwise would have made. These restrictions, and similar restrictions that limit our ability to transact business with our officers or directors or their affiliates, may limit the scope of investment opportunities that would otherwise be available to us.


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Item 1A.    Risk Factors


RISK FACTORS


Investing in our common stock involves a number of significant risks. In addition to the other information contained in this Annual Report on Form 10-K, you should consider carefully the following information before making an investment in our common stock. The risks set out below are not the only risks we face. 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 could decline, and you may lose all or part of your investment. The risk factors described below are the principal risk factors associated with an investment in our common stock, as well as those factors generally associated with an investment company with investment objectives, investment policies and capital structures similar to ours.


Summary Risk Factors


We are subject to risks related to our business and structure.


• Global economic, political and market conditions caused by uncertainty related to the COVID-19 pandemic has affected, and may continue to adversely affect our business, results of operations and financial condition and those of our portfolio companies.


• Due to the COVID-19 pandemic or other disruptions in the economy, we may not be able to increase our dividends and may reduce or defer our dividends and choose to incur U.S. federal excise tax in order preserve cash and maintain flexibility.


• We may finance our investments with borrowed money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.


• A significant amount of our portfolio investments are recorded at fair value as determined in good faith by our Board and, as a result, there may be uncertainty as to the value of our portfolio investments.


• We are dependent upon the OFSC senior professionals for our future success and upon their access to the investment professionals and partners of OFSC and its affiliates


• OFS Advisor 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.


• The Company is dependent on OFS Advisor for Expense Support Payments, which can be terminated by OFS Advisor, without payment of any penalty, with or without notice, to us at anytime.


• OFS Services can resign from its role as our Administrator under the Administration Agreement, and we may not be able to find a suitable replacement, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.


• The valuation process for certain of our portfolio holdings may create a conflict of interest.


• Our incentive fee may induce OFS Advisor to make certain investments, including speculative investments.


• Changes in interest rates will affect our cost of capital and net investment income.


• OFS Advisor’s liability is limited under the Investment Advisory Agreement, and we have agreed to indemnify OFS Advisor against certain liabilities, which may lead OFS Advisor to act in a riskier manner on our behalf than it would when acting for its own account.


• Our Board may change our investment objectives, operating policies and strategies without prior notice or stockholder approval.


• We will be subject to corporate-level U.S. federal income tax if we are unable to maintain our tax treatment as a RIC.


• Our subsidiaries and portfolio companies may be unable to make distributions to us that will enable us to meet RIC requirements, which could result in the imposition of an entity-level tax.


• We may in the future choose to pay distributions in our own stock, in which case stockholders may be required to pay tax in excess of the cash they receive.


• Because we expect to distribute substantially all of our net ordinary income and net realized capital gains to our stockholders, we may need additional capital to finance our growth and such capital may not be available on favorable terms or at all.


• Our ability to enter into transactions with our affiliates is restricted, which may limit the scope of investments available to us.


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• Changes in the laws or regulations governing our business, or changes in the interpretations thereof, and any failure by us to comply with these laws or regulations, could have a material adverse effect on our, and our portfolio companies’ business, results of operations or financial condition.


• Insufficient cash flows may increase our risk of default of our debt obligations, including under our Unsecured Notes and our PWB Credit Facility.


We are subject to risks related to our investments.


• Events outside of our control, including public health crises, may negatively affect the results of our operations.


• Our investments in private and middle-market portfolio companies are generally considered lower credit quality obligations, are risky, and we could lose all or part of our investment.


• Any of our portfolio companies operating in the Health Care and Social Assistance industry are subject to extensive government regulation and certain other risks particular to that industry.


• Inflation may adversely affect the business, results of operations and financial condition of our portfolio companies.


• Our investments in Structured Finance Notes carry additional risks to the risks associated with investing in private debt.


• Our investments in Structured Finance Notes are more likely to suffer a loss of all or a portion of their value in the event of a default.


• We are a non-diversified management investment company within the meaning of the 1940 Act, and therefore we are not limited by the 1940 Act with respect to the proportion of our assets that may be invested in securities of a single issuer.


• If we make subordinated investments, the obligors or the portfolio companies may not generate sufficient cash flow to service their debt obligations to us.


• The interest rates of our loans to our portfolio companies might be subject to change based on recent regulatory changes, including the transition away from LIBOR and the adoption of alternative reference rates, which could affect our results of operations.


• There is a risk that stockholders may not receive distributions or that our distributions may not grow over time and a portion of our distributions may be a return of capital.





Risks Related to the COVID-19 Pandemic





Global economic, political and market conditions caused by uncertainty related to the COVID-19 pandemic has affected, and may continue to adversely affect our business, results of operations and financial condition and those of our portfolio companies.


A novel strain of coronavirus (“COVID-19”) initially appeared in China in late 2019 and rapidly spread to other countries, including the United States. General uncertainty surrounding the dangers and impact of COVID-19 (including the preventative measures taken in response thereto) and additional uncertainty regarding new variants of COVID-19, most notably the Delta and Omicron variants, have to date impacted and continue to impact supply chains, consumer demand and the operations of many businesses, as well as created labor shortages, increased inflationary pressure and overall economic and financial market instability both globally and in the United States. There is considerable uncertainty surrounding the full economic impact of the COVID-19 pandemic and the long-term effects on the U.S. and global financial markets.


Any disruptions in the capital markets, as a result of the COVID-19 pandemic or otherwise, may increase the spread between the yields realized on risk-free and higher risk securities and can result in illiquidity in parts of the capital markets, significant write-offs in the financial sector and re-pricing of credit risk in the broadly syndicated market. These and any other unfavorable economic conditions created by the COVID-19 pandemic and related restrictions and closures could increase our funding costs, limit our access to the capital markets and result in a decision by lenders not to extend credit to us. In addition, our success depends in substantial part on the management, skill and acumen of OFS Advisor, whose operations may be adversely impacted, including through quarantine measures and travel restrictions imposed on its investment professionals or service providers, or any related health issues of such investment professionals or service providers. Though all of OFS Advisor’s employees are able to work remotely, these closures have nevertheless affected many of our borrowers and many businesses through which we seek new borrowers. These effects, individually or in the aggregate, have had, and may in the future continue to have, an adverse impact on our business, financial condition, operating results and cash flows and such adverse impacts may be material.


In addition, the COVID-19-related restrictions and closures and related market conditions have resulted in, and could further result in, certain of our portfolio companies halting or significantly curtailing operations and negative impacts to the


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supply chains of certain of our portfolio companies. The financial results of middle-market companies in which we primarily invest, have experienced deterioration, which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults, and further deterioration will further depress the outlook for middle-market companies. Further, adverse economic conditions have decreased, and may in the future decrease, the value of collateral securing some of our loans and the value of our equity investments. Such conditions have required, and may in the future require, us to modify the payment terms of our investments, including changes in PIK interest provisions and/or cash interest rates. The performance of certain of our portfolio companies has been, and in the future may be, negatively impacted by these economic or other conditions, which can result in our receipt of reduced interest income from our portfolio companies and/or realized and unrealized losses related to our investments, and, in turn, may adversely affect distributable income and have a material adverse effect on our results of operations. In addition, as governments ease COVID-19 related restrictions, certain of our portfolio companies may experience increases in health and safety expenses, payroll costs and other operating expenses. The COVID-19 pandemic has also led to significant interest rate reductions by the Federal Reserve, including dropping certain rates to near zero, and market uncertainty, which has had, and may continue to have, a materially adverse effect on us.


On March 27, 2020, the U.S. government enacted the CARES Act, which contains provisions intended to mitigate the adverse economic effects of the COVID-19 pandemic. On December 27, 2020, the U.S. government passed the December 2020 COVID Relief Package. Additionally, on March 11, 2021, the U.S. government enacted the American Rescue Plan, which included additional funding to mitigate the adverse economic effects of the COVID-19 pandemic. It is uncertain whether, or to what extent, our portfolio companies will be able to benefit from the CARES Act, the December 2020 COVID Relief Package, the American Rescue Plan, or any other subsequent legislation intended to provide financial relief or assistance.


As a result of the disruption and pressures on liquidity caused by the COVID-19 pandemic, certain of our portfolio companies have been, or may continue to be, incentivized to draw on most, if not all, of the unfunded portion of any revolving or delayed draw term loans made by us, subject to availability under the terms of such loans.


We are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it impacts our portfolio companies, employees, due diligence and underwriting processes, and financial markets. The U.S. capital markets experienced extreme volatility and disruption following the outbreak of the COVID-19 pandemic and certain economists and major investment banks have expressed concern that the continued spread of the virus globally could lead to a prolonged period of world-wide economic downturn.


Due to the COVID-19 pandemic or other disruptions in the economy, we may not be able to increase our dividends and may reduce or defer our dividends and choose to incur U.S. federal excise tax in order preserve cash and maintain flexibility.


As a BDC, we are not required to make any distributions to stockholders other than in connection with our election to be taxed as a RIC under subchapter M of the Code. In order to maintain our tax treatment as a RIC, we must distribute to stockholders for each taxable year at least 90% of our ICTI (i.e., net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses). If we qualify for taxation as a RIC, we generally will not be subject to corporate-level U.S. federal income tax on our ICTI and net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) that we timely distribute to stockholders. We will be subject to a 4% U.S. federal excise tax on undistributed earnings of a RIC unless we distribute each calendar year at least the sum of (i) 98.0% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year, and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no U.S. federal income tax.


Under the Code, we may satisfy certain of our RIC distributions with dividends paid after the end of the current year. In particular, if we pay a distribution in January of the following year that was declared in October, November, or December of the current year and is payable to stockholders of record in the current year, the dividend will be treated for all U.S. federal tax purposes as if it were paid on December 31 of the current year. In addition, under the Code, we may pay dividends, referred to as “spillover dividends,” that we (i) declare on or before the later of the 15th day of the 9th month following the close of our taxable year or in the case of an extension of time for filing our return for the taxable year, the due date for filing such return taking into account such extension and (ii) pay during the following taxable year (but not later than the date of the first dividend payment of the same type of dividend made after such declaration). Such dividends will allow us to maintain our qualification for taxation as a RIC and eliminate our liability for corporate-level U.S. federal income tax. Under these spillover dividend procedures, we may defer distribution of income earned during the current year until December of the following year. For example, we may defer distributions of income earned during 2021 until as late as December 31, 2022. However, if we choose to pay a spillover dividend, we will still incur the 4% U.S. federal excise tax on some or all of the distribution.


Due to the COVID-19 pandemic or other disruptions in the economy, we anticipate that we may take certain actions with respect to the timing and amounts of our distributions in order to preserve cash and maintain flexibility. For example, we


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anticipate that we may not be able to increase our dividends. In addition, we may reduce our dividends and/or defer our dividends to the following taxable year. If we defer our dividends, we may choose to utilize the spillover dividend rules discussed above and incur the 4% U.S. federal excise tax on such amounts. To further preserve cash, we may combine these reductions or deferrals of dividends with one or more distributions that are payable partially in our stock as discussed below under the risk factor “We may in the future choose to pay distributions in our own stock, in which case stockholders may be required to pay tax in excess of the cash they receive.”


Risks Related to Our Business and Structure


We have a limited operating history.


We commenced operations on August 30, 2016 and are subject to all of the business risks and uncertainties associated with any business with a limited operating history, including the risk that we will not achieve or sustain our investment objective and that the value of our common stock could decline substantially.


We are dependent upon the OFSC senior professionals for our future success and upon their access to the investment professionals and partners of OFSC and its affiliates.


We do not have any internal management capacity or employees. We will depend on the diligence, skill and network of business contacts of the OFSC senior professionals to achieve our investment objective. Our future success will depend, to a significant extent, on the continued service and coordination of the OFSC senior management team, particularly Bilal Rashid, Senior Managing Director and President of OFSC, Jeffrey A. Cerny, Senior Managing Director and Treasurer of OFSC and Kyde Sharp, Managing Director of OFSC. Each of these individuals is an employee at will of OFSC. In addition, we rely on the services of Richard Ressler, Chairman of the executive committee of OFSAM and Chairman of certain of the Advisor Investment Committees, pursuant to a consulting agreement with Orchard Capital Corporation. The departure of Mr. Ressler or any of the senior managers of OFSC, or of a significant number of its other investment professionals, could have a material adverse effect on our ability to achieve our investment objective.


We expect that OFS Advisor will continue to evaluate, negotiate, structure, close and monitor our investments in accordance with the terms of the Investment Advisory Agreement. We can offer no assurance, however, that OFSC senior professionals will continue to provide investment advice to us. If these individuals do not maintain their existing relationships with OFSC and its affiliates and do not develop new relationships with other sources of investment opportunities, we may not be able to grow our investment portfolio or achieve our investment objective. In addition, individuals with whom the OFSC senior professionals have relationships are not obligated to provide us with investment opportunities. Therefore, we can offer no assurance that such relationships will generate investment opportunities for us.


OFS Advisor is a subsidiary of OFSAM, has no employees and depends upon access to the investment professionals and other resources of OFSC and its affiliates to fulfill its obligations to us under the Investment Advisory Agreement. OFS Advisor also depends upon OFSC to obtain access to deal flow generated by the professionals of OFSC and its affiliates. Under a Staffing Agreement between OFSC, a subsidiary of OFSAM,  and OFS Advisor, OFSC has agreed to provide OFS Advisor with the resources necessary to fulfill these obligations. The Staffing Agreement provides that OFSC will make available to OFS Advisor experienced investment professionals and access to the senior investment personnel of OFSC for purposes of evaluating, negotiating, structuring, closing and monitoring our investments. We are not a party to this Staffing Agreement and cannot assure stockholders that OFSC will fulfill its obligations under the agreement. If OFSC fails to perform, we cannot assure stockholders that OFS Advisor will enforce the Staffing Agreement or that such agreement will not be terminated by either party or that we will continue to have access to the investment professionals of OFSC and its affiliates or their information and deal flow.


The Middle-Market Investment Committee that oversees our investment activities are provided by OFS Advisor under the Investment Advisory Agreement. The Middle-Market Investment Committee consists of Richard Ressler (Chairman), Jeffrey A. Cerny, Kyde Sharp and Bilal Rashid. The loss of any member of the Middle-Market Investment Committee or of other OFSC senior professionals could limit our ability to achieve our investment objective and operate as we anticipate. This could have a material adverse effect on our financial condition and results of operation.


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


We depend upon OFS Advisor to maintain relationships with financial institutions, sponsors and investment professionals, and we will continue to rely to a significant extent upon these relationships to provide us with potential investment opportunities. If OFS Advisor fails to maintain such relationships, or to develop new relationships with other sources of investment opportunities, we will not be able to grow our investment portfolio. In addition, individuals with whom the principals of OFS Advisor have relationships are not obligated to provide us with investment opportunities, and, therefore, we can offer no assurance that these relationships will generate investment opportunities for us in the future.


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Our financial condition and results of operation will depend on our ability to manage our business effectively.


Our ability to achieve our investment objective and grow will depend on our ability to manage our business. This will depend, in turn, on the ability of the Advisor Investment Committees to identify, invest in and monitor companies that meet our investment criteria. The achievement of our investment objectives on a cost-effective basis will depend upon the Advisor Investment Committees' ability to execute our investment process, their ability to provide competent, attentive and efficient services to us and, to a lesser extent, our access to financing on acceptable terms. OFS Advisor has substantial responsibilities under the Investment Advisory Agreement. OFS Advisor's senior professionals and other personnel of OFS Advisor's affiliates, including OFSC, may be called upon to provide managerial assistance to our portfolio companies. These activities may distract them or slow our rate of investment. Any failure to manage our business and our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.


To the extent PIK interest and PIK dividends constitute a portion of our income, we will be required to include such income in taxable and accounting income prior to receipt of cash representing such income.


Our investments may include contractual PIK interest or PIK dividends, which represents contractual interest or dividends added to a loan balance or equity security and due at the end of such loan’s or equity security’s term. To the extent PIK interest and PIK dividends constitute a portion of our income, we will be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash. Such risks include:


• The higher interest or dividend rates of PIK instruments reflect the payment deferral and increased risk associated with these instruments, and PIK instruments often represent a significantly higher risk than non-PIK instruments.


• Even if the accounting conditions for income accrual are met, the borrower could still default when our actual collection is supposed to occur at the maturity of the obligation.


• PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. PIK income may also create uncertainty about the source of our cash distributions.


• For accounting purposes, any cash distributions to stockholders representing PIK income are not treated as coming from paid-in capital. As a result, despite the fact that a distribution representing PIK income could be paid out of amounts invested by our stockholders, the 1940 Act does not require that stockholders be given notice of this fact by reporting it as a return of capital.


• PIK interest or dividends have the effect of generating investment income at a compounding rate, thereby further increasing the incentive fees payable to OFS Advisor. Similarly, all things being equal, the deferral associated with PIK interest or dividends also decreases the investment principal-to-value ratio at a compounding rate.


A significant amount of our portfolio investments are recorded at fair value as determined in good faith by our Board and, as a result, there may be uncertainty as to the value of our portfolio investments.


Many of our portfolio investments will take 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 at fair value as determined in good faith by our Board, including to reflect significant events affecting the value of our securities. Most of our investments (other than cash and cash equivalents) are classified as Level 3 under Accounting Standards Codification Topic 820, Fair Value Measurement and Disclosures (ASC Topic 820). This means that a majority of our portfolio valuations are based on unobservable inputs and our own assumptions about how market participants would price the asset or liability in question. Inputs into the determination of fair value of these portfolio investments require significant management judgment or estimation. Even if observable market data are available, such information may be the result of consensus pricing information or broker quotes, which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimers materially reduces the reliability of such information. We presently retain the services of independent service providers to prepare the valuation of these securities.


The types of factors that the Board takes into account in determining the fair value of our investments generally include, as appropriate, comparison to third-party yield benchmarks and comparison to publicly traded securities including such factors as yield, maturity and measures of credit quality, the enterprise value of a portfolio company, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and cash flow, the markets in which the portfolio company does business 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 NAV 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.


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We adjust quarterly the valuation of our portfolio to reflect our Board's determination of the fair value of each investment in our portfolio. Any changes in fair value are recorded in our statement of income as net change in unrealized appreciation or depreciation.


We may finance our investments with borrowed money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.


The use of leverage magnifies the potential for gain or loss on amounts invested. The use of leverage is generally considered a speculative investment technique and increases the risks associated with investing in our securities. We may pledge up to 100% of our assets and may grant a security interest in all of our assets, under the terms of any debt instruments we may enter into with lenders. In addition, under the terms of any credit facility or other debt instrument we enter into, we are likely to be required by its terms to use the net proceeds of any investments that we sell to repay a portion of the amount borrowed under such facility or instrument before applying such net proceeds to any other uses. 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, thereby magnifying losses or eliminating our equity stake in a leveraged investment. Similarly, any decrease in our revenue or income will cause our net income to decline more sharply than it would have had we not borrowed. Such a decline would also negatively affect our ability to make dividend payments on our common stock or preferred stock. Our ability to service our debt will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. Moreover, because the management fee payable to OFS Advisor is payable based on our total assets, OFS Advisor has 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 our use of leverage, including interest expenses and any increase in the management fee payable to OFS Advisor.


On November 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 application of a reduced 150% asset coverage ratio to us; and we extended to each of our stockholders as of November 6, 2018, an offer to repurchase the equity securities held by such stockholder as of November 6, 2018, with 25% of such equity securities to be repurchased in each of the four quarters following November 6, 2018. As a result, pursuant to Section 61(a)(2) of the 1940 Act, we are subject to the reduced asset coverage ratio effective November 6, 2019. See “Effective November 6, 2019, we became subject to 150% Asset Coverage after receiving the approval of our Board and meeting certain conditions.”


Insufficient cash flows may increase our risk of default of our debt obligations, including under our Unsecured Notes and our PWB Credit Facility.


Any default under the agreements governing our indebtedness that is not waived and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on our other debt obligations. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. Our ability to generate sufficient cash flow in the future is, to some extent, subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure stockholders that our business will generate cash flow from operations to meet the payment obligations of our debt obligations under the Unsecured Note and the PWB Credit Facility.


Effective November 6, 2019, we became subject to 150% Asset Coverage after receiving the approval of our Board and meeting certain conditions.


The 1940 Act generally prohibits us from incurring indebtedness unless immediately after such borrowing, we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, Section 61(a)(2) of the 1940 Act allows a BDC to increase the maximum amount of leverage it may incur from an asset coverage ratio of 200% to an asset coverage ratio of 150%, if certain requirements are met. On November 6, 2018 a “required majority” (as defined in Section 57(o) of the 1940 Act) of our Board approved the application of the reduced asset coverage ratio to us. In accordance with Section 61(a)(2) of the 1940 Act, we extended to each of our stockholders as of November 6, 2018, an offer to repurchase the equity securities held by such stockholders, with 25% of such equity securities to be repurchased in each of the four quarters following November 6, 2018. As a result, the asset coverage ratio test applicable to us decreased from 200% to 150%, effective November 6, 2019 and we are able to increase our leverage up to an amount that reduces our asset coverage ratio from 200% to 150% (i.e., the amount of debt may not exceed 66 2/3% of the value of our assets), assuming that additional borrowings are available.


Leverage magnifies the potential for loss on investments in our indebtedness and on invested equity capital. As we use leverage to partially finance our investments, stockholders will experience increased risks of investing in our securities. If the value of our assets increases, then the additional leverage would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not increased our leverage. Conversely, if the value of our assets


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decreases, the additional leverage would cause net asset value to decline more sharply than it otherwise would have had we not increased our leverage. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the additional leverage, while any decrease in our income would cause net investment income to decline more sharply than it would have had we not increased our leverage. Such a decline could negatively affect our ability to pay common stock dividends, scheduled debt payments or other payments related to our securities. Leverage is generally considered a speculative investment technique. See “Risks Related to Our Business and Structure — We may finance our investments with borrowed money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.”


In addition, the ability of BDCs to increase their leverage will increase the capital available to BDCs and thus competition for the investments that we seek to make. This may negatively impact pricing on the investments that we do make and adversely affect our net investment income and results of operations.


Changes in interest rates will affect our cost of capital and net investment income.


To the extent we borrow money or issue preferred stock to make investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds or pay dividends on preferred stock and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income in the event we use debt to finance our investments. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.


A rise in the general level of interest rates typically leads to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates may result in an increase of the amount of incentive fees payable to OFS Advisor.


We may enter into reverse repurchase agreements, which are another form of leverage.


We may enter into reverse repurchase agreements as part of our management of our temporary investment portfolio. Under a reverse repurchase agreement, we will effectively pledge our assets as collateral to secure a short-term loan. Generally, the other party to the agreement makes the loan in an amount equal to a percentage of the fair value of the pledged collateral. At the maturity of the reverse repurchase agreement, we will be required to repay the loan and correspondingly receive back our collateral. While used as collateral, the assets continue to pay principal and interest which are for our benefit.


Our use of reverse repurchase agreements, if any, involves many of the same risks involved in our use of leverage, as the proceeds from reverse repurchase agreements generally will be invested in additional securities. There is a risk that the market value of the securities acquired in the reverse repurchase agreement may decline below the price of the securities that we have sold but remain obligated to purchase. In addition, there is a risk that the market value of the securities retained by us may decline. If a buyer of securities under a reverse repurchase agreement were to file for bankruptcy or experience insolvency, we may be adversely affected. Also, in entering into reverse repurchase agreements, we would bear the risk of loss to the extent that the proceeds of such agreements at settlement are less than the fair value of the underlying securities being pledged. In addition, due to the interest costs associated with reverse repurchase agreements transactions, our NAV would decline, and, in some cases, we may be worse off than if we had not used such instruments.


Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited.


In November 2020, the SEC adopted 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. Under the rule, BDCs that use derivatives would be subject to a value-at-risk leverage limit, a derivatives risk management program and testing requirements and requirements related to board reporting. These requirements will apply unless the BDC qualifies as a “limited derivatives user,” as defined in the rule. Under the 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, among other things, 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. Collectively, these requirements may limit our ability to use derivatives and/or enter into certain other financial contracts.


We may in the future determine to fund a portion of our investments with preferred stock, which would magnify the potential for gain or loss and the risks of investing in us in the same way as our borrowings.


Preferred stock, which is another form of leverage, has the same risks to our common stockholders as borrowings because the dividends on any preferred stock we issue must be cumulative. Payment of such dividends and repayment of the liquidation preference of such preferred stock must take preference over any dividends or other payments to our common stockholders, and preferred stockholders are not subject to any of our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference.


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We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses.


A number of entities compete with us to make the types of investments that we plan to make. We compete with public and private funds, other BDCs, commercial and investment banks, commercial finance companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some of our competitors may have 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 than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or the source of income, asset diversification and distribution requirements we must satisfy to maintain our RIC tax treatment. These characteristics could allow our competitors to consider a wider variety of instruments, establish more relationships and offer better pricing and more flexible structuring than we are able to. The competitive pressures we face may have a material adverse effect on our business, financial condition and results of operations. As a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we may not be able to identify and make investments that are consistent with our investment objective.


With respect to the investments we make, we will not seek to compete based primarily on the interest rates we will offer, and we believe that some of our competitors may make loans with interest rates that will be lower than the rates we offer. In the secondary market for acquiring existing loans, we expect to compete generally on the basis of pricing terms. With respect to all investments, we may lose some investment opportunities if we do not match our competitors’ pricing, terms and structure. However, if we match our competitors’ pricing, terms and structure, we may experience decreased net interest income, lower yields and increased risk of credit loss. We may also compete for investment opportunities with OFSAM and its other affiliates or accounts managed by OFSAM or one of its other affiliates. Although OFS Advisor will allocate opportunities in accordance with its policies and procedures, allocations to such other accounts will reduce the amount and frequency of opportunities available to us and may not be in the best interests of us and our stockholders. Moreover, the performance of investments will not be known at the time of allocation.


We may suffer credit losses.


Investment in middle-market companies is highly speculative and involves a high degree of risk of credit loss, and therefore our securities may not be suitable for someone with a low tolerance for risk. These risks are likely to increase during volatile economic periods, such as the U.S. and many other economies have recently been experiencing.


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


We have elected to be taxed as a RIC under Subchapter M of the Code, but no assurance can be given that once elected we will be able to maintain RIC status. As a RIC, we are not required to pay corporate-level U.S. federal income taxes on our income and capital gains distributed (or deemed distributed) to our stockholders. To continue to qualify for tax treatment as a RIC under the Code and to be relieved of federal taxes on income and gains distributed to our stockholders, we must meet certain source-of-income, asset diversification and distribution requirements. The distribution requirement for a RIC is satisfied if we distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long - term capital losses, if any, to our stockholders on an annual basis. We will be subject, to the extent we use debt financing or preferred stock, to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements or preferred stock that could, under certain circumstances, restrict us from making distributions necessary to qualify for tax treatment as a RIC. If we are unable to obtain cash from other sources, we may fail to maintain our qualification for the tax benefits available to RICs and, thus, may be subject to corporate-level U.S. federal income tax. To maintain our qualification for tax treatment 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 status. Because most of our investments are in private or thinly traded public companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses. If we fail to continue to qualify for tax treatment as a RIC for any reason and become subject to corporate-level U.S. federal income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distributions to stockholders and the amount of our distributions and the amount of funds available for new investments. Such a failure would have a material adverse effect on us and our stockholders. See “Item 1. Business—Material U.S. Federal Income Tax Considerations—Taxation as a RIC.”


Our subsidiaries and portfolio companies may be unable to make distributions to us that will enable us to meet RIC requirements, which could result in the imposition of an entity-level tax.


In order for us to maintain our tax treatment as a RIC and to minimize corporate-level U.S. federal income taxes, we are required to distribute on an annual basis substantially all of our taxable income, which includes income from our subsidiaries and portfolio companies. If our subsidiaries and portfolio companies are unable to make distributions to us, this may result in loss of RIC tax treatment and a consequent imposition of a corporate-level U.S. federal income tax on us.


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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 the accrual of OID. This may arise if we purchase assets at a discount, receive warrants in connection with the making of a loan or in other circumstances, or through contracted PIK interest or dividends (meaning interest or dividends paid in the form of additional principal amount of the loan or equity security instead of in cash), which represents contractual interest or dividends added to the loan balance or equity security and due at the end of the investment term. Such OID, which could be significant relative to our overall investment activities, or increases in loan or equity investment balances as a result of contracted PIK arrangements, will be included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash.


Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to maintain the tax benefits available to RICs. In such a case, 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 reduce new investment originations and sourcings to meet these distribution requirements. If we sell built-in-gain assets, we may be required to recognize taxable income in respect of the built-in-gain on such assets. In such a case, we would have to distribute all of our taxable gain (including the built-in-gain) in respect of such sale to avoid the imposition of entity-level tax on such gain. If we are not able to obtain such cash from other sources, we may fail to maintain the tax benefits available to RICs and thus be subject to corporate-level U.S. federal income tax.


We may in the future choose to pay distributions in our own stock, in which case stockholders may be required to pay tax in excess of the cash they receive.


We distribute taxable distributions that are payable in cash or shares of our common stock at the election of each stockholder. In accordance with guidance issued by the Internal Revenue Service, a publicly traded RIC should generally be eligible to treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder is permitted to elect to receive his or her distribution in either cash or stock of the RIC (even where there is a limitation on the percentage of the distribution payable in cash, provided that the limitation is at least 20%), subject to the satisfaction of certain guidelines. If too many stockholders elect to receive their distributions in cash, each such stockholder would receive a pro rata share of the total cash to be distributed and would receive the remainder of their distribution in shares of stock. If this and certain other requirements are met, for U.S. federal income tax purposes, the amount of the distribution paid in stock generally will be a taxable distribution in an amount equal to the amount of cash that could have been received instead of stock. If we decide to make any distributions consistent with this guidance that are payable in part in our stock, stockholders receiving such distribution would 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 designated as a capital gain dividend) 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 dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, it may be subject to transaction fees (e.g., broker fees or transfer agent fees) and the sales proceeds may be less than the amount included in income with respect to the dividend, 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 dividends, including in respect of all or a portion of such dividend 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 dividends, it may put downward pressure on the trading price of our stock.


Because we expect to distribute substantially all of our net ordinary income and net realized capital gains to our stockholders, we may need additional capital to finance our growth and such capital may not be available on favorable terms or at all.


We have elected to be taxed for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. If we meet certain requirements, including source of income, asset diversification and distribution requirements, and if we continue to qualify as a BDC, we will continue to qualify for tax treatment as RIC under the Code and will not have to pay corporate-level U.S. federal taxes on income we distribute to our stockholders as dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability. Because we received the approval of our Board, we are generally required to meet a coverage ratio of total assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of at least 150% at the time we issue any debt or preferred stock. See "Item 1A. Risk Factors - Effective November 6, 2019, we became subject to 150% Asset Coverage after receiving the approval of our Board and meeting certain conditions". This requirement limits the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, this limitation may prevent us from incurring debt or preferred stock and require us to raise additional equity at a time when it may be disadvantageous to do so. We cannot assure investors that debt and equity financing will be available to us on favorable terms, or at all, and debt financings may be restricted by the terms of any of our outstanding


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borrowings. In addition, as a BDC, we are generally not permitted to issue common stock priced below net asset value without stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease new lending and investment activities, and our net asset value could decline.


Our PWB Credit Facility contains various covenants and restrictions which, if not complied with, could accelerate our repayment obligations under the credit facility or limit its use, thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions.


The PWB Credit Facility provides us with a senior secured revolving line of credit of up to $15.0 million, with maximum availability equal to 35% of the aggregate outstanding principal amount of eligible loans included in the borrowing base and otherwise specified in the PWB Credit Facility. The PWB Credit Facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, a minimum tangible net asset value, a minimum quarterly net investment income after incentive fees, and a statutory asset coverage test. The PWB Credit Facility also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change in investment advisor, and the occurrence of a material adverse change in our financial condition. The PWB Credit Facility permits us to fund additional investments as long as we are within the conditions set out in the PWB Credit Facility. Our continued compliance with these covenants depends on many factors, some of which are beyond our control, and there are no assurances that we will continue to comply with these covenants. Our failure to satisfy these covenants could result in foreclosure by our lender, which would accelerate our repayment obligations under the PWB Credit Facility and thereby have a material adverse effect on our business, liquidity, financial condition, results of operations and ability to pay distributions to our stockholders. We had $5.4 million outstanding under the PWB Credit Facility as of December 31, 2021.


Loss of status as a RIC would reduce our net asset value and distributable income.


We have elected to be taxed as a RIC under the Code. As a RIC we will not be required to pay corporate level U.S. federal income taxes on our income and capital gains that we timely distribute to our stockholders, provided that we satisfy certain annual distribution and other requirements. Accordingly, we will not be permitted under accounting rules to establish reserves for taxes on our unrealized capital gains. If we fail to qualify for RIC status in any year, to the extent that we had unrealized gains, we would have to establish reserves for taxes, which would reduce our net asset value and the amount potentially available for distribution. In addition, if we, as a RIC, were to decide to make a deemed distribution of net realized capital gains and retain the net realized capital gains, we would have to establish appropriate reserves for taxes that we would have to pay on behalf of stockholders. It is possible that establishing reserves for taxes could have a material adverse effect on the value of our common stock.


Events outside of our control, including public health crises, may negatively affect the results of our operations.


Periods of market volatility could continue to occur in response to pandemics or other events outside of our control. We, OFS Advisor and the portfolio companies in which we invest could be affected by force majeure events (i.e., events beyond the control of the party claiming that the event has occurred, such as acts of God, fire, flood, earthquakes, outbreaks of an infectious disease, pandemic or any other serious public health concern, war, terrorism, labor strikes, major plant breakdowns, pipeline or electricity line ruptures, failure of technology, defective design and construction, accidents, demographic changes, government macroeconomic policies, social instability, etc.). Some force majeure events could adversely affect the ability of a party (including us, OFS Advisor, a portfolio company or a counterparty to us, OFS Advisor, or a portfolio company) to perform its obligations until it is able to remedy the force majeure event. In addition, force majeure events, such as the cessation of the operation of equipment for repair or upgrade, could similarly lead to the unavailability of essential equipment and technologies. These risks could, among other effects, adversely impact the cash flows available from a portfolio company, cause personal injury or loss of life, including to a senior manager of OFS Advisor or its affiliates, damage property, or instigate disruptions of service. In addition, the cost to a portfolio company or us of repairing or replacing damaged assets resulting from such force majeure event could be considerable. It will not be possible to insure against all such events, and insurance proceeds received, if any, could be inadequate to completely or even partially cover any loss of revenues or investments, any increases in operating and maintenance expenses, or any replacements or rehabilitation of property. Certain events causing catastrophic loss could be either uninsurable, or insurable at such high rates as to adversely impact us, OFS Advisor, or portfolio companies, as applicable.


Force majeure events that are incapable of or are too costly to cure could have permanent adverse effects. Certain force majeure events (such as war or an outbreak of an infectious disease) could have a broader negative impact on the world economy and international business activity generally, or in any of the countries in which we invest or our portfolio companies operate specifically. Such force majeure events could result in or coincide with: increased volatility in the global securities, derivatives and currency markets; a decrease in the reliability of market prices and difficulty in valuing assets; greater fluctuations in currency exchange rates; increased risk of default (by both government and private issuers); further social,


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economic, and political instability; nationalization of private enterprise; greater governmental involvement in the economy or in social factors that impact the economy; less governmental regulation and supervision of the securities markets and market participants and decreased monitoring of the markets by governments or self-regulatory organizations and reduced enforcement of regulations; limited, or limitations on, the activities of investors in such markets; controls or restrictions on foreign investment, capital controls and limitations on repatriation of invested capital; inability to purchase and sell investments or otherwise settle security or derivative transactions (i.e., a market freeze); unavailability of currency hedging techniques; substantial, and in some periods extremely high, rates of inflation, which can last many years and have substantial negative effects on credit and securities markets as well as the economy as a whole; recessions; and difficulties in obtaining and/or enforcing legal judgments. Additionally, a major governmental intervention into industry, including the nationalization of an industry or the assertion of control over one or more portfolio companies or its assets, could result in a loss to us, including if the investment in such portfolio companies is canceled, unwound or acquired (which could result in inadequate compensation). Any of the foregoing could therefore adversely affect the performance of us and our investments.


Adverse developments in the credit markets may impair our ability to secure debt financing.


During the economic downturn in the United States that began in mid-2007, many commercial banks and other financial institutions stopped lending or significantly curtailed their lending activity. In addition, in an effort to stem losses and reduce their exposure to segments of the economy deemed to be high risk, some financial institutions limited routine refinancing and loan modification transactions and even reviewed the terms of existing facilities to identify bases for accelerating the maturity of existing lending facilities. As a result, should we experience another economic downturn in the United States, it may be difficult for us to obtain desired financing to finance the growth of our investments on acceptable economic terms, or at all.


If we are unable to consummate credit facilities on commercially reasonable terms, our liquidity may be reduced significantly. If we are unable to repay amounts outstanding under any facility we may enter into and are declared in default or are unable to renew or refinance any such facility, it would limit our ability to initiate significant originations or to operate our business in the normal course. These situations may arise due to circumstances that we may be unable to control, such as inaccessibility of 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 damage our business. Moreover, we are unable to predict when economic and market conditions may become more favorable. Even if such conditions improve broadly and significantly over the long term, adverse conditions in particular sectors of the financial markets could adversely impact our business.


Changes in the laws or regulations governing our business, or changes in the interpretations thereof, and any failure by us to comply with these laws or regulations, could have a material adverse effect on our, and our portfolio companies’ business, results of operations or financial condition.


We and our portfolio companies are subject to regulation by laws at the U.S. federal, state and local levels, including those that govern BDCs, SBICs, RICs, or non-depository commercial lenders. These laws and regulations, including applicable accounting standards, as well as their interpretation, may change from time to time, including as the result of directives from the U.S. President and others in the executive branch, and new laws, regulations, accounting standards and interpretations may also come into effect. For example, the current U.S. presidential administration could support an enhanced regulatory agenda that imposes greater costs on all sectors and on financial services companies in particular. Any such new or changed laws or regulations could have a material adverse effect on our business, and political uncertainty could increase regulatory uncertainty in the near term.


We are also subject to judicial and administrative 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, we may have to incur significant expenses in order to comply, or we might have to restrict our operations. If we do not comply with applicable laws, regulations and decisions, we may lose licenses needed for the conduct of our business and may be subject to civil fines and criminal penalties.


Over the last several years, there has been an increase in regulatory attention to the extension of credit outside of the traditional banking sector, raising the possibility that some portion of the non-bank financial sector will be subject to new or different regulation. While it cannot be known at this time whether these regulations will be implemented or what form they will take, increased regulation of non-bank credit extension could negatively impact our operations, cash flows or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our business.


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We cannot predict how new tax 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 Internal Revenue Service and the U.S. Treasury Department. The Biden Administration has proposed significant changes to the existing U.S. tax rules, and there are a number of proposals in Congress that would similarly modify the existing U.S. tax rules. At the end of 2021, the Build Back Better Act included proposals that, if adopted, would have changed the corporate statutory and effective tax rate. While there are no immediate prospects for the Build Back Better Act to become law, future tax acts tend to draw upon earlier proposals. The likelihood of any such legislation being enacted is uncertain and we cannot predict with certainty how any future changes in the tax laws might affect us, our investors or our portfolio investments, but 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 or the U.S. federal income tax consequences to us and our investors of such qualification, or could have other adverse consequences. Investors 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 common stock.


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 on-going discussion and commentary regarding potential significant changes to U.S. trade policies, treaties and tariffs, which has created significant uncertainty about the future relationship between the United States and other countries with respect to the 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.


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 systems backup, adding to costs, and can contribute to increased system stresses, including service interruptions.


Our Board may change our investment objectives, operating policies and strategies without prior notice or stockholder approval.


Our Board has the authority, except as otherwise provided in the 1940 Act, to modify or waive certain of our operating policies and strategies without prior notice 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 the price value of our common stock. Nevertheless, any such changes could adversely affect our business and impair our ability to make distributions.


Failure to achieve and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and the value of our common stock.


We are obligated to maintain proper and effective internal control over financial reporting, including the internal control evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act (“Section 404”). We will not be required to comply with all of the requirements of Section 404 until we are no longer an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Accordingly, our internal controls over financial reporting do not currently meet all of the standards contemplated by Section 404 that we will eventually be required to meet. We are required to conduct annual management assessments of the effectiveness of our  internal controls over financial reporting. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the date we are no longer an emerging growth company under the JOBS Act.


If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our operations, financial reporting or financial results could be adversely affected. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory


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consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules, and result in a breach of the covenants under the agreements governing any of our financing arrangements. There could also be a negative reaction in the financial markets due to a loss of investor confidence in the Company and the reliability of our consolidated financial statements. Confidence in the reliability of our consolidated financial statements could also suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect us.


We are conditionally liable for costs incurred on our behalf by OFS Advisor.


OFS Advisor and its affiliates have incurred significant organizational and offering costs on our behalf. Under the terms of the Investment Advisory Agreement, we are conditionally liable for these costs, meaning OFS Advisor is entitled to receive up to 1.5% of the gross proceeds raised in the Offering until all of the organization and offering costs paid by OFS Advisor and its affiliates have been recovered. Additionally, OFS Advisor and their affiliates may continue to incur offering costs on our behalf throughout the Offering and for which we will also be conditionally liable.


Historically, OFS Advisor and CIM Capital have provided us with expense support that ensured, and OFS Advisor currently provides support under the Expense Support Agreement that ensures, no portion of our distributions to stockholders were, or will be paid, from Offering proceeds, and provided or provides, as the case may be, for expense-reduction payments to us in any quarterly period in which our cumulative distributions to stockholders exceed our cumulative distributable ordinary income and net realized gains. We may become obligated to reimburse OFS Advisor for expense support payments, conditioned upon maintenance of our per-share distribution rate and our realization of improved unsupported expense ratios.


Risks Related to OFS Advisor and its Affiliates


We have potential conflicts of interest related to obligations that OFS Advisor or its affiliates may have to other clients.


OFS Advisor and its affiliates manage other assets, including those of other BDCs and registered investment companies, separately managed accounts, accounts for which OFS Advisor or its affiliates may serve as sub-adviser and CLOs, and may manage other entities in the future, and these other funds and entities may have similar or overlapping investment strategies. Our executive officers, directors and members of the Advisor Investment Committees serve as officers, directors or principals of entities that operate in the same or a related line of business as we do, or of investment funds or other investment vehicles managed by OFS Advisor or its affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in our or our stockholders’ best interests or may require them to devote time to services for other entities, which could interfere with the time available to provide services to us. For example, OFS Advisor currently serves as the investment adviser to OFS Capital, a publicly-traded BDC, that invests primarily in senior secured loans of middle-market companies in the United States, similar to those we target for investment, including first-lien, second-lien and unitranche loans as well as subordinated loans and, to a lesser extent, warrants and other equity securities. OFS Advisor also serves as the investment adviser to OCCI, a closed-end management investment company that primarily invests in CLO debt and subordinated securities. Therefore, many investment opportunities will satisfy the investment criteria for both OFS Capital and us and, in certain instances, investment opportunities may be appropriate for OCCI and us. OFS Capital operates as a distinct and separate entity and any investment in our common stock will not be an investment in OFS Capital. In addition, our executive officers serve in substantially similar capacities for OFS Capital and OCCI and our independent directors serve in a similar capacity for OFS Capital. Similarly, OFS Advisor and/or its affiliates may have other clients with, similar, different or competing investment objectives. In serving in these multiple capacities, our executive officers and directors, OFS Advisor and/or its affiliates, and members of the Advisor Investment Committees may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the best interests of us or our stockholders.


OFS Advisor and OFSAM have procedures and policies in place designed to manage the potential conflicts of interest between OFS Advisor’s fiduciary obligations to us and its fiduciary obligations to other clients. For example, such policies and procedures are designed to ensure that investment opportunities are allocated in a fair and equitable manner among us and other clients of OFS Advisor. An investment opportunity that is suitable for clients of OFS Advisor may not be capable of being shared among some or all of such clients due to the limited scale of the opportunity or other factors, including regulatory restrictions imposed by the 1940 Act.


There can be no assurance that we will be able to participate in all investment opportunities that are suitable to us. OFS Advisor will seek to allocate investment opportunities among eligible accounts in a manner that is fair and equitable over time and consistent with its allocation policy.


We have potential conflicts of interest related to the purchases and sales that OFS Advisor makes on our behalf and/or on behalf of Affiliated Accounts .


Conflicts may arise when we make an investment in conjunction with an investment being made by Affiliated Accounts, or in a transaction where another Affiliated Account has already made an investment.  Investment opportunities are, from time to time, appropriate for more than one Affiliated Account in the same, different or overlapping securities of a


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portfolio company’s capital structure.  Conflicts arise in determining the terms of investments, particularly where these Affiliated Accounts may invest in different types of securities in a single portfolio company.  Questions arise as to whether payment obligations and covenants should be enforced, modified or waived, or whether debt should be restructured, modified or refinanced.


We may invest in debt and other securities of companies in which other Affiliated Accounts hold those same securities or different securities, including equity securities. In the event that we make such investments, our interests will at times conflict with the interests of such other Affiliated Accounts, particularly in circumstances where the underlying company is facing financial distress.  Decisions about what action should be taken, particularly in troubled situations, raises conflicts of interest, including, among other things, whether or not to enforce claims, whether or not to advocate or initiate a restructuring or liquidation inside or outside of bankruptcy, and the terms of any work-out or restructuring.  The involvement of multiple Affiliated Accounts at both the equity and debt levels could inhibit strategic information exchanges among fellow creditors, including among us and other Affiliated Accounts.  In certain circumstances, we or other Affiliated Accounts may be prohibited from exercising voting or other rights and may be subject to claims by other creditors with respect to the subordination of their interest.


For example, in the event that one Affiliated Account has a controlling or significantly influential position in a portfolio company, that Affiliated Account may have the ability to elect some or all of the board of directors of such a portfolio company, thereby controlling the policies and operations, including the appointment of management, future issuances of securities, payment of dividends, incurrence of debt and entering into extraordinary transactions.  In addition, a controlling Affiliated Account is likely to have the ability to determine, or influence, the outcome of operational matters and to cause, or prevent, a change in control of such a portfolio company.  Such management and operational decisions may, at times, be in direct conflict with us or other Affiliated Accounts that have invested in the same portfolio company that do not have the same level of control or influence over the portfolio company.


If additional capital is necessary as a result of financial or other difficulties, or to finance growth or other opportunities, we or other Affiliated Accounts may or may not provide such additional capital, and if provided each Affiliated Account will supply such additional capital in such amounts, if any, as determined by OFS Advisor and/or OFS Advisor’s affiliates. Investments by more than one Affiliated Account in a portfolio company also raises the risk of using assets of an Affiliated Account of OFS Advisor to support positions taken by other Affiliated Accounts, or that a client may remain passive in a situation in which it is entitled to vote.  In addition, there may be differences in timing of entry into, or exit from, a portfolio company for reasons such as differences in strategy, existing portfolio or liquidity needs, different Affiliated Account mandates or fund differences, or different securities being held. These variations in timing may be detrimental to us.


The application of our investment mandate as compared to investment mandates of other Affiliated Accounts and the policies and procedures of OFS Advisor and OFS Advisor's affiliates are expected to vary based on the particular facts and circumstances surrounding each investment by two or more Affiliated Accounts, in particular when those Affiliated Accounts are in different classes of an issuer’s capital structure (as well as across multiple issuers or borrowers within the same overall capital structure) and, as such, there may be a degree of variation and potential inconsistencies, in the manner in which potential or actual conflicts are addressed.


Our independent directors may face conflicts of interest related to their obligations to the Affiliated Funds for which they also serve as independent directors.


The independent directors of our board of directors also comprise a portion of the independent directors of the board of directors of OFS Capital, an affiliated BDC that is also managed by OFS Advisor. In their capacities as directors for an Affiliated Fund board, the independent directors have a duty to make decisions on behalf of that Affiliated Fund that are in the best interests of that Affiliated Fund and its stockholders. Accordingly, our independent directors may face conflicts of interest when making a decision on behalf of one Affiliated Fund that may not be in the best interest of the other Affiliated Fund(s). For example, the SEC has granted exemptive relief to us, OFS Advisor, OFS Capital, OCCI, and certain other of our affiliates to co-invest in certain transactions that would otherwise be prohibited by the 1940 Act. In accordance with that relief, the independent directors must make certain findings on behalf of each Affiliated Fund with respect to initial co-investment transactions, including that the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Affiliated Fund and its stockholders and do not involve overreaching in respect of the Affiliated Fund or its stockholders on the part of any of the other participants in the proposed transaction. Under such circumstances, the independent directors may face conflicts of interest when making these determinations on behalf of us and OFS Capital.


Members of the Advisor Investment Committees, OFS Advisor or its affiliates may, from time to time, possess material non-public information, limiting our investment discretion.


OFSC senior professionals and members of the Advisor Investment Committees may serve as directors of, or in a similar capacity with, companies in which we invest, the securities of which are purchased or sold on our behalf. In the event


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that material nonpublic information is obtained with respect to such companies, or we become subject to trading restrictions under the internal trading policies of those companies or as a result of applicable law or regulations, we could be prohibited for a period of time from purchasing or selling the securities of such companies, and this prohibition may have an adverse effect on us and our stockholders.


The valuation process for certain of our portfolio holdings may create a conflict of interest.


Many of our portfolio investments may be made in the form of securities that are not publicly traded. As a result, our Board will determine the fair value of these securities in good faith and, as a result, there may be uncertainty as to the value of our portfolio investments. In connection with that determination, investment professionals from OFS Advisor may provide our Board with portfolio company valuations based upon the most recent portfolio company consolidated financial statements available and projected financial results of each portfolio company. In addition, the members of our Board who are not independent directors have a substantial indirect pecuniary interest in OFS Advisor. The participation of the OFS Advisor’s investment professionals in our valuation process, and the indirect pecuniary interest in OFS Advisor by those members of our Board, could result in a conflict of interest since OFS Advisor’s management fee is based, in part, on our total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity).


We may have additional conflicts related to other arrangements with OFS Advisor or its affiliates.


We rent office space from a subsidiary of OFSAM and pay to that subsidiary our allocable portion of overhead and other expenses incurred in performing its obligations under the Administration Agreement, such as rent and our allocable portion of the cost of our officers, including our chief executive officer, chief financial officer, chief compliance officer and chief accounting officer. This creates conflicts of interest that our Board must monitor.


The Investment Advisory Agreement with OFS Advisor and the Administration Agreement with OFS Services were not negotiated on an arm’s length basis and may not be as favorable to us as if they had been negotiated with an unaffiliated third party.


The Investment Advisory Agreement and the Administration Agreement were negotiated between related parties. Consequently, their terms, including fees payable to OFS Advisor, may not be as favorable to us as if they had been negotiated with an unaffiliated third party. In addition, we could choose not to enforce, or to enforce less vigorously, our rights and remedies under these agreements because of our desire to maintain our ongoing relationship with OFS Advisor, OFS Services and their respective affiliates. Any such decision, however, would breach our fiduciary obligations to our stockholders.


Our ability to enter into transactions with our affiliates is restricted, which may limit the scope of investments available to us.


We generally are prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of their independent directors and, in some cases, of the SEC. Those transactions include purchases from, sales to, and so-called “joint” transactions, in which we and one or more of our affiliates engage in certain types of profit-making activities with such affiliates. Any person that owns, directly or indirectly, five percent or more of our outstanding voting securities will be considered an affiliate of us for purposes of the 1940 Act, and we generally are prohibited from engaging in purchases of assets from or sales of assets to or joint transactions with such affiliates, absent the prior approval of our independent directors. Additionally, without the approval of the SEC, we are prohibited from engaging in purchases from or sales of assets to or joint transactions with our officers, directors, and employees, and advisors (and its affiliates).


We may, however, invest alongside certain related parties or their respective other clients in certain circumstances where doing so is consistent with current law and SEC staff interpretations. For example, we may invest alongside such accounts consistent with guidance promulgated by the SEC staff permitting us and such other accounts to purchase interests in a single class of privately placed securities so long as certain conditions are met, including our advisor, acting on our behalf and on behalf of other clients, negotiates no term other than price. Co-investment with such other accounts is not permitted or appropriate under this guidance when there is an opportunity to invest in different securities of the same issuer or where the different investments could be expected to result in a conflict between our interests and those of other accounts.


The 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting the BDC to do so. On August 4, 2020, we received the Order from the SEC to permit us to co-invest in portfolio companies with Affiliated Funds subject to compliance with the Order. The Order superseded a previous order we received on October 12, 2016 and provides us with greater flexibility to enter into co-investment transactions with Affiliated Funds. Pursuant to the Order, we are generally permitted to co-invest with Affiliated Funds 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 that (1) the terms of the transactions, 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


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of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.


In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs, with exemptive orders through December 31, 2020, we were permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates that are private funds, even if such other funds had not previously invested in such existing portfolio company. Without this order, such Affiliated Funds that are private funds would not be able to participate in such co-investments with us unless the Affiliated Funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the conditional exemptive order expired on December 31, 2020, the SEC’s Division of Investment Management has indicated that until March 31, 2022, it will not recommend enforcement action, to the extent that any BDC with an existing co-investment order continues to engage in certain transactions described in the conditional exemptive order, pursuant to the same terms and conditions described therein.


When we invest alongside clients of OFSAM and its affiliates or their respective other clients, OFS Advisor will, to the extent consistent with applicable law, regulatory guidance, or the Order, allocate investment opportunities in accordance with its allocation policy. Under this allocation policy, if two or more investment vehicles with similar or overlapping investment strategies are in their investment periods, an available opportunity will be allocated based on the provisions governing allocations of such investment opportunities in the relevant organizational, offering or similar documents, if any, for such investment vehicles. In the absence of any such provisions, OFS Advisor will consider the following factors and the weight that should be given with respect to each of these factors:


• investment guidelines and/or restrictions, if any, set forth in the applicable organizational, offering or similar documents for the investment vehicles;


• the status of tax restrictions and tests and other regulatory restrictions and tests;


• risk and return profile of the investment vehicles;


• suitability/priority of a particular investment for the investment vehicles;


• if applicable, the targeted position size of the investment for the investment vehicles;


• level of available cash for investment with respect to the investment vehicles;


• total amount of funds committed to the investment vehicles; and


• the age of the investment vehicles and the remaining term of their respective investment periods, if any.


When not relying on the Order, priority as to opportunities will generally be given to clients that are in their “ramp-up” period, or the period during which the account has yet to reach sufficient scale such that its investment income covers its operating expenses, over the accounts that are outside their ramp-up period but still within their investment or re-investment periods. However, application of one or more of the factors listed above, or other factors determined to be relevant or appropriate, may result in the allocation of an investment opportunity to a fund no longer in its ramp-up period over a fund that is still within its ramp-up period.


In situations where co-investment with other accounts is not permitted or appropriate, OFS Advisor will need to decide which account will proceed with the investment. The decision by OFS Advisor to allocate an opportunity to another entity could cause us to forego an investment opportunity that we otherwise would have made. These restrictions, and similar restrictions that limit our ability to transact business with our officers or directors or their affiliates, may limit the scope of investment opportunities that would otherwise be available to us.


OFS Advisor 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.


OFS Advisor has the right, under the Investment Advisory Agreement, to resign at any time upon not less than 60 days’ written notice, whether we have found a replacement or not. If OFS Advisor resigns, we may not be able to find a new investment advisor or hire internal management with similar expertise and the 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 value 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 the OFS Advisor 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 objectives may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations.


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The Company is dependent on OFS Advisor for Expense Support Payments, which can be terminated by OFS Advisor, without payment of any penalty, with or without notice, to us at anytime.


The Company has benefited from Expense Support Payments since inception to maintain its monthly distributions. Expense limitation under both the Investment Advisory Agreement and Second Amended Expense Support Agreement can be terminated by OFS Advisor, without payment of any penalty, with or without notice, to us at any time. If the Second Amended Expense Support Agreement was cancelled, we may not be able to continue paying distributions at the current level, or would have to pay distributions from Offering proceeds. Cessation of expense support under the Investment Advisory Agreement does not require termination of the Investment Advisory Agreement. If expense support under the Investment Advisory Agreement were terminated, the sale of our shares and the Offering could be significantly impaired.


OFS Services can resign from its role as our Administrator under the Administration Agreement, and we may not be able to find a suitable replacement, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.


OFS Services has the right to resign under the Administration Agreement, whether we have found a replacement or not. If OFS Services resigns, we may not be able to find a new administrator or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms, 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 value of our shares may decline. In addition, the coordination of our internal management and administrative activities is likely to suffer if we are unable to identify and reach an agreement with a service provider or individuals with the expertise possessed by OFS Services. Even if we are able to retain a comparable service provider or individuals to perform such services, whether internal or external, their integration into our business and lack of familiarity with our investment objectives may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations.


Our base management fee may induce OFS Advisor to cause us to incur leverage.


Our base management fee is payable based upon our total assets, other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity. This fee structure may encourage OFS Advisor to cause us to borrow money to finance additional investments. Under certain circumstances, the use of borrowed money may increase the likelihood of default, which would disfavor holders of our common stock. Given the subjective nature of the investment decisions made by OFS Advisor on our behalf, our Board may not be able to monitor this potential conflict of interest effectively.


Our incentive fee may induce OFS Advisor to make certain investments, including speculative investments.


The incentive fee payable by us to OFS Advisor may create an incentive for OFS Advisor to make investments on our behalf that are riskier or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to OFS Advisor is determined may encourage OFS Advisor to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor our stockholders.  Generally, the more equity we sell in offerings and the greater the risk assumed by us with respect to our investments, the greater the potential for growth in our assets and profits (and, correlatively, the fees payable by us to CCO and OFS Advisor). These compensation arrangements could affect OFS Advisor’s or its affiliates’ judgment with respect to public offerings of equity and investments made by us, which may allow CCO to earn additional sales commissions and dealer manager fees and OFS Advisor to earn increased asset management fees. In addition, the way in which the incentive fee payable to OFS Advisor is determined may encourage OFS Advisor to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor our stockholders.


OFS Advisor receives an incentive fee based, in part, upon net capital gains realized on our investments. Unlike that portion of the incentive fee based on income, there is no hurdle rate applicable to the portion of the incentive fee based on net capital gains. As a result, OFS Advisor may have a tendency to invest more capital in investments that are likely to result in 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 economic downturns.


We may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds, and, to the extent we so invest, will bear our ratable share of any such investment company’s expenses, including management and performance fees. We remain obligated to pay management and incentive fees to OFS Advisor with respect to the assets invested in the securities and instruments of other investment companies. With respect to each of these investments, each of our stockholders will bear his or her share of the management and incentive fee of OFS


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Advisor as well as indirectly bearing the management and performance fees and other expenses of any investment companies in which we invest.


Our Board is charged with protecting our interests by monitoring how OFS Advisor addresses these and other conflicts of interests associated with its management services and compensation. While our Board is not expected to review or approve each borrowing or incurrence of leverage, our independent directors will periodically review OFS Advisor’s services and fees. In connection with these reviews, our independent directors will consider whether our fees and expenses (including those related to leverage) remain appropriate.


Our incentive fee structure may create incentives for OFS Advisor that are not fully aligned with the interests of our stockholders.


In the course of our investing activities, we will pay management and incentive fees to OFS Advisor. The base management fee is based on our total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity). As a result, investors in our common stock will invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in a lower rate of return than one might achieve through direct investments. Because these fees are based on our total assets, other than cash and cash equivalents but including assets purchased with borrowed amounts and including any assets owned by any consolidated entity, OFS Advisor will benefit when we incur debt or use leverage. Our Board is charged with protecting our interests by monitoring how OFS Advisor addresses these and other conflicts of interests associated with its management services and compensation. While our Board is not expected to review or approve each borrowing or incurrence of leverage, our independent directors will periodically review OFS Advisor’s services and fees as well as its portfolio management decisions and portfolio performance. In connection with these reviews, our independent directors will consider whether our fees and expenses (including those related to leverage) remain appropriate. As a result of this arrangement, OFS Advisor or its affiliates may from time to time have interests that differ from those of our stockholders, giving rise to a conflict.


We may pay an incentive fee on income we do not receive in cash.


The part of the incentive fee payable to OFS Advisor that relates to our pre-incentive fee net investment income is computed and paid on income that may include interest income that has been accrued but not yet received in cash. This fee structure may be considered to involve a conflict of interest for OFS Advisor to the extent that it may encourage OFS Advisor to favor debt financings that provide for deferred interest, rather than current cash payments of interest. OFS Advisor may have an incentive to invest in deferred interest securities in circumstances where it would not have done so but for the opportunity to continue to earn the incentive fee even when the issuers of the deferred interest securities would not be able to make actual cash payments to us on such securities. This risk could be increased because OFS Advisor is not obligated to reimburse us for any incentive fees received even if we subsequently incur losses or never receive in cash the deferred income that was previously accrued.


OFS Advisor’s liability is limited under the Investment Advisory Agreement, and we have agreed to indemnify OFS Advisor against certain liabilities, which may lead OFS Advisor to act in a riskier manner on our behalf than it would when acting for its own account.


Under the Investment Advisory Agreement, OFS Advisor will not assume any responsibility to us other than to render the services called for under that agreement, and it will not be responsible for any action of our Board in following or declining to follow OFS Advisor’s advice or recommendations. Under the terms of the Investment Advisory Agreement, OFS Advisor and its affiliates’ respective officers, directors, members, managers, stockholders and employees will not be liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the Investment Advisory Agreement, except those resulting from acts constituting gross negligence, willful misconduct, bad faith or reckless disregard of such person’s duties under the Investment Advisory Agreement. In addition, we have agreed to indemnify OFS Advisor and its affiliates’ respective officers, directors, members, managers, stockholders and employees from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement, except where attributable to gross negligence, willful misconduct, bad faith or reckless disregard of such person’s duties under the Investment Advisory Agreement. These protections may lead OFS Advisor to act in a riskier manner when acting on our behalf than it would when acting for its own account.


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Risks Related to BDCs


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


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 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% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets decline, 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. Also, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders. If we issue senior securities, we will be exposed to typical risks associated with leverage, including an increased risk of loss.


If we issue preferred stock, the preferred stock would rank “senior” to common stock in our capital structure, preferred stockholders would have separate voting rights on certain matters and might have other rights, preferences or privileges more favorable than those of our common stockholders, and the issuance of preferred stock could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for holders of our common stock or otherwise be in our stockholders’ best interest. Holders of our common stock will directly or indirectly bear all of the costs associated with offering and servicing any preferred stock that we issue. In addition, any interests of preferred stockholders may not necessarily align with the interests of holders of our common stock and the rights of holders of shares of preferred stock to receive dividends would be senior to those of holders of shares of our 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 per share of our common stock if our Board determines that such sale is in the best interests of us and our stockholders, and if our stockholders approve any such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board, closely approximates the market value of such securities (less any distributing commission or discount). If we raise additional funds by issuing common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at that time will decrease, and our stockholders might experience dilution.


Our ability to invest in public companies may be limited in certain circumstances.


To maintain our status as a BDC, we are not permitted to acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our assets, as defined by the 1940 Act, are qualifying assets (with certain limited exceptions). Subject to certain exceptions for follow-on investments and distressed companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as a qualifying asset only if such issuer has a common equity market capitalization that is less than $250 million at the time of such investment and meets the other specified requirements.


If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to continue to qualify as a BDC 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 and after giving effect to such acquisition, at least 70% of our assets, as defined by the 1940 Act, are qualifying assets.


We believe that most of the investments that we may acquire in the future 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 a sufficient portion of our assets are not qualifying assets, we could violate the 1940 Act provisions applicable to BDCs. As a result of such violation, specific rules under the 1940 Act could prevent us, for example, 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 come into compliance with the 1940 Act. If we need to dispose of such investments quickly, it could be difficult to dispose of such investments on favorable terms. We may not be able to find a buyer for such investments and, even if we do find a buyer, we may have to sell the investments at a substantial loss. Any such outcomes would have a material adverse effect on our business, financial condition and results of operations.


If we do not maintain our status as a BDC, we would be subject to regulation as a registered closed-end investment company under the 1940 Act. As a registered closed-end fund, we would be subject to substantially more regulatory restrictions under the 1940 Act which would significantly decrease our operating flexibility.


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Risks Related to Our Investments


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


We expect that many of our portfolio companies will be susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions may decrease the value of collateral securing some of our loans and the value of our equity investments. 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 our 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, 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, lenders in certain cases can be subject to lender liability claims for actions taken by them when they become too involved in the borrower’s business or exercise control over a borrower. It is possible that we could become subject to a lender liability claim, including as a result of actions taken if we render significant managerial assistance to the borrower. Furthermore, if one of our portfolio companies were to file for bankruptcy protection, even though we may have structured our investment as senior secured debt, depending on the facts and circumstances, including the extent to which we provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to claims of other creditors.


Our investments in the debt instruments of  leveraged portfolio companies may be risky and, due to the significant volatility of such companies, we could lose all or part of our investment in bankruptcy proceedings or otherwise.


Investment in leveraged companies involves a number of significant risks. Leveraged companies in which we invest may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold due to the significant volatility of such companies. Negative developments may be accompanied by deterioration of the value of any collateral and a reduction in the likelihood of our realizing any guarantees that we may have obtained in connection with our investment. Such developments may ultimately result in the leveraged companies in which we invest entering into bankruptcy proceedings, which have a number of inherent risks. Many events in a bankruptcy proceeding are the product of contested matters and adversary proceedings and are beyond the control of the creditors. A bankruptcy filing by an issuer may adversely and permanently affect the issuer. If the proceeding is converted to a liquidation, the value of the issuer may not equal the liquidation value that was believed to exist at the time of the investment. The duration of a bankruptcy proceeding is also difficult to predict, and a creditor’s return on investment can be adversely affected by delays until the plan of reorganization or liquidation ultimately becomes effective. The administrative costs in connection with a bankruptcy proceeding are frequently high and would be paid out of the debtor’s estate prior to any return to creditors. Because the standards for classification of claims under bankruptcy law are vague, our influence with respect to the class of securities or other obligations we own may be lost by increases in the number and amount of claims in the same class or by different classification and treatment. In the early stages of the bankruptcy process, it is often difficult to estimate the extent of, or even to identify, any contingent claims that might be made. In addition, certain claims that have priority by law (for example, claims for taxes) may be substantial. In addition, since our mezzanine loans are generally subordinated to senior loans and are generally unsecured, other creditors may rank senior to us in the event of a bankruptcy proceeding.


Our investments in debt instruments may include “covenant-lite” loans. Covenants are contractual restrictions that lenders place on companies to limit the corporate actions a company may pursue. Generally, the loans in which we expect to invest will have financial maintenance covenants, which are used to proactively address materially adverse changes in a portfolio company’s financial performance. However, to a lesser extent, we may invest in “covenant-lite” loans. We use the term “covenant-lite” to refer generally to loans that do not have a complete set of financial maintenance covenants. Generally, “covenant-lite” loans provide borrower companies more freedom to negatively impact lenders because their covenants are incurrence-based, which means they are only tested and can only be breached following an affirmative action of the borrower, rather than by a deterioration in the borrower’s financial condition. Accordingly, to the extent we invest in “covenant-lite” loans, we may have fewer rights against a borrower and may have a greater risk of loss on such investments as compared to investments in or exposure to loans with financial maintenance covenants.


Inflation may adversely affect the business, results of operations and financial condition of our portfolio companies.


Certain of our portfolio companies may be impacted by inflation. If such portfolio companies are unable to pass any increases in their costs along to their customers, it could adversely affect their results and impact their ability to pay interest and principal on our loans. In addition, any projected future decreases in our portfolio companies’ operating results due to


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inflation could adversely impact the fair value of those investments. Any decreases in the fair value of our investments could result in future unrealized losses and therefore reduce our net assets resulting from operations.


The documents governing the loans underlying our CLO investments may allow for “priming transactions.”


The documents governing the loans underlying our CLO investments may allow for “priming transactions,” where majority lenders or debtors can amend the documents to the detriment of other lenders, amend the documents in order to move collateral, or amend the documents in order to facilitate capital outflow to other parties/subsidiaries in a capital structure, any of which may adversely affect the rights and security priority with respect to such loans.


Our investments in private and middle-market portfolio companies are generally considered lower credit quality obligations, are risky, and we could lose all or part of our investment.


Investment in private and middle-market companies involves a number of significant risks. Generally, little public information exists about these companies, and we rely on the ability of OFS Advisor’s investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. Middle-market 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 our realizing any guarantees we may have obtained in connection with our investment. Such companies typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns.


Middle-market companies are more likely to be considered lower grade investments, commonly called “junk bonds,” which are either rated below investment grade by one or more nationally-recognized statistical rating agencies at the time of investment, or may be unrated but determined by the OFS Advisor to be of comparable quality. Lower grade securities or comparable unrated securities are considered predominantly speculative regarding the issuer’s ability to pay interest and principal, and are susceptible to default or decline in market value due to adverse economic and business developments. The market values for lower grade debt tend to be very volatile and are less liquid than investment grade securities. For these reasons, an investment in our company is subject to the following specific risks: increased price sensitivity to a deteriorating economic environment; greater risk of loss due to default or declining credit quality; adverse company specific events are more likely to render the issuer unable to make interest and/or principal payments; and if a negative perception of the lower grade debt market develops, the price and liquidity of lower grade securities may be depressed. This negative perception could last for a significant period of time.


Additionally, middle-market 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. Middle-market companies also may be parties to litigation and may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence. In addition, our executive officers, directors and OFS Advisor may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies.


Any of our portfolio companies operating in the Health Care and Social Assistance industry are subject to extensive government regulation and certain other risks particular to that industry.


We invest in companies in the Health Care and Social Assistance industry. Our investments in portfolio companies that operate in this sector are subject to certain significant risks particular to that industry. The laws and rules governing the business of healthcare companies and interpretations of those laws and rules are subject to frequent change. Broad latitude is given to the agencies administering those regulations. Existing or future laws and rules could force our portfolio companies engaged in healthcare to change how they do business, restrict revenue, increase costs, change reserve levels and change business practices. Healthcare companies often must obtain and maintain regulatory approvals to market many of their products and change prices for certain regulated products. Delays in obtaining or failing to obtain or maintain these approvals could reduce revenue or increase costs. Policy changes on the local, state and federal level, such as the expansion of the government’s role in the healthcare arena and alternative assessments and tax increases specific to the healthcare industry or healthcare products as part of federal health care reform initiatives, could fundamentally change the dynamics of the healthcare industry. In particular, health insurance reform could have a significant effect on our portfolio companies in this industry sector, and may force our portfolio companies in this industry sector to change how they do business. We can give no assurance that our portfolio companies will be able to adapt successfully in response to these changes.


Portfolio companies in the Health Care and Social Assistance industry may also have a limited number of suppliers of necessary components or a limited number of manufacturers for their products, and therefore face a risk of disruption to their manufacturing process if they are unable to find alternative suppliers when needed.


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Any of these factors could materially adversely affect the operations of a portfolio company in this industry sector and, in turn, impair our ability to timely collect principal and interest payments owed to us.


Investments in equity securities involve a substantial degree of risk.


We may purchase common stock and other equity securities, including warrants, in various portfolio companies. Although equity securities historically have generated higher average total returns than debt securities over the long term, equity securities may experience more volatility in those returns than debt securities. The equity securities we acquire may fail to appreciate, decline in value or lose all value, and our ability to recover our investment will depend on our portfolio company's success. Investments in equity securities involve a number of significant risks, including the risk of further dilution in the event the portfolio company issues additional securities. Investments in preferred securities involve special risks, such as the risk of deferred distributions, illiquidity and limited voting rights.


Our equity ownership in a portfolio company may represent a control investment. Our ability to exit a control investment in a timely manner could result in a realized loss on the investment.


If we obtain a control investment in a portfolio company, our ability to divest ourselves from a debt or equity investment could be restricted due to illiquidity in a private stock, limited trading volume on a public company’s stock, inside information on a company’s performance, insider blackout periods, or other factors that could prohibit us from disposing of the investment as we would if it were not a control investment. Additionally, we may choose not to take certain actions to protect a debt investment in a control investment portfolio company. As a result, we could experience a decrease in the value of our portfolio company holdings and potentially incur a realized loss on the investment.


Our investments in Structured Finance Notes carry additional risks to the risks associated with investing in private debt.


In addition to the general risks associated with debt securities and structured products discussed herein, CLOs carry additional risks, including, but not limited to (i) the possibility 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 possibility that the investments in CLOs are subordinate to other classes or tranches thereof, (iv) the potential of spread compression in the underlying loans of the CLO, which could reduce credit enhancement in the CLOs and (v) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results. CLO equity securities that we may acquire are subordinated to more senior tranches of CLO debt. CLO equity securities are subject to increased risks of default relative to the holders of superior priority interests in the same securities. In addition, at the time of issuance, CLO equity securities are under-collateralized in that the liabilities of a CLO at inception exceed its total assets. When we invest in CLOs, we may be in a first loss or subordinated position with respect to realized losses on the assets of the CLOs in which it is invested. We may recognize phantom taxable income from our investments in the subordinated tranches of CLOs.


Between the closing date and the effective date of a CLO, the CLO collateral manager will generally expect to purchase additional collateral obligations for the CLO. During this period, the price and availability of these collateral obligations may be adversely affected by a number of market factors, including price volatility and availability of investments suitable for the CLO, which could hamper the ability of the collateral manager to acquire a portfolio of collateral obligations that will satisfy specified concentration limitations and allow the CLO to reach the initial par amount of collateral prior to the effective date. An inability or delay in reaching the target initial par amount of collateral may adversely affect the timing and amount of interest or principal payments received by the holders of the CLO debt securities and distributions of the CLO on equity securities and could result in early redemptions which may cause CLO debt and equity investors to receive less than the face value of their investment.


In addition, the portfolios of certain CLOs in which we may invest may contain “covenant-lite” loans. Accordingly, to the extent we are exposed to “covenant-lite” loans, we may have a greater risk of loss on such investments as compared to investments in or exposure to loans with financial maintenance covenants.The failure by a CLO in which we invest to satisfy financial covenants, including with respect to adequate collateralization and/or interest coverage tests, could lead to a reduction in the payments we receive from the CLO. In the event that a CLO fails certain tests, holders of CLO senior debt 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 or any other investment we may make. If any of these occur, it could adversely affect our operating results and cash flows.


Our CLO investments will be exposed to leveraged credit risk. If a CLO does not meet certain minimum collateral value ratios and/or interest coverage ratios, primarily due to senior secured loan defaults, then cash flow that otherwise would have been available to pay us distributions may instead be used to redeem any senior notes or to purchase additional senior secured loans, until the ratios again exceed the minimum required levels or any senior notes are repaid in full.


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Our investments in Structured Finance Notes are more likely to suffer a loss of all or a portion of their value in the event of a default.


From time to time, we invest in Structured Finance Notes that comprise the equity tranche of CLOs, which are junior in priority of payment and are subject to certain payment restrictions generally set forth in an indenture governing such investments. In addition, Structured Finance Notes generally do not benefit from any creditors’ rights or ability to exercise remedies under the indenture governing such investments. Structured Finance Notes are not guaranteed by another party and are subject to greater risk than the secured notes issued by the CLO. CLOs are typically highly levered, utilizing up to approximately 9-13 times leverage, and therefore Structured Finance Notes are more prone to a risk of total loss. There can be no assurance that distributions on the assets held by the CLO will be sufficient to make any distributions or that the yield on the Structured Finance Notes will meet our expectations.


CLOs generally may make payments on Structured Finance Notes only to the extent permitted by the payment priority provisions of an indenture governing the notes issued by the CLO. CLO indentures generally provide that principal payments on Structured Finance Notes may not be made on any payment date unless all amounts owing under secured notes are paid in full. In addition, if a CLO does not meet the asset coverage tests or the interest coverage test set forth in the indenture governing the Structured Finance Notes issued by the CLO, cash would be diverted from the Structured Finance Notes to first pay the secured notes in amounts sufficient to cause such tests to be satisfied.


We will have no influence on management of underlying investments managed by non-affiliated third-party CLO collateral managers.


We are not responsible for, and have no influence over, the asset management of the portfolios underlying the Structured Finance Notes we hold as those portfolios are managed by non-affiliated third-party CLO collateral managers. Similarly, we are not responsible for and have no influence over the day-to-day management, administration or any other aspect of the issuers of the CLOs. As a result, the values of the portfolios underlying our Structured Finance Notes could decrease as a result of decisions made by third-party CLO collateral managers.


We may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient.


We will at times take a security interest in the available assets of our portfolio companies, including the equity interests of their subsidiaries and, in some cases, the equity interests of our portfolio companies held by their stockholders. In the event of a default by a portfolio company on a secured loan, we will only have recourse to the assets collateralizing the loan. There is a risk that the collateral securing our loans may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise, and may fluctuate in value based upon the success or deterioration of the business and market conditions, including as a result of the inability of a portfolio company to raise additional capital. Additionally, in the case of certain of our investments, we do not have a first lien position on the collateral and may not receive the full value of the collateral upon liquidation. If the underlying collateral value is less than the loan amount, we will suffer a loss.


In the event of bankruptcy of a portfolio company, we may not have full recourse to its assets in order to satisfy our loan, or our loan may be subject to equitable subordination. In addition, certain of our loans are subordinate to other debt of the portfolio company. If a portfolio company defaults on our loan or on debt senior to our loan, or in the event of a portfolio company bankruptcy, our loan will be satisfied only after the senior debt receives payment. Where debt senior to our loan exists, the presence of inter-creditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings relating to the portfolio company. Bankruptcy and portfolio company litigation can significantly increase collection losses and the time needed for us to acquire the underlying collateral in the event of a default, during which time the collateral may decline in value, causing us to suffer losses.


Borrowers of Broadly Syndicated Loans may be permitted to designate unrestricted subsidiaries under the terms of their financing agreements, which would exclude such unrestricted subsidiaries from restrictive covenants under the financing agreement with the borrower. Without restriction under the financing agreement, the borrower could take various actions with respect to the unrestricted subsidiary including, among other things, incur debt, grant security on its assets, sell assets, pay dividends or distribute shares of the unrestricted subsidiary to the borrower’s shareholders. Any of these actions could increase the amount of leverage that the borrower is able to incur and increase the risk involved in our investments in Broadly Syndicated Loans accordingly.


If the value of collateral underlying our loan declines or interest rates increase during the term of our loan, a portfolio company may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Decreasing collateral value and/or increasing interest rates may hinder a portfolio company’s ability to refinance our loan because the underlying collateral cannot satisfy the debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our loan at maturity, we could suffer a loss which may adversely impact our financial performance.


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


We expect that all of our assets will be invested in illiquid securities, and a substantial portion of our investments will be in leveraged companies will be subject to legal and other restrictions on resale or will be otherwise less liquid than more broadly traded public securities. The illiquidity of these investments may make it difficult for us to sell such investments if the need arises. In addition, 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 these investments. We may also face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we, OFS Advisor, OFSAM or any of its other affiliates have material nonpublic information regarding such portfolio company.


Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation.


As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by our Board. As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments:


• a comparison of the portfolio company’s securities to publicly traded securities;


• the enterprise value of a portfolio company;


• the nature and realizable value of any collateral;


• the portfolio company’s ability to make payments and its earnings and discounted cash flow;


• the markets in which the portfolio company does business; and


• changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future and other relevant factors.


When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we will use the pricing indicated by the external event to corroborate our valuation. We will record decreases in the market values or fair values of our investments as unrealized depreciation. Declines in prices and liquidity in the corporate debt markets may result in significant net unrealized depreciation in our portfolio. The effect of all of these factors on our portfolio may reduce our net asset value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may suffer additional unrealized losses in future periods, which could have a material adverse effect on our business, financial condition and results of operations.


We are a non-diversified management investment company within the meaning of the 1940 Act, and therefore we are not limited by the 1940 Act with respect to the proportion of our assets that may be invested in securities of a single issuer.


We are classified as a non-diversified management investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. To the extent that we assume large positions in the securities of a small number of issuers, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. Beyond our asset diversification requirements as a RIC under the Code, we do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few portfolio companies.


Our portfolio may be concentrated in a limited number of portfolio companies and industries, which will subject us to a risk of significant loss if any of these companies defaults on its obligations under any of its debt instruments or if there is a downturn in a particular industry.


Our portfolio is, and may in the future be, concentrated in a limited number of portfolio companies and industries. Beyond the asset diversification requirements associated with our qualification as a RIC under the Code, we do not have fixed guidelines for diversification. As a result, 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. Additionally, while we are not targeting any specific industries, our investments may be concentrated in relatively few industries. As a result, a downturn in any particular industry in which we are invested could also significantly impact the aggregate returns we realize.


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


Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in seeking to:


• increase or maintain in whole or in part our position as a creditor or equity ownership percentage in a portfolio company;


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• exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or


• preserve or enhance the value of our investment.


We have discretion to make follow-on investments, subject to the availability of capital resources. Failure on our part 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 level of risk, because we prefer other opportunities or because we are inhibited by compliance with BDC requirements or the desire to maintain our RIC status. Our ability to make follow-on investments may also be limited by OFS Advisor’s allocation policy.


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


We generally do not hold controlling equity positions in our portfolio companies. For portfolio companies in which we do not hold a controlling equity interest, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and that the management and/or stockholders of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity of 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.


Defaults by our portfolio companies will 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, termination of its loans and foreclosure on its assets. This could trigger cross-defaults under other agreements and jeopardize such portfolio company’s ability to meet its obligations under the debt or equity securities that we hold. 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 portfolio company.


Our investments in the health care and social assistance sector face considerable uncertainties including substantial regulatory challenges.


As of December 31, 2021, our investments in the health care and social assistance sector represented 9.9% of our total portfolio at fair value. Our investments in the health care and social assistance sector, which include portfolio companies providing services such as child care, home healthcare, substance abuse treatment and mental health outpatient treatments, are subject to substantial risks. Our portfolio companies in the health care and social assistance sector are often subject to various federal, state and local laws, as well as a variety of regulatory provisions related to zoning, sanitation, licensing, curriculum, health and safety, among others. The laws and rules governing the business of social assistance companies and interpretations of those laws and rules are subject to frequent change. Broad latitude is given to the agencies administering those regulations. In particular, policies and regulations regarding government and third-party reimbursement and insurance coverage of in-home healthcare and mental health and substance abuse treatment fluctuate often. Existing or future laws and rules could force our portfolio companies in the health care and social assistance sector to change how they do business, restrict revenue, increase costs, change reserve levels, change business practices and increase liability in federal and state courts. Participants in the health care and social assistance industry may be subject to certain claims, allegations or litigation involving the care, development and supervision of patients and clients. Such claims, allegations or litigation could significantly damage the reputation of the provider and have adverse effects on the social assistance industry, the financial condition of our portfolio companies, and in turn, our returns, even if such claims, allegations or litigation are proven false.


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


We have invested a substantial portion of our capital in senior secured, unitranche, second-lien and mezzanine loans issued by our portfolio companies. The portfolio companies may be permitted to incur 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 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 senior creditors, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt securities in which we invest, we would have to share any distributions on an equal and ratable basis with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.


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Additionally, certain loans that we make to portfolio companies may be secured on a second-priority basis by the same collateral securing first-priority debt of such companies. The senior-secured liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the portfolio company under the agreements governing the loans. The holders of obligations secured by first-priority liens on the collateral will generally control the liquidation of, and be entitled to receive proceeds from, any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second-priority liens after payment in full of all obligations secured by the first-priority liens on the collateral. If such proceeds were not sufficient to repay amounts outstanding under the loan obligations secured by the second-priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, would only have an unsecured claim against the portfolio company’s remaining assets, if any.


The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with more senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of such senior debt. Under a typical intercreditor agreement, at any time that obligations that have the benefit of the first-priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first-priority liens:


• the ability to cause the commencement of enforcement proceedings against the collateral;


• the ability to control the conduct of such proceedings;


• the approval of amendments to collateral documents;


• releases of liens on the collateral; and


• waivers of past defaults under collateral documents.


We may not have the ability to control or direct such actions, even if our rights are adversely affected.


We may also make unsecured loans to portfolio companies, meaning that such loans will not benefit from any interest in collateral of such companies. Liens on such portfolio companies’ collateral, if any, will secure the portfolio company’s obligations under its outstanding secured debt and may secure certain future debt that is permitted to be incurred by the portfolio company under its secured loan agreements. The holders of obligations secured by such liens will generally control the liquidation of, and be entitled to receive proceeds from, any realization of such collateral to repay their obligations in full before us. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy our unsecured loan obligations after payment in full of all secured loan obligations. If such proceeds were not sufficient to repay the outstanding secured loan obligations, then our unsecured claims would rank equally with the unpaid portion of such secured creditors’ claims against the portfolio company’s remaining assets, if any.


If we make subordinated investments, the obligors or the portfolio companies may not generate sufficient cash flow to service their debt obligations to us.


We may make subordinated investments that rank below other obligations of the obligor in right of payment. Subordinated investments are subject to greater risk of default than senior obligations as a result of adverse changes in the financial condition of the obligor or in general economic conditions. If we make a subordinated investment in a portfolio company, the portfolio company may be highly leveraged, and its relatively high debt-to-equity ratio may create increased risks that its operations might not generate sufficient cash flow to service all of its debt obligations.


The disposition of our investments may result in contingent liabilities.


We expect that a significant portion of our investments will involve private securities. In connection with the disposition of an investment in private securities, we may be required to make representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate, or with respect to potential liabilities. These arrangements may result in contingent liabilities that ultimately result in funding obligations that we must satisfy through our return of distributions previously made to us.


We may be subject to additional risks if we engage in hedging transactions and/or invest in foreign securities.


The 1940 Act generally requires that 70% of our investments be in issuers each of whom is organized under the laws of, and has its principal place of business in, any state of the United States, the District of Columbia, Puerto Rico, the Virgin Islands or any other possession of the United States. Our investment strategy does not presently contemplate investments in securities of non-U.S. companies. We expect that these investments would focus on the same debt investments that we make in


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U.S. middle-market companies and accordingly would be complementary to our overall strategy and enhance the diversity of our holdings. Investing in securities of emerging market issuers involves many risks, including economic, social, political, financial, tax and security conditions in the emerging market, potential inflationary economic environments, regulation by foreign governments, different accounting standards and political uncertainties. Economic, social, political, financial, tax and security conditions also could negatively affect the value of emerging market companies. These factors could include changes in the emerging market government’s economic and fiscal policies, the possible imposition of, or changes in, currency exchange laws or other laws or restrictions applicable to the emerging market companies or investments in their securities and the possibility of fluctuations in the rate of exchange between currencies.


Engaging in either hedging transactions or investing in foreign securities would entail additional risks to our stockholders. We could, for example, use instruments such as interest rate swaps, caps, collars and floors and, if we were to invest in foreign securities, we could use instruments such as forward contracts or currency options and borrow under a credit facility in currencies selected to minimize our foreign currency exposure. In each such case, we generally would seek to hedge against fluctuations of the relative values of our portfolio positions from changes in market interest rates or currency exchange rates. Hedging against a decline in the values of our portfolio positions would not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of the positions declined. However, such hedging could establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions could also limit the opportunity for gain if the values of the underlying portfolio positions increased. Moreover, it might not be possible to hedge against an exchange rate or interest rate fluctuation that was so generally anticipated that we would not be able to enter into a hedging transaction at an acceptable price.


While we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates could 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 could vary. Moreover, for a variety of reasons, we might not seek to establish a perfect correlation between the hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation could prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it might not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities would likely fluctuate as a result of factors not related to currency fluctuations.


We may not realize gains from our equity investments.


When we invest in senior secured, unitranche, second-lien and mezzanine loans, we may acquire warrants or other equity securities of portfolio companies as well. We may also invest in equity securities directly. To the extent we hold equity investments, except as described below, we will attempt to dispose of them and realize gains upon our disposition of them. However, the equity interests we receive may not appreciate in value and may decline in value. As a result, 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.


The interest rates of our loans to our portfolio companies might be subject to change based on recent regulatory changes, including the transition away from LIBOR and the adoption of alternative reference rates, which could affect our results of operations.


LIBOR was the basic rate of interest used in lending transactions between banks on the London interbank market and was widely used as a reference for setting the interest rate on loans globally. We typically used LIBOR as a reference rate in loans we extended to portfolio companies such that the interest due to us pursuant to a loan extended to a portfolio company was calculated using LIBOR. The terms of our debt investments generally included minimum interest rate floors which were calculated based on LIBOR.


On March 5, 2021, the Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the 1-week and 2-month U.S. dollar LIBOR settings would cease publication after December 31, 2021 and the overnight, 1, 3, 6 and 12 months U.S. dollar LIBOR settings will cease publication after June 30, 2023. However, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation encouraged banks to cease entering into new contracts that use U.S. dollar LIBOR as a reference rate no later than December 31, 2021. To identify a successor rate for U.S. dollar LIBOR, the Alternative Reference Rates Committee (“ARRC”), a U.S.-based group convened by the U.S. Federal Reserve Board and the Federal Reserve Bank of New York, was formed. On July 29, 2021, the ARRC formally recommended Secured Overnight Financing Rate (“SOFR”) as its preferred alternative replacement rate for LIBOR for use in derivatives and other financial contracts currently indexed to LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. The AARC has proposed a paced market transition plan to SOFR from LIBOR.


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There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities. If our LIBOR-based borrowings are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in higher interest costs for us, which could have a material adverse effect on our operating results and liquidity. Although SOFR is the ARRC's recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR. In addition, the discontinuance of LIBOR and/or changes to another index could result in mismatches with the interest rate of some of our investments. The transition from LIBOR to SOFR or other alternative reference rates may also introduce operational risks in our accounting, financial reporting, loan servicing, liability management and other aspects of our business. However, we cannot reasonably estimate the impact of the transition at this time.


Recently, the CLOs we have invested in have included, or have been amended to include, language permitting the CLO investment manager to implement a market replacement rate (like those proposed by ARRC) upon the occurrence of certain material disruption events. However, we cannot ensure that all CLOs in which we are invested will have such provisions, nor can we ensure the CLO investment managers will undertake the suggested amendments when able. We believe that because CLO managers and other CLO market participants have prepared for a transition away from LIBOR, we do not anticipate such a transition to have a material impact on the liquidity or value of any of our LIBOR-referenced CLO investments. However, the specific effects of a transition away from LIBOR cannot be determined with certainty as of the date of this filing, a transition away from LIBOR could:


•    adversely impact the pricing, liquidity, value of, return on and trading for a broad array of financial products, including any LIBOR-linked CLO investments;


•    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 CLO investment managers, regarding the interpretation and enforceability of provisions in our LIBOR-based CLO 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.


In addition, the effect of a phase out of LIBOR on U.S. senior secured loans, the underlying assets of the CLOs in which we invest, is currently unclear. To the extent that any replacement rate utilized for senior secured loans differs from that utilized for a CLO that holds those loans, the CLO would experience an interest rate mismatch between its assets and liabilities which could have an adverse impact on our net investment income and portfolio returns. Further, there may be disputes between market participants regarding the interpretation and enforceability of provisions in our LIBOR-based investments (or lack of such provisions) related to the economic floors in such investments, which may result in a loss or degradation of floor protection in the case of a transition from LIBOR to any one of the various alternative reference rates.


Many underlying corporate borrowers can elect to pay interest based on 1-month LIBOR, 3-month LIBOR and/or other rates in respect of the loans held by CLOs in which we are invested, in each case plus an applicable spread, whereas CLOs generally pay interest to holders of the CLO’s debt tranches based on 3-month LIBOR plus a spread. The mismatch in the rate at which CLOs earn interest and the rate at which they pay interest on their debt tranches negatively impacts the cash flows on a CLO’s equity tranche, which may in turn adversely affect our cash flows and results of operations.


The senior secured loans underlying the CLOs in which we invest typically have floating interest rates. A rising interest rate environment may increase loan defaults, resulting in losses for the CLOs in which we invest. In addition, increasing interest rates may lead to higher prepayment rates, as corporate borrowers look to avoid escalating interest payments or refinance floating rate loans. Further, a general rise in interest rates will increase the financing costs of the CLOs. However, since many of the senior secured loans within CLOs have LIBOR floors, if LIBOR is below the average LIBOR floor, there may not be corresponding increases in investment income resulting in smaller distributions to equity investors in these CLOs.


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Risks Related to Our Securities and an Investment in our Common Stock


Our shares are not listed on an exchange or quoted through a quotation system and will not be listed for the foreseeable future, if ever. Therefore, our stockholders have limited liquidity and may not receive a full return of invested capital (including front-end commissions, fees and expenses), upon selling their shares or upon liquidation of our company.


Our shares are illiquid investments for which there is not a secondary market nor is it expected that any such secondary market will develop in the future. Our Board must contemplate a liquidity event for our stockholders on or before ten years after the completion of the Offering, which such ten-year period may be extended, in the sole discretion of the OFS Advisor for up to two additional one-year periods. A future liquidity event could include: (i) a listing of our shares on a national securities exchange; (ii) a merger or another transaction approved by our Board in which our stockholders will receive cash or shares of a listed company; or (iii) a sale of all or substantially all of our assets either on a complete portfolio basis or individually followed by a liquidation. Certain types of liquidity events, such as a listing, would allow us to retain our investment portfolio intact while providing our stockholders with access to a trading market for their securities.


We do not know at this time what circumstances will exist in the future and therefore we do not know what factors our Board will consider in determining whether to pursue a liquidity event in the future. A liquidity event may include a sale, merger or rollover transaction with one or more affiliated investment companies managed by OFS Advisor.


If our shares are listed on a national securities exchange or quoted through a quotation system, we cannot assure our stockholders that a public trading market will develop or, if one develops, that such trading market can be sustained. Shares of companies offered in an initial public offering often trade at a discount to the initial offering price due to underwriting discounts and related offering expenses. Also, shares of closed-end investment companies and BDCs frequently trade at a discount from their net asset value. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share of common stock may decline. We cannot predict whether our common stock, if listed on a national securities exchange, will trade at, above or below net asset value.


If we are unable to raise substantial funds in the Offering, we may be limited in the number and type of investments we may make, the value of an investment in us may be reduced in the event our assets under-perform and we may be unable to continue our operations.


To the extent that less than the maximum number of shares is subscribed for, the opportunity for diversification of our investments may be decreased and the returns achieved on those investments may be reduced as a result of allocating all of our expenses among a smaller capital base. In addition, if we are unable to raise substantial funds in the Offering, we may be unable to continue our operations.


Our dealer manager in the Offering may be unable to sell a sufficient number of shares of common stock for us to achieve our investment objective. Our ability to conduct the Offering successfully is dependent, in part, on the ability of CCO to successfully establish, operate and maintain relationships with a network of broker-dealers.


The success of the Offering, and correspondingly our ability to implement our business strategy, is dependent upon the ability of CCO to establish and maintain relationships with a network of licensed securities broker-dealers and other agents to sell our shares. If CCO fails to perform, we may not be able to raise adequate proceeds through the Offering to implement our investment strategy. If we are unsuccessful in implementing our investment strategy, you could lose all or a part of your investment.


The dealer manager in the Offering has limited experience selling shares on behalf of a BDC and may be unable to sell a sufficient number of shares of common stock for us to achieve our investment objective.


Our dealer manager in the Offering has no prior experience selling shares on behalf of a BDC. There is therefore no assurance that CCO will be able to sell a sufficient number of shares to allow us to have adequate funds to purchase a diversified portfolio of investments. If CCO fails to perform, we may not be able to raise adequate proceeds through the Offering to implement our investment strategy. As a result, we may be unable to achieve our investment objective, and you could lose some or all of the value of your investment. In addition, because CCO is an affiliate of OFS Advisor, it may face conflicts of interest. See “Item 1A. Risk Factors - Our dealer manager may face conflicts of interest as a result of a compensation arrangement between one of its affiliates and OFS Advisor”.


We may, but are not required to, offer to repurchase our stockholder’s shares on a quarterly basis. As a result, our stockholders will have limited opportunities to sell their shares.


Any repurchase offer allows our stockholders to sell their shares back to us at a price equal to the most recently disclosed net asset value per share of our common stock immediately prior to the date of repurchase. Our Board has the right to suspend or terminate the share repurchase program to the extent that it determines that it is in our best interest to do so. Any share repurchase program will include numerous restrictions that limit our stockholder’s ability to sell their shares. We may use cash on hand, cash available from borrowings, and cash from the sale of our investments as of the end of the applicable


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period to repurchase shares. If our Board so determines, we will limit repurchases in each quarter to 2.5% of the weighted average number of shares of our common stock outstanding for any prior 12-month period. To the extent that the number of shares put to us for repurchase exceeds the number of shares that we are able to purchase, we will repurchase shares on a pro rata basis, not on a first-come, first-served basis. These limits may prevent us from accommodating all repurchase requests made in any year. Our Board may amend, suspend or terminate the share repurchase program upon 30 days’ notice. We will notify our stockholders of such developments: (i) in our quarterly reports or (ii) by means of a separate mailing to you, accompanied by disclosure in a current or periodic report under the Exchange Act. In addition, under the quarterly share repurchase program, if implemented, we will have discretion to not repurchase shares, to suspend the program, and to cease repurchases. Further, the program may have many limitations and should not be relied upon as a method to sell shares promptly and at a desired price.


The timing of our repurchase offers pursuant to our share repurchase program may be at a time that is disadvantageous to our stockholders, and, to the extent our stockholders are able to their shares under the program, they may not be able to recover the amount of their investment in our shares.


If we make repurchase offers pursuant to the share repurchase program, we may offer to repurchase shares at a price that is lower than the price that our stockholders paid for their shares. As a result, to the extent our stockholders paid a price that includes the related sales load and to the extent they have the ability to sell their shares pursuant to our share repurchase program, then the price at which they may sell shares, which will be approximately equivalent to our estimated net asset value on the last business day of the prior calendar quarter, may be lower than the amount they paid in connection with the purchase of shares in the Offering.


Our ability to grow depends on our ability to raise additional capital.


We will need to periodically access the capital markets to raise cash to fund new investments. We may be unable to raise substantial capital, which could result in us being unable to structure our investment portfolio as anticipated. If we are unable to structure our investment portfolio as anticipated, the opportunity for diversification of our investments may be decreased and the returns achieved on those investments may be reduced as a result of allocating all of our expenses among a smaller capital base.


We expect to use debt financing and issue additional securities to fund our growth, if any. We cannot assure investors that debt and equity financing will be available to us on favorable terms, or at all, and debt financings may be restricted by the terms of any of our outstanding borrowings. As a BDC, we are generally required to meet a coverage ratio of total assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of at least 150% at the time we issue any debt or preferred stock. This requirement limits the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, this limitation may prevent us from incurring debt or preferred stock and require us to raise additional equity at a time when it may be disadvantageous to do so. In addition, as a BDC, we will generally not be permitted to issue common stock priced below net asset value without stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease new lending and investment activities, and our net asset value could decline.


On November 6, 2018,  a “required majority” (as defined in Section 57(o) of the 1940 Act) of our Board approved the application of a reduced 150% asset coverage ratio to us. In accordance with Section 61(a)(2) of the 1940 Act, we extended to each of our stockholders as of November 6, 2018, an offer to repurchase the equity securities held by such stockholders, with 25% of such equity securities to be repurchased in each of the four quarters following November 6, 2018. As a result, the asset coverage ratio test applicable to us decreased from 200% to 150%, effective November 6, 2019.


A stockholder’s interest in us will be diluted if we issue additional shares, which could reduce the overall value of an investment in us.


Our stockholders will not have preemptive rights to any shares we issue in the future. Our Charter authorizes us to issue up to 20 million shares of common stock. Pursuant to our Charter, a majority of our entire Board may amend our Charter to increase our authorized shares without stockholder approval. Our board may elect to sell additional shares in the future or issue equity interests in private offerings. To the extent we issue additional equity interests at or below net asset value a stockholder’s percentage ownership interest in us may be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our investments, a stockholder may also experience dilution in the book value and fair value of its shares.


Under the 1940 Act, we are generally prohibited from issuing or selling our common stock at a price below net asset value per share, which may be a disadvantage as compared with certain public companies. We may, however, sell our common stock, or warrants, options, or rights to acquire our common stock, at a price below the current net asset value of our common stock if our Board and independent directors determine that such sale is in our best interests and the best interests of our stockholders, and our stockholders, including a majority of those stockholders that are not affiliated with us, approve such


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sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board, closely approximates the fair value of such securities (less any distributing commission or discount). If we raise additional funds by issuing common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at that time will decrease and our stockholders will experience dilution.


We may be unable to invest a significant portion of the net proceeds of the Offering on acceptable terms in an acceptable timeframe.


Delays in investing the net proceeds of the Offering may impair our performance. We cannot assure our stockholders that we will be able to continue to identify investments that meet our investment objective or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds of the Offering on acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.


Before making investments, we will invest the net proceeds of the Offering primarily in cash, cash equivalents, U.S. government securities, repurchase agreements, and/or other high-quality debt instruments maturing in one year or less from the time of investment. This will produce returns that are significantly lower than the returns which we expect to achieve when our portfolio is fully invested in securities meeting our investment objective. As a result, any distributions that we pay while our portfolio is not fully invested in securities meeting our investment objective may be lower than the distributions that we may be able to pay when our portfolio is fully invested in securities meeting our investment objective.


Certain provisions of the Maryland General Corporation Law and of our Charter and bylaws could deter takeover attempts and have an adverse impact on the value of our common stock.


The Maryland General Corporation Law contains and our charter and bylaws contain provisions that may discourage, delay or make more difficult a change in control of the Company 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 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 independent 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.


We 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 in three classes serving staggered three-year terms, and authorizing our Board 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, to amend our Charter without stockholder approval and 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. 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 has considered both the positive and negative effects of the foregoing provisions and determined that they are in the best interest of our stockholders.


The net asset value of our common stock may fluctuate significantly.


The net asset value and liquidity, if any, of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:


• changes in the value of our portfolio of investments and derivative instruments as a result of changes in market factors, such as interest rate shifts, and also portfolio specific performance, such as portfolio company defaults, among other reasons;


• changes in regulatory policies or tax guidelines, particularly with respect to RICs or BDCs;


• loss of RIC or BDC status;


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• distributions that exceed our net investment income and net income as reported according to GAAP;


• changes in earnings or variations in operating results;


• changes in accounting guidelines governing valuation of our investments;


• any shortfall in revenue or net income or any increase in losses from levels expected by investors;


• departure of either of OFS Advisor or certain of their respective key personnel;


• general economic trends and other external factors; and


• loss of a major funding source.


Our Unsecured Note is effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future and will rank pari passu with, or equal to, all outstanding and future unsecured, unsubordinated indebtedness issued by us and our general liabilities.


Our Unsecured Note is not secured by any of our assets or any of the assets of any of our subsidiaries. As a result, the Unsecured Note is effectively subordinated to any secured indebtedness we have outstanding (including the PWB Credit Facility or that we may incur in the future (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our secured indebtedness may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holder of the Unsecured Note.


There is a risk that stockholders may not receive distributions or that our distributions may not grow over time and a portion of our distributions may be a return of capital.


Subject to our Board’s discretion and applicable legal restrictions, we intend to authorize, declare and pay cash distributions on a quarterly basis. We expect to pay distributions out of assets legally available for distribution. We cannot assure stockholders that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions might be adversely affected by the impact of one or more of the risk factors described in this Annual Report on Form 10-K. Due to the asset coverage test applicable to us under the 1940 Act as a BDC, we may be limited in our ability to make distributions.


When we make distributions, we will be required to determine the extent to which such distributions are paid out of current or accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of an investor’s basis in our stock and, assuming that an investor holds our stock as a capital asset, thereafter as a capital gain. A return of capital is a return to stockholders of a portion of their original investment in us rather than income or capital gains.


We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent our cash flows from operations, net investment income or earnings are not sufficient to fund declared distributions.


We may fund distributions from the uninvested proceeds of an offering and borrowings, and we have not established limits on the amount of funds we may use from such proceeds or borrowings to make any such distributions. We may pay distributions from the sale of assets to the extent distributions exceed our earnings or cash flows from operations. Distributions from offering proceeds or from borrowings could reduce the amount of capital we ultimately invest in our investment portfolio.


The existence of a large number of outstanding shares and stockholders prior to completion of the listing of our securities on a national securities exchange could negatively affect our stock price.


The ability of our stockholders to liquidate their investments is limited. If we were to list our common stock on a securities exchange in the future, a large volume of sales of these shares could decrease the prevailing market prices of our common stock and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if a substantial number of sales were not affected, the mere perception of the possibility of these sales could depress the market price of our common stock and have a negative effect on our ability to raise capital in the future. In addition, anticipated downward pressure on our common stock price due to actual or anticipated sales of common stock from this market overhang could cause some institutions or individuals to engage in short sales of our common stock, which may itself cause the price of our stock to decline.


If we issue preferred stock, debt securities or convertible debt securities, the net asset value of our common stock may become more volatile.


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We cannot assure the holders of common stock that the issuance of preferred stock and/or debt securities would result in a higher yield or return to the holders of our common stock. The issuance of preferred stock, debt securities or convertible debt would likely cause the net asset value of our common stock to become more volatile. If the dividend rate on the preferred stock, or the interest rate on the debt securities, were to approach the net rate of return on our investment portfolio, the benefit of leverage to the holders of our common stock would be reduced. If the dividend rate on the preferred stock, or the interest rate on the debt securities, were to exceed the net rate of return on our portfolio, the use of leverage would result in a lower rate of return to the holders of common stock than if we had not issued the preferred stock or debt securities. Any decline in the net asset value of our investment would be borne entirely by the holders of our 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 our common stock than if we were not leveraged through the issuance of preferred stock.


There is also a risk that, in the event of a sharp decline in the value of our net assets, we would be in danger of failing to maintain required asset coverage ratios which may be required by the preferred stock, debt securities, convertible debt or units or of a downgrade in the ratings of the preferred stock, debt securities, convertible debt or units or our current investment income might not be sufficient to meet the dividend requirements on the preferred stock or the interest payments on the debt securities. If we do not maintain our required asset coverage ratios, we may not be permitted to declare dividends. In order to counteract such an event, we might need to liquidate investments in order to fund redemption of some or all of the preferred stock, debt securities or convertible debt. In addition, we would pay (and the holders of our common stock would bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred stock, debt securities, convertible debt or any combination of these securities. Holders of preferred stock, debt securities or convertible debt may have different interests than holders of common stock and may at times have disproportionate influence over our affairs.


Holders of any preferred stock that we may issue will have the right to elect members of our Board and have class voting rights on certain matters.


The 1940 Act requires that holders of shares of preferred stock must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred stock are in arrears by two years or more, until such arrearage is eliminated. In addition, certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock, including changes in fundamental investment restrictions and conversion to open-end status and, accordingly, preferred stockholders could veto any such changes. Restrictions imposed on the declarations and payment of dividends 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, might impair our ability to maintain our tax treatment as a RIC for U.S. federal income tax purposes.


Because the Company is not currently a “publicly offered regulated investment company,” as defined in the Code, certain U.S. stockholders will be treated as having received a dividend from us in the amount of such U.S. stockholders’ allocable share of certain Company expenses, including a portion of its management fees, and such expenses will be treated as miscellaneous itemized deductions of such U.S. stockholders that are not currently deductible.


The Company does not currently qualify as a “publicly offered regulated investment company,” as defined in the Code. Accordingly, stockholders will be taxed as though they received a distribution of some of the Company’s expenses. A “publicly offered regulated investment company” is a RIC whose shares are either (i) continuously offered pursuant to a public offering, (ii) regularly traded on an established securities market, or (iii) held by at least 500 persons at all times during the taxable year. The Company anticipates that it will not qualify as a publicly offered RIC for the 2021 tax year, and the Company cannot determine when it will qualify as a publicly offered RIC. Since the Company is not a publicly offered RIC, a non-corporate stockholder’s allocable portion of the Company’s affected expenses, including a portion of its management fees, will be treated as an additional distribution to the stockholder. A non-corporate stockholder’s allocable portion of these expenses are treated as miscellaneous itemized deductions that are not currently deductible by such stockholders.


General Risk Factors


Investing in our common stock involves a high degree of risk.


The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and includes volatility or loss of principal. Our investments in portfolio companies may be highly speculative and aggressive and, therefore, an investment in our common stock may not be suitable for someone with lower risk tolerance.


We may experience fluctuations in our quarterly operating results.


We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate 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, distributions from our subsidiaries and portfolio


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companies, the degree to which we encounter competition in our markets and general economic conditions. In light of these factors, results for any period should not be relied upon as being indicative of performance in future periods.


We incur significant costs as a result of being a public company.


As a public company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company registered under the Exchange Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act and other rules implemented by the SEC.


Global capital markets could enter a period of severe disruption and instability. These conditions have historically affected and could again materially and adversely affect debt and equity capital markets in the United States and around the world and our business.


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 U.S. and worldwide. The impact of downgrades by rating agencies to the U.S. government’s sovereign credit rating or its perceived creditworthiness as well as potential government shutdowns could adversely affect the U.S. and global financial markets and economic conditions. Since 2010, several European Union, or EU, countries have faced budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. 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. The decision made in the United Kingdom referendum to leave the EU (commonly known as “Brexit”) has led to volatility in global financial markets and may lead to weakening in consumer, corporate and financial confidence in the United Kingdom and Europe. Under the terms of the withdrawal agreement negotiated and agreed to between the United Kingdom and the European Union, the United Kingdom's departure from the European Union was followed by a transition period which ran until December 31, 2020 and during which the United Kingdom continued to apply European Union law and was treated for all material purposes as if it were still a member of the European Union. On December 24, 2020, the European Union and United Kingdom governments signed a trade deal (the "Trade Agreement") that applied provisionally from January 1, 2021  until the end of April 2021, when the European Parliament approved the Trade Agreement, and that now governs the relationship between the United Kingdom and the European Union. The Trade Agreement implements significant regulation around trade, transport of goods and travel restrictions between the United Kingdom and the European Union.  Notwithstanding the foregoing, the longer term economic, legal, political, and social framework to be put in place between the United Kingdom and the European Union are unclear at this stage and are likely to lead to ongoing political and economic uncertainty.


The deterioration in the economic conditions in the Eurozone and other regions or countries globally and the resulting instability in global financial markets may pose a risk to our business. Global market and economic disruptions have affected, and may in the future affect the U.S. capital markets, which could adversely affect our business, financial condition or results of operations. We cannot assure you that market disruptions in Europe and other regions or countries, including the increased cost of funding for certain governments and financial institutions, will not impact the global economy, and we cannot assure you that assistance packages will be available, or if available, be sufficient to stabilize countries and markets in Europe or elsewhere affected by a financial crisis. To the extent uncertainty regarding any economic recovery in Europe negatively impacts consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly and adversely affected.


Various social and political circumstances in the United States and around the world (including wars and other forms of conflict, terrorist acts, security operations and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes and global health epidemics) may also contribute to increased market volatility and economic uncertainties or deterioration in the United States and worldwide. Such events, including rising trade tensions between the United States and China, other uncertainties regarding actual and potential shifts in U.S. and foreign, trade, economic and other policies with other countries, escalating border tensions between Russia and Ukraine, and the COVID-19 pandemic, could adversely affect our business, financial condition or results of operations. These market and economic disruptions could negatively impact the operating results of our portfolio companies.


Additionally, the Federal Reserve may raise, or may announce its intention to raise, the Federal Funds Rate in 2022. These developments, along with the U.S. government’s credit and deficit concerns, global economic uncertainties and market volatility and the impacts of the COVID-19 pandemic, could cause interest rates to be volatile, which may negatively impact our ability to access the debt markets and capital markets on favorable terms.


Capital markets may experience periods of disruption and instability and we cannot predict when these conditions will occur. Such market conditions could materially and adversely affect debt and equity capital markets in the United States and abroad, which could have a negative impact on our business, financial condition and results of operations.


The global capital markets have experienced a period of disruption as evidenced by a lack of liquidity in the debt capital markets, write-offs in the financial services sector, the re-pricing of credit risk and the failure of certain major financial


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institutions. While the capital markets have improved, these conditions could deteriorate again in the future. During such market disruptions, we may have difficulty raising debt or equity capital, especially as a result of regulatory constraints.


Market conditions may in the future make it difficult to extend the maturity of or refinance our existing indebtedness and any failure to do so could have a material adverse effect on our business. 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 disruption and volatility, 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 and results of operations.


Various social and political tensions in the United States and around the world, including in the Middle East, Eastern Europe and Russia, may continue to contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause further economic uncertainties or deterioration in the United States and worldwide. Specifically, the rising conflict between Russia and Ukraine, and resulting market volatility, could adversely affect our business, financial condition or results of operations. In response to the conflict between Russia and Ukraine, the U.S. and other countries have imposed sanctions or other restrictive actions against Russia. Additionally, several EU countries, including Greece, Ireland, Italy, Spain, and Portugal, continue to face budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is also 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. The recent United States and global economic downturn, or a return to the recessionary period in the United States, could adversely impact our investments. Any of the above factors, including sanctions, export controls, tariffs, trade wars and other governmental actions, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline. These market and economic disruptions could also negatively impact the operating results of our portfolio companies. We cannot predict the duration of the effects related to these or similar events in the future on the United States 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.


We are subject to risks related to corporate social responsibility.


Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities, which are increasingly considered to contribute to the long-term sustainability of a company’s performance. A variety of organizations measure the performance of companies on ESG topics, and the results of these assessments are widely publicized. In addition, investment in funds that specialize in companies that perform well in such assessments are increasingly popular, and major institutional investors have publicly emphasized the importance of such ESG measures to their investment decisions.


We risk damage to our brand and reputation if we fail to act responsibly in a number of areas, such as diversity, equity and inclusion, environmental stewardship, corporate governance, support for local communities and transparency and considering ESG factors in our investment processes. Adverse incidents with respect to ESG activities could impact the value of our brand, the cost of our operations and relationships with investors, all of which could adversely affect our business and results of operations. Additionally, new regulatory initiatives related to ESG could adversely affect our business. The SEC has announced that it may require disclosure of certain ESG-related matters. At this time, there is uncertainty regarding the scope of such proposals or when they would become effective (if at all). Compliance with any new laws or regulations increases our regulatory burden and could make compliance more difficult and expensive, affect the manner in which we or our portfolio companies conduct our businesses and adversely affect our profitability.


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Cybersecurity risks and cyber incidents may adversely affect our business or the business of our portfolio companies by causing a disruption to our operations or the operations of our portfolio companies, a compromise or corruption of our confidential information or the confidential information of our portfolio companies and/or damage to our business relationships or the business relationships of our portfolio companies, all of which could negatively impact the business, financial condition and operating results of us or our portfolio companies.


A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of the information resources of us or our portfolio companies. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems or those of our portfolio companies or third-party vendors for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusions, including by computer hackers, nation-state affiliated actors, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Despite careful security and controls design, our information technology systems and the information technology systems of our portfolio companies and our third-party vendors, may be subject to security breaches and cyber-attacks, the result of which may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation damage to business relationships and damage to our competitiveness, stock price, and long-term stockholder value. The costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. As our, our portfolio companies’ and our third party vendors’ reliance on technology has increased, so have the risks posed to our information systems, both internal and those provided by OFS Services and third-party service providers, and the information systems of our portfolio companies. OFS Advisor has implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that a cyber incident will not occur and/or that our financial results, operations or confidential information will not be negatively impacted by such an incident. In addition, cybersecurity has become a top priority for regulators around the world, and some jurisdictions have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data. Even the most well-protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not be detected and, in fact, may not be detected. Accordingly, we and our service providers may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us and our service providers to entirely mitigate this risk. Cybersecurity risks require continuous and increasing attention and other resources from us to, among other actions, identify and quantify these risks, upgrade and expand our technologies, systems and processes to adequately address such risks. Such attention diverts time and other resources from other activities and there is no assurance that our efforts will be effective. If we fail to comply with the relevant laws and regulations, we could suffer financial losses, a disruption of our businesses, liability to investors, regulatory intervention or reputational damage. Further, the remote working conditions resulting from the COVID-19 pandemic have heightened our and our portfolio companies' vulnerability to a cybersecurity risk or incident.




Item 1B.    Unresolved Staff Comments


Not applicable.




Item 2.    Properties


We do not own or lease any real estate or other physical properties material to our operation. Our headquarters are located at 10 S. Wacker Drive, Suite 2500, Chicago, IL, 60606, and are provided by OFS Services pursuant to the Administration Agreement. Additional operations are conducted from offices in New York, New York and Los Angeles, California, which are also provided by OFS Services pursuant to the Administration Agreement. We believe that our office facilities are suitable and adequate for our business as we contemplate continuing to conduct it.




Item 3.     Legal Proceedings


We, OFS Advisor and OFS Services, are not currently subject to any material pending legal proceedings threatened against us as of December 31, 2021. From time to time, we may be a party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of 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 business, financial condition, results of operations or cash flows.




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


There is currently no market for our common stock, nor can we give any assurance that one will develop. Until a market for our common stock develops, it may only be offered and sold in transactions exempt from registration under the Securities Act under Section 4(2) and Regulation D.


Stockholders


As of March 14, 2022, there were 447 holders of record of our stock.


Issuer Purchases of Equity Securities


On November 6, 2018,  a “required majority” (as defined in Section 57(o) of the 1940 Act) of our board of directors approved the application of a reduced 150% asset coverage ratio to us. In accordance with Section 61(a)(2) of the 1940 Act, we extended to each of our stockholders as of November 6, 2018, an offer to repurchase the equity securities held by such stockholders, with 25% of such equity securities to be repurchased in each of the four quarters following November 6, 2018. As a result, the asset coverage ratio test applicable to us decreased from 200% to 150%, effective November 6, 2019.


The following table summarizes the common stock repurchases by us for the years ended December 31, 2021, 2020 and 2019: Number of SharesAmountJanuary 1, 2019 through April 5, 2019(1)7,407$98,296April 6, 2019 through June 30, 20199,029119,821July 1, 2019 through September 30, 20197,40797,111October 1, 2019 through December 31, 201915,597204,317January 1, 2020 through April 3, 2020(2)32,622364,384April 4, 2020 through June 30, 202053,665654,713July 1, 2020 through September 30, 202055,320694,819October 1, 2020 through December 31, 202055,674700,935January 1, 2021 through April 5, 2021(3)55,377708,272April 6, 2021 through June 30, 202155,016700,354July 1, 2021 through September 30, 202154,557702,694October 1, 2021 through December 31, 202153,941696,391


(1) Our February 11, 2019 tender offer that was originally scheduled to expire on March 27, 2019, was amended to extend the offer period to April 5, 2019.


(2) Our February 21, 2020 tender offer that was originally scheduled to expire on March 27, 2020, was amended to extend the offer period to April 3, 2020.


(3)    Our February 19, 2021 tender offer that was originally scheduled to expire on March 26, 2021, was amended to extend the offer period to April 5, 2021.


All repurchased shares were retired upon acquisition.


Sales of Unregistered Securities


During the year ended December 31, 2021, we issued and sold 60,332 shares of our common stock for gross proceeds of $845,000 or a weighted average price of $14.01 per share.


The offer and sale of the Company’s Common Stock in the private placement was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of, and Rule 506 of Regulation D under, the Securities Act. We paid $61,700 in commissions in connection with the sale of the shares.


Because shares of our common stock have been acquired by investors in our more transactions “not involving a public offering,” they are “restricted securities” and may be required to be held indefinitely. Our common shares may not be sold, transferred, assigned, pledged or otherwise disposed of unless (i) the transferor provides OFS Advisor with at least 10 days written notice of the transfer; (ii) the transfer is made in accordance with applicable securities laws; and (iii) the transferee agrees in writing to be bound by these restrictions and the other restrictions imposed on the common shares and to execute such other instruments or certifications as are reasonably required by us. Accordingly, an investor must be willing to bear the economic risk of investment in the common shares until we are liquidated. No sale, transfer, assignment, pledge or other


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disposition, whether voluntary or involuntary, of the common shares may be made except by registration of the transfer on our books.


Distributions


We generally intend to distribute, out of assets legally available for distribution, substantially all of our available earnings, on a quarterly basis, as determined by our Board in its discretion. Distributions directly affect our taxable income. See “Item 1. Business–Material U.S. Federal Income Tax Considerations–Taxation as a RIC.”


Distributions in excess of our current and accumulated ICTI are reported as returns of capital; the tax treatment to the stockholder will depend on a variety of factors including the stockholder’s tax basis in our shares. The determination of the tax attributes of our distributions is made annually as of the end of the year, and is based on our taxable income for the full year and distributions paid for the full year; therefore, determinations made on a quarterly basis may not be representative of the tax attributes of our distributions to stockholders. Each year a statement on Form 1099-DIV identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus, which is a nontaxable distribution) is mailed to our U.S. stockholders. For the year ended December 31, 2021, all of our distributions were paid from ordinary income.







Item 6.    Reserved.







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


Forward-Looking Statements


This Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:


• our ability and experience operating a BDC or maintaining our qualification as a RIC under the Code;


• our dependence on key personnel;


• our ability to maintain or develop referral relationships;


• the ability of OFS Advisor to identify, invest in and monitor companies that meet our investment criteria;


• the belief that the carrying amounts of our financial instruments, such as cash, receivables and payables approximate the fair value of such items due to the short maturity of such instruments and that such financial instruments are held with high credit quality institutions to mitigate the risk of loss due to credit risk;


• actual and potential conflicts of interest with OFS Advisor and other affiliates of OFSAM;


• constraint on investment due to access to material nonpublic information;


• restrictions on our ability to enter into transactions with our affiliates;


• the impact of interest and inflation rates on our business prospects and the prospects of our portfolio companies;


• the use of borrowed money to finance a portion of our investments;


• our increased ability to incur additional leverage pursuant to Section 61(a)(2) of the 1940 Act, and the impact of such leverage on our net investment income and results of operations;


• competition for investment opportunities;


• the percentage of investments that bear interest on a floating rate or fixed rate basis;


• our ability to raise debt or equity capital as a BDC;


• the timing, form and amount of any distributions from our portfolio companies;


• the impact of a protracted decline in the liquidity of credit markets on our business;


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• interest rate volatility, including the transition from LIBOR to one or more alternative reference rate(s);


• the general economy and its impact on the industries in which we invest;


• changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, including with respect to changes from the impact of the COVID-19 pandemic; the length and duration of the COVID-19 pandemic in the United States as well as worldwide and the magnitude of the economic impact of the pandemic; the effect of the COVID-19 pandemic on our business, financial condition, results of operations and cash flows and those of our portfolio companies (including the expectation that a shift from cash interest to PIK interest will result from concessions granted to borrowers due to the COVID-19 pandemic), including our and their ability to achieve our respective objectives; the effect of the disruptions caused by the COVID-19 pandemic on our ability to continue to effectively manage our business and on the availability of equity and debt capital and our use of borrowed money to finance a portion of our investments;


• the belief that we have sufficient levels of liquidity to support our existing portfolio companies and deploy capital in new investment opportunities;


• uncertain valuations of our portfolio investments, including our belief that reverting back to an equal weighting of the Reunderwriting Analysis method and Synthetic Rating Analysis method more accurately captures certain data related to the observed return of market liquidity and the historic correlative relationship between these markets;


• the effect of new or modified laws or regulations governing our operations;


• ability to continue generating strong risk-adjusted net returns by assembling a diversified portfolio of investments across a broad range of industries;


• the need and availability of additional capital on favorable terms to finance growth given our expectation to distribute substantially all of our net ordinary income and net realized capital gains to our stockholders; and


• ability to secure financial maintenance covenants in the loans in which we invest.


Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Annual Report on Form 10-K should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include, among others, those described or identified in “Item 1A. Risk Factors” in this Annual Report on Form 10-K. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report on Form 10-K.


We have based the forward-looking statements on information available to us on the date of this Annual Report on Form 10-K. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The forward-looking statements and projections contained in this annual report on Form 10-K are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act.


The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this Annual Report on Form 10-K.


Overview


Key performance metrics are presented below: December 31, 2021December 31, 2020Net asset value per common share$12.99$12.59


Year Ended December 31,202120202019Net investment income per common share$1.06$0.99$1.00Net increase in net assets resulting from operations per common share1.400.560.95Distributions paid per common share1.021.011.05


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Our NAV per share increased to $12.99 at December 31, 2021 from $12.59 at December 31, 2020, primarily due to net gains on our investment portfolio of $728,088, or $0.34 per common share. For the year ended December 31, 2021, higher then expected net gains were primarily due to a realized gain of $479,727 on the sale of our preferred equity in TTG Healthcare, LLC, as well as net gains of $591,437 on our senior secured loans from the continued reversal of unrealized depreciation recognized during the three months ended March 31, 2020, due to market disruptions resulting from the COVID-19 pandemic.


During the year ended December 31, 2021, net investment income increased $58,956 from the prior year. Net interest margin (total interest income less interest expense) increased $480,840, or $0.23 per common share, primarily due to an increase in the weighted-average performing income yield on interest-bearing investments to 11.0% from 10.0% in the prior year. Also, our weighted-average debt interest costs decreased during the year ended December 31, 2021, due to amendments to each the PWB Credit Facility and Unsecured Note to reduce their stated interest rates.


During the year ended December 31, 2021, we recognized net gains on our debt and equity investments of $678,331 and $410,531, respectively, offset by net losses of $266,953 on our Structured Finance Notes. For the year ended December 31, 2021, net realized losses on investments of $298,166 were primarily attributable to the realized loss of $1,007,141 on the write-off of our subordinated debt investment in Online Tech Stores, LLC, offset by realized gains of $702,837 on the sale of common and preferred equity investments. As of December 31, 2021, we had no debt investments on non-accrual status.


Since OFS Advisor implemented its business continuity plan in mid-March 2020, OFS Advisor’s entire team effectively transitioned to remote work, and we are currently capable of maintaining our normal functionality to complete our operational requirements.


We have actively monitored our portfolio companies throughout this period of economic uncertainty, which has included assessments of our portfolio companies' operational and liquidity outlook. During the year ended December 31, 2021, we extended six revolvers and eight delayed draw commitments to support our portfolio companies through the COVID-19 pandemic. As of December 31, 2021, we have unfunded commitments of $4,180,448 to ten portfolio companies. For details on our portfolio activity for the year ended December 31, 2021, see “Portfolio Composition and Investment Activity — Investment Activity”.


We will continue to monitor the rapidly evolving situation relating to the COVID-19 pandemic and guidance from U.S. and international authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plan of operation.


We cannot predict the full impact of the COVID-19 pandemic, including its duration in the United States and worldwide, and the magnitude of the economic impact of the pandemic, including the impact of travel restrictions, business closures and other quarantine measures imposed on service providers and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, we are unable to predict the duration and impact of any additional business and supply-chain disruptions, the extent to which the COVID-19 pandemic will negatively affect our portfolio companies’ operating results, or the impact that such disruptions may have on our results of operations and financial condition. Depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies will experience financial distress and possibly default on their financial obligations to us and their other capital providers. We also expect that some of our portfolio companies may significantly curtail business operations, furlough or lay-off employees and terminate service providers, and defer capital expenditures if subjected to prolonged and severe financial distress, which would likely impair their business on a permanent basis. However, to the extent our portfolio companies continue to be adversely impacted by the COVID-19 pandemic, our future net investment income, financial condition, results of operations and the fair value of our portfolio investments may be materially adversely impacted. . See “Item 1A. Risk Factors — Risks Related to the COVID-19 Pandemic” for additional information.


We are also subject to financial risks, including changes in market interest rates. As of December 31, 2021, approximately $32.6 million (aggregate cost amount) of our debt investments bore interest at variable rates, which are generally LIBOR-based but will transition away from LIBOR to any one the various alternative reference rates, and many of which are subject to reference-rate floors. We have prepared and planned for the transition away from LIBOR, incorporating alternate reference rates to be used in our credit agreements and making other preparations, and believe the impact on us from the transition will be low. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased, primarily in the second quarter of 2020. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR or an alternative rate are not offset by a corresponding increase in the credit spread over LIBOR or an alternative rate that we earn on our portfolio investments, or a decrease in our operating expenses, including our incentive fee and the interest costs on our liabilities indexed to LIBOR or an alternative rate. As of December 31, 2021, the majority of our variable rate debt investments are subject to the base rate floor, partially mitigating the impact of the recent decrease in LIBOR on our gross investment income. However, there may be disputes between market participants regarding the interpretation and


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enforceability of provisions related to the economic floors in our LIBOR-based investments (or lack thereof), which may result in a loss or degradation of floor protection in the case of a transition from LIBOR to any one of the various alternative reference rates. See “Item 1A. Risk Factors — Risks Related to our Business and Structure” for additional information.


At December 31, 2021, our asset coverage ratio was 228% and we remained in compliance with all applicable financial covenant thresholds under our outstanding debt and our minimum asset coverage requirement under the 1940 Act. As of December 31, 2021, we had an unfunded commitment of $6,794,859 under our PWB Credit Facility. Based on fair values and net asset value at December 31, 2021, we could access our full remaining unfunded commitment of $6,794,859 under the PWB Credit Facility and have an asset coverage ratio of 196%. We continue to believe that we have sufficient levels of liquidity to support our commitments to existing portfolio companies and selectively deploy capital in new investment opportunities in this challenging environment.


On January 26, 2022, our Board declared a distribution of $0.0846 per common share, payable on April 15, 2022, to stockholders of record on January 27, 2022.


On February 23, 2022, our Board declared a distribution of $0.0846 per common share, payable on April 15, 2022, to stockholders of record on February 24, 2022.


Critical Accounting Policies and Significant Estimates


The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. Critical accounting policies are those that require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact on our current and future financial condition and results of operations.


Our critical accounting policies and estimates are those relating to revenue recognition, expense limitation agreements and fair value estimates. Management has discussed the development and selection of each critical accounting policy and estimate with the Audit Committee of the Board of Directors. For a descriptions of our revenue recognition and fair value policies, see “Item 8 – Financial Statements – Note 2. Summary of Significant Accounting Policies.”


Revenue recognition


Our direct lending activities frequently involve the acquisition of multiple financial instruments or rights either in an initial transaction, or in subsequent or "follow-on" transactions, including amendments to existing securities. These financial instruments can include loans, preferred and common stock, warrants, or membership interests in limited liability companies. Acquired rights can include fixed or variable fees that can be either guaranteed or contingent upon operating performance of the underlying portfolio companies. Moreover, these fees may be payable in cash or additional securities. The revenue recognized on these instruments is a function of the fee or other consideration allocated to them, including amounts allocated to loan syndication fees at the time of acquisition.


These allocations are generally based on the relative fair value of the instruments at the time of the transaction, a process involving fair value estimates which is also a critical accounting policy and significant estimate. Once determined, these allocations directly affect the discount/premium and yield on debt securities, the cost and net gains/losses on equity securities, and ICTI. These allocations require an understanding of the terms and conditions of the underlying agreements and requires significant management judgment.


PIK Income . Our recognition of PIK interest includes assessment of collectibility. In determining whether a loan should be on non-accrual status, management considers whether the in-kind securities received would be non-accretive to overall value of our investment position (i.e., the recognition of PIK income merely results in the recognition of offsetting unrealized depreciation on the position, and no increase in our net assets). Furthermore, the non-accrual of PIK interest does not preclude the recognition of cash interest received.


Structured Finance Notes . Recognition of interest income on our subordinated note and mezzanine debt investments require development of numerous assumptions regarding the performance and behavior of the underlying loans and portfolio companies, as well as assumption regarding the actions expected by the collateral managers of the CLOs. Income recognized under ASC Sub-topic 325-40, Beneficial Interests in Securitized Financial Assets , the authoritative accounting literature for income recognition on our Structured Finance Notes, is the constant yield-to-redemption that equates the expected cash flows


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from the instrument to its cost or amortized cost. The cash flows from a subordinated note structured finance instrument are estimated, on a period-by-period basis, as


• the expected cash flows from the underlying portfolio of the CLO vehicle, derived by adjusting the contractual amounts due on the portfolio investments for, among other things


◦ expected losses on defaults,


◦ expected prepayments, and


◦ the impact to cash flows (positive or negative) from the assumed reinvestment of recoveries on defaults and amounts collected on prepayments, less


• the amounts contractually due on tranches senior to the subordinated notes, which generally requires use of forward reference rate curves and the stated spread over such rates specified in the CLO indentures,


through the expected redemption of the subordinated notes, which is generally assumed to occur upon the exercise of an optional redemption by the collateral manager of the underlying CLO sometime after the reinvestment period specified in the CLO indenture. Following the reinvestment period specified in the indenture, CLO instruments enter their amortization period during which the principle balances of the CLO senior debt tranches are reduced through amortization payment. As the senior CLO debt tranches amortize, the management of the CLO becomes less economically viable to its collateral manager, prompting the manager to exercise options to liquidate the underlying portfolio, distribute cash to remaining tranches in order of seniority, and wind-up the CLO vehicle. Depending on where the CLO vehicle is in its reinvestment period, the period over which these cash flows are forecast can be several years from the valuation date and cross several business cycles. Such estimates involve significant judgement by management. When the amortized cost of an CLO instrument exceeds the undiscounted expected cash flows from the instrument as of the estimation date, the yield on that instrument is set to zero percent (-0-%).


The cash flow assumptions utilized in our subordinated note and mezzanine debt investments revenue recognition determination (our “Revenue Assumptions”) generally involve the same economic considerations as the cash flow assumptions utilized in our period-end fair value estimates for these instruments (our “Fair Value Assumptions”), though on an factor-by-factor basis the assumptions will not be identical as the assumptions are developed by independent parties. To ensure that our Revenue Assumptions and our Fair Value Assumptions are consistent, management performs period tests involving with-and-without type considerations to ensure the collection of assumptions for each purpose produce consistent cash flows in all material respects.


Expense Limitation Agreements


We benefit from two expense limitation agreements with OFS Advisor: portions of the Investment Advisory Agreement, which limits our liability to reimburse OFS Advisor for organization and offering expenses it incurs on our behalf, and the Second Amended Expense Support Agreement. See “Item 8 – Financial Statements – Note 3. Related Party Transactions.”


We considered the relevant accounting literature applicable to expense limitation agreements—particularly ASC Topic 946 Subtopic 20 Section 254 and related publications by the American Institute of Certified Public Accountants, as well as publicly available documents on industry practice and the SEC Staff’s views thereon. The application of this accounting literature requires interpretation of the reimbursement conditions in the expense limitation agreements, which requires significant judgment. An agreement whose reimbursement conditions are either non-substantive or whose occurrence is inevitable will generally fail to meet to the requirements of this literature, resulting in greater reported expense, lower reported net asset values, and an on-balance sheet liability to reimburse the agreement counterparty for any funds or support received.


We regularly evaluate the Investment Advisory Agreement conditions for reimbursement, and have concluded the expense-reduction recognition it has been given is appropriate because the substantive conditions for recognition of liability by us—specifically, the sale of shares from whose proceeds OFS Advisor will be paid for unreimbursed costs—have not been satisfied.


Fair value estimates


As discussed more fully in “Item 8 – Financial Statements – Note 2. Summary of Significant Accounting Policies.” GAAP requires us to categorize fair value measurements according to a three-level valuation hierarchy. The hierarchy gives the highest priority to quoted, active market prices for identical assets and liabilities (Level 1) and the lowest priority to valuation techniques that require significant management judgment because one or more of the significant inputs are unobservable in the market place (Level 3). All of our investments carried at fair value are classified as Level 2 and Level 3, with a significant portion of our investments classified as Level 3. We typically do not hold equity securities or other instruments that are actively traded on an exchange.


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Rule 2a-5 under the 1940 Act was recently adopted by the SEC and establishes requirements for determining fair value in good faith for purposes of the 1940 Act. We are evaluating the impact of adopting Rule 2a-5 on the consolidated financial statements and intend to comply with the new rule’s requirements on or before the compliance date in September 2022.


As described in “Item 8 – Financial Statements – Note 5 . Fair Value of Financial Instruments.” we follow a process, under the supervision and review of the Board, to determine these unobservable inputs used in the fair value estimates of our investments. The most significant unobservable inputs in the Level 3 fair value measurements are the discount rates and EBITDA multiples. Investments classified as Level 2 are measured on the basis of Indicative Prices provided by pricing services.


Our discounted cash flow valuations involve a determination of discount rate commensurate with the risk inherent in each investment. Management uses two primary methods to estimate discount rates on Portfolio Company Investments: a method based upon a hypothetical recapitalization of the entity given its current operating performance and current market conditions; and a synthetic debt rating method, which assigns a surrogate debt rating to the entity based on known industry standards for assigning such ratings and then estimates the discount rate based on observed market yields for actual rated debt. Management may also use a relative value method to estimate yields, which involves estimating the discount rate of non-traded subject debt investments based on an expected or assumed relationship between Indicative Prices on traded debt and the subject debt for a portfolio company. All methods for estimating the discount rate generally involve calibration of unobservable inputs utilized in estimating the discount rate on the subject investment to its internal rate of return at close or purchase date. These methods generally produce a range of discount rates, and we generally select the midpoint of the range for use in fair value measures, subject to limitations on the basis of the borrowers' ability to prepay the debt without penalty.


Our market approach valuations, generally applied to equity investments and investments in non-performing debt, involve a determination of an enterprise value multiple to a financial performance metric of the portfolio company, generally EBITDA. These determinations are based on identification of a comparable set of publicly traded companies and determination of a public-to-private liquidity adjustment factor, generally through calibration to transaction prices in the subject investment instrument. This method generally produces a range of multiplier values and management, under the supervision of the Board, generally selects the midpoint of the range for fair value measures.


We adjusted our approach to fair value estimates throughout 2020 in response to the economic uncertainty associated with the spread of the COVID-19 pandemic. Our use of Indicative Prices includes assessments of whether a sufficient number of market quotations are available and whether the depth of the markets from which those Indicative Prices were received is sufficient to transact in amounts approximating our positions in such assets without impacting such prices. Moreover, these assessments are generally based on 90-day moving averages of our depth and liquidity metrics. The 90-day moving average generally counters the effects of intermittent quoting activity observed at month- and quarter-ends, irregular quoting activity that tends to artificially inflate our market depth and liquidity metrics. We observed significant declines in market liquidity beginning in the middle of March 2020 and concluded the 90-day moving average was not representative of market conditions given the significant market dislocation during that period. Accordingly, we adjusted our depth and liquidity assessment to one based on a 5-day moving average of the metrics in our liquidity assessments as of March 31, 2020, and partially reverted, utilizing 30-day and 60-day moving average, in our June 30, 2020, and September 30, 2020 assessments, respectively, as liquidity continued to return to the loan market. We fully reverted to use of the 90-day moving average in our December 31, 2020 assessments and throughout 2021 in our quarterly and year-end assessments.


We also adjusted the relative weighting of our Level 3 fair value models during much of 2020. Our processes included assessments of the impact of the COVID-19 pandemic on the financial condition, results of operations or cash flows of our portfolio companies. Initially, such forward-looking assessments were fragmentary; however as such forward-looking estimates became more reliable, such information was directly incorporated into our fair value models. In circumstances in which reliable forward-looking information was unavailable, we considered the market impact on performance-metric multiples and related impact on enterprise values. Additionally, management observed a decrease in the historic correlation between market spreads used in our synthetic debt rating method and those used in our Reunderwriting Analysis. These market spreads, though highly correlated before the on set of COVID-19, relate to different segments of the lending market primarily on the basis of borrower size. The synthetic debt rating method is based on market spreads for larger borrowers with rated debt, while the reunderwring analysis market spreads are generally used for what are considered middle-market borrowers. Management concluded, given the break-down in this relationship, the relative weight given to each of these methods required adjustment to correspond to the market most closely associated with the subject investment. Accordingly, we decreased the weighting for the synthetic debt rating method and increased the weighting for the reunderwriting analysis in the current period year, from a weighting of 50/50 to a weighting of 10/90, at March 31, 2020, and partially reverted to 25/75 at June 30, 2020. We believed the over-weighting to the reunderwriting analysis during this period more accurately captured the market in which these instruments are exchanged. By September 30, 2020, we had fully reverted to an equal weighting of these models as we have observed a return, in all significant respects, of the historic correlative relationship between these markets. Our equal weighting of models remained in effect throughout 2021 as markets and market factors remained stable and correlated.


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The following table illustrates the impact of our fair value measures if we selected the low or high end of the range for all investments at December 31, 2021: Fair Value at December 31, 2021Range of Fair ValueInvestment TypeLow-endHigh-endDebt investments:Senior Secured$29,405,085$29,156,716$29,653,476Senior Secured (valued at Transaction Price)3,371,2923,371,2923,371,292Subordinated476,279467,993484,565Structured Finance NotesSubordinated notes and other CLO equity related investments6,704,6876,532,3896,876,987Mezzanine debt1,791,0061,762,8741,819,136Loan accumulation facility (valued at Transaction Price)1,500,0001,500,0001,500,000Equity investments:Common equity and warrants360,220310,347410,171$43,608,569$43,101,611$44,115,627





Related Party Transactions


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


• The Investment Advisory Agreement with OFS Advisor to manage our operating and investment activities. Under the Investment Advisory Agreement we have agreed to pay OFS Advisor an annual base management fee based on the average value of our total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) as well as an incentive fee based on our investment performance. See “Item 1 – Business - Management and Other Agreements” and “Item 8 – Financial Statements – Note 3. Related Party Transactions.”


• From August 3, 2020 through February 2, 2022, the Sub-Advisory Agreement with CIM Capital, an affiliate of OFS Advisor, to assist OFS Advisor with the management of our activities and operations. See "Item 1 – Business - Management and Other Agreements” and “Item 8 – Financial Statements – Note 3. Related Party Transactions.”


• The Second Amended Dealer Manager Agreement with CCO Capital, LLC, an affiliate of OFS Advisor and CIM Capital, to provide sales, promotional and marketing services to us in connection with the Offering. See "Item 1 – Business - Management and Other Agreements” and “Item 8 – Financial Statements – Note 3. Related Party Transactions.”


• The Administration Agreement with OFS Capital Services, LLC, an affiliate of OFS Advisor, to provide us with the office facilities and administrative services necessary to conduct our operations. See “Item 1 – Business - Management and Other Agreements" and “Item 8 – Financial Statements – Note 3. Related Party Transactions.”


• Expense Limitation Agreements: OFS Advisor limits our incurred expenses under the (1) Investment Advisory Agreement which contains provisions limiting organization and offering costs and Contractual Issuer Expenses and (2) Second Amended Expense Support Agreement, which limits all other operating expenses. From August 3, 2020 through February 1, 2022, CIM Capital limited our incurred expenses under the (i) Sub-Advisory Agreement, which contained provisions limiting organization and offering costs and Contractual Issuer Expenses and (ii) Amended Expense Support Agreement, which limited all other operating expenses. All agreements contain conditions under which we may become obligated to reimburse OFS Advisor or CIM Capital, as applicable, for expense limitations provided thereunder. See “Item 1 – Business - Management and Other Agreements" and “Item 8 – Financial Statements – Note 3. Related Party Transactions.”


OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to us and OFS Advisor is free to furnish similar services to other entities, including other BDCs managed by OFS Advisor, so long as its services to us are not impaired. OFS Advisor also serves as the investment adviser or collateral manager to CLOs and other assets, including OFS Capital, a publicly-traded BDC with an investment strategy similar to the Company, as well as OCCI. OFS Advisor provides sub-advisory services to CMFT Securities Investments, LLC, a wholly owned subsidiary of CIM Real Estate Finance Trust, Inc., a corporation that qualifies as a real estate investment trust. Additionally, OFS Advisor serves as sub-adviser to CIM Real


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Assets & Credit Fund, an externally managed registered investment company that operates as an interval fund that invests primarily in a combination of real estate, credit and related investments.


The 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting the BDC to do so. On August 4, 2020, we received the Order from the SEC to permit us to co-invest in portfolio companies with certain Affiliated Funds in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions. The Order superseded a previous order we received on October 12, 2016 and provides us with greater flexibility to enter into co-investment transactions with Affiliated Funds. We are generally permitted to co-invest with Affiliated Funds if under the terms of the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.


In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs with exemptive orders, through December 31, 2020, we were permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates that are private funds even if such other funds had not previously invested in such existing portfolio company. Without this order, such Affiliated Funds that are private funds would not be able to participate in such co-investments with us unless the Affiliated Funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the conditional exemptive order has expired, the SEC’s Division of Investment Management has indicated that until March 31, 2022, it will not recommend enforcement action, to the extent that any BDC with an existing coinvestment order continues to engage in certain transactions described in the conditional exemptive order, pursuant to the same terms and conditions described therein.


Conflicts may arise when an account managed by OFS Advisor makes an investment in conjunction with an investment being made by an Affiliated Account, or in a transaction where an Affiliated Account has already made an investment. Investment opportunities are, from time to time, appropriate for more than one account in the same, different or overlapping securities of a portfolio company’s capital structure. Conflicts arise in determining the terms of investments, particularly where these accounts may invest in different types of securities in a single portfolio company. Questions arise as to whether payment obligations and covenants should be enforced, modified or waived, or whether debt should be restructured, modified or refinanced. See "Item 1A. Business — Conflicts of Interest" and  "Item 1A. Risk Factors — Risks Related to Our Business and Structure  — We have potential conflicts of interest related to obligations that OFS Advisor or its affiliates may have to other clients."


Portfolio Composition and Investment Activity


Our investment strategy focuses primarily on middle-market companies in the United States, including senior secured loans, which includes first-lien, second-lien and unitranche loans, as well as subordinated loans and, to a lesser extent, preferred, common, and other equity securities. Such middle-market company investments are more likely to be considered lower grade investments, which are either rated below investment grade by one or more nationally-recognized statistical rating agencies at the time of investment, or may be unrated but determined by OFS Advisor to be of comparable quality. We also make investments in other investment companies including Structured Finance Notes.


Portfolio Composition


As of December 31, 2021, the fair value of our debt investment portfolio totaled $33,252,656 in 23 portfolio companies, of which 99% and 1% were senior secured loans and subordinated loans, respectively. We also held $360,220 in equity investments, at fair value, in five portfolio companies in which we also held debt investments and three portfolio companies in which we solely held equity investments. We had unfunded commitments of $4,180,448 to ten portfolio companies at December 31, 2021.


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The following table presents our investment portfolio by each wholly owned legal entity within the consolidated group as of December 31, 2021 and 2020 (in thousands): December 31, 2021December 31, 2020Amortized CostFair ValueAmortized CostFair ValueHancock Park Corporate Income, Inc. (Parent)$43,196,316$43,334,161$45,664,632$44,375,688HPCI-MB204,071274,408561,949939,000Total investments$43,400,387$43,608,569$46,226,581$45,314,688


The following table summarizes the composition of our investment portfolio as of December 31, 2021 and 2020: December 31, 2021December 31, 2020Amortized CostFair ValueAmortized CostFair ValueSenior secured debt investments(1)$32,617,023$32,776,377$39,315,954$38,890,010Subordinated debt investments483,191476,2791,482,464381,516Preferred equity investments——191,409338,000Common equity investments338,056360,220540,157708,036Total debt and equity investments33,438,27033,612,87641,529,98440,317,562Structured Finance Notes9,962,1179,995,6934,696,5974,997,126Total investments$43,400,387$43,608,569$46,226,581$45,314,688Total number of portfolio companies33333535


(1) Includes debt investment in which we have entered into a contractual arrangement with co‐lenders whereby, subject to certain conditions, we have agreed to receive our principal payments after the repayment of certain co-lenders pursuant to a payment waterfall. At December 31, 2021, the amortized cost and fair value of this investment were each $618,757.


As of December 31, 2021, our investment portfolio’s three largest industries by fair value, were (1) Wholesale Trade (17.9%),  (2) Professional, Scientific, and Technical Services (11.3%), and (3) Health Care and Social Assistance (9.9%), totaling approximately 39.1% of the investment portfolio. For a full summary of our investment portfolio by industry, see “Item 8 – Financial Statements– Note 4 . Investments."


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The following table presents our five largest debt and equity investments by portfolio company based on fair value as of  December 31, 2021:


Amortized CostFair Value% of Total Portfolio, at Fair ValueAll Star Auto Lights, Inc.$5,208,743$5,219,34812.0%Milrose Consultants, LLC3,998,0113,936,3859.0SourceHOV Tax, Inc.3,502,6373,558,4238.2STS Operating, Inc.1,592,7161,593,2203.7TruGreen Limited Partnership1,543,1891,530,0003.5Total$15,845,296$15,837,37636.4%


Portfolio Yields : The following table presents weighted-average yields metrics for our portfolio:


Year Ended December 31,20212020Weighted-average performing current yield(1):Debt investments9.2%9.5%Structured Finance Notes12.8%10.4%Interest-bearing investments9.8%9.5%Weighted-average performing income yield(2):Debt investments10.5%9.9%Structured Finance Notes13.9%12.6%Interest-bearing investments11.0%10.0%Weighted-average realized yield:Interest-bearing investments(3)10.8%9.8%Total portfolio(4)10.7%9.6%


(1)    Current yield is calculated as (a) the actual amount earned on performing investments, including interest and prepayment fees but excluding amortization of Net Loan Fees, divided by (b) the weighted-average of total performing investments  amortized cost.


(2)    Income yield is calculated as (a) the actual amount earned on performing investments, including interest and prepayment fees and amortization of Net Loan Fees, divided by (b) the weighted-average of total performing investment amortized cost .


(3)    Realized yield computed as ( a) the actual amount earned on interest-bearing investments, including interest, prepayment fees and Net Loan Fees, divided by (b) the weighted-average of total interest-bearing investments amortized cost , in each case, including debt investments in non-accrual status and non-income producing Structured Finance Notes.


(4)    Realized yield computed as ( a) the actual amount earned on all investments including interest, dividends and prepayment fees, amortization of Net Loan Fees, and dividends received divided by (b) the weighted-average of total investments amortized cost or cost .


As of both December 31, 2021 and 2020, floating rate loans at fair value were 99% and fixed rate loans at fair value were 1% of our debt investment portfolio.


The weighted average yield of our investments is not the same as a return on investment for our stockholders, but rather the gross investment income from our investment portfolio before the payment of all of our fees and expenses. There can be no assurance that the weighted average yield will remain at its current level.


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Non-Accrual Loans


At December 31, 2021, no portfolio company loans were on non-accrual status.


On November 2, 2021, Online Tech Stores, LLC assets were liquidated resulting in $0 proceeds to us. We wrote-off our subordinated debt investment in Online Tech Stores, LLC and recognized a realized loss of $1,007,141, of which $855,510 was included as an unrealized loss as of December 31, 2020.


At December 31, 2020, we had a loan to one portfolio company (Online Tech Stores, LLC) on non-accrual status with respect to all interest and Net Loan Fee amortization, with an aggregate amortized cost and fair value of $1,007,141 and $151,631, respectively. The change to non-accrual status for our investment in Online Tech Stores, LLC was effective January 1, 2020.


Investment Activity


The following is a summary of our debt and equity investment activity for the year ended December 31, 2021, 2020 and 2019:


Year Ended December 31,202120202019Investments in new portfolio companies$13,849,932$7,261,307$11,586,049Investments in existing portfolio companies9,342,6416,927,3526,125,964Total investments in new and existing portfolio companies$23,192,573$14,188,659$17,712,013Proceeds from principal payments$29,156,811$10,447,939$4,163,149Proceeds from investments sold or redeemed2,297,1402,517,7941,539,643Total proceeds from principal payments and investments sold$31,453,951$12,965,733$5,702,792


Notable investments in portfolio companies during the year ended December 31, 2021 include All Star Auto Lights, Inc. ($2.0 million senior secured loan), RumbleOn, Inc. ($1.0 million senior secured loan and $0.1 million warrants), TruGreen Limited Partnership ($1.5 million senior secured loan) and Tolemar Acquisition, Inc. ($1.3 million senior secured loan).


Notable investments in portfolio companies during the year ended December 31, 2020 include A&A Transfer Buyer, LLC ($2.6 million senior secured loan), Milrose Consultants, LLC ($1.3 million senior secured loan) and SourceHOV Tax, Inc. ($2.3 million senior secured loan).


We purchased four Structured Finance Notes for $6,711,138 during 2021 and four Structured Finance Notes for $4,615,447 during 2020.


Our level of investment activity may vary substantially from period to period depending on various factors, including, but not limited to, the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.


Non-cash Investment Activity


On March 27, 2020, our debt investments in Constellis Holdings, LLC were restructured, pursuant to which we converted our non-accrual debt investments into two new debt investments and 1,362 shares of common equity. The allocated cost and fair value of the debt investments received were $6,174 and $6,172, respectively, and the allocated cost and fair value of the shares of common equity received were $46,403 and $46,410, respectively. For the year ended December 31, 2020, we recognized a realized loss of $526,444 on the restructuring, which was fully recognized as an unrealized loss as of December 31, 2019.


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We categorize debt investments into seven risk categories based on relevant information about the ability of borrowers to service their debt. For additional information regarding our risk categories, see “Item 1. Business—Portfolio Review/Risk Monitoring.” The following table shows the classification of our debt investments portfolio by risk category as of December 31, 2021 and 2020 (dollar amounts in thousands): As of December 31,20212020Risk CategoryDebtInvestments, atFair Value% of DebtInvestmentsDebtInvestments, atFair Value% of DebtInvestments1 (Low Risk)$——%$——%2 (Below Average Risk)——%——%3 (Average)33,252,656100.0%37,258,34794.9%4 (Special Mention)——%1,861,5484.7%5 (Substandard)——%151,6310.4%6 (Doubtful)——%——%7 (Loss)————%$33,252,656100.0%$39,271,526100.0%


Due to continued improvement in borrower performance, the percentage of risk rated “3” investments increased from 94.9% of the debt portfolio at fair value as of December 31, 2020 to 100% of the debt portfolio as of December 31, 2021.


Results of Operations


Key Financial Measures


The following is a discussion of the key financial measures that management employs in reviewing the performance of our operations.


Net Investment Income : Total investment income less total expenses (“NII”) is a key performance metric in obtaining part of our investment objective of providing current income to stockholders. NII can be a general indicator of ICTI and the amount of distributions that will be required to be made due to RIC requirements. One of our main objectives is to increase NII, and, in turn, increase distributions to stockholders.


Net Gain (Loss) on Investments. Net gain (loss) on investments consists of the sum of: (a) realized gains and losses from the sale of debt or equity securities, or the redemption of equity securities; and (b) net unrealized appreciation or depreciation on debt and equity investments, net of applicable taxes to the extent the investments are held through taxable wholly owned subsidiaries. In the period in which a realized gain or loss is recognized, such gain or loss will generally be offset by the reversal of previously recognized unrealized appreciation or depreciation, and the net gain recognized in that period will generally be smaller. The unrealized appreciation or depreciation on debt securities is also reversed when those investments are redeemed or paid off prior to maturity. In such instances, the reversal of accumulated unrealized appreciation or depreciation will be reported as a net loss or gain, respectively, and may be partially offset by the acceleration of any premium or discount on the debt security, which is reported in interest income, and any prepayment fees on the debt security, which is reported in fee income.


Net Asset Value : Total assets less total liabilities (“NAV”) is a key performance metric that is monitored to ensure part of our investment objective of capital appreciation to stockholders is fulfilled. The net increase (decrease) in net assets resulting from operations can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, annual comparisons of net increase in net assets resulting from operations may not be meaningful.


Portfolio Yield : Portfolio yield is a key financial metric of our investment portfolio in order to obtain our investment objective of providing current income to stockholders. The effective yield of an investment is measured by adding its coupon rate plus the accretion of its Net Loan Fees, divided by the investments cost basis.


We do not believe that our historical operating performance is necessarily indicative of our future results of operations that we expect to report in future periods. Our investment strategy is to maintain a credit investment portfolio, primarily focused on investments in middle-market companies in the United States, including debt investments and, to a lesser extent, equity investments, including warrants and other minority equity securities. Moreover, as a BDC and a RIC, we are also subject to certain constraints on our operations, including, but not limited to, limitations imposed by the 1940 Act and the Code.


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Net increase in net assets resulting from operations can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, annual comparisons of net increase in net assets resulting from operations may not be meaningful.


Comparison of the years ended December 31, 2021, 2020 and 2019


Operating results for the years ended December 31, 2021, 2020, and 2019: Years Ended December 31,202120202019Total investment income$5,054,613$4,384,912$3,527,589Total operating expenses4,058,2114,101,4482,691,878Expense limitation under agreements with the Advisors(1,250,633)(1,904,615)(1,220,369)Net operating expenses2,807,5782,196,8331,471,509Net investment income2,247,0352,188,0792,056,080Net unrealized gain (loss) on investments1,120,075(266,688)(83,072)Deferred tax benefit (expense) on investments85,179(85,018)(20,570)Net realized gain (loss) on investments(298,166)(590,347)52Income tax expense from realized gains on investments(179,000)——Net increase in net assets resulting from operations$2,975,123$1,246,026$1,952,490


Discussion of the years ended December 31, 2021, 2020, and 2019


Investment Income


Investment income for the years ended December 31, 2021, 2020, and 2019: Years Ended December 31,202120202019Interest income$4,694,065$4,262,609$3,429,780Fee income360,548122,30397,809Total investment income$5,054,613$4,384,912$3,527,589


Investment income for the years ended December 31, 2021, 2020, and 2019, consisted primarily of interest income on our debt investments and Structured Finance Notes. For the year ended December 31, 2021, growth in investment income compared to the prior year was primarily due to the acceleration of Net Loan Fees of $292,951 related to the prepayment of loans. Growth in investment income for the year ended December 31, 2020 compared to the year ended December 31, 2019 was related to the deployment of funds raised through our Offering and from the Unsecured Note into portfolio securities.


During the years ended December 31, 2021 and 2020, fee income increased compared to the corresponding prior year primarily due to syndication fees in which OFS Advisor sourced, structured, and arranged the lending group, and for which we were additionally compensated. During the year ended December 31, 2021, we also recognized prepayment fees of $107,812  relating to the prepayment of loans.


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Gross Expenses


Our gross expenses are limited under the Advisory Agreements and the ESAs; see “—Expense Limitations.” Investment expenses shown with respect to each governing expense limitation agreement: Years Ended December 31,202120202019Expenses subject to limitation under the Advisory Agreements:Amortization of deferred offering costs$91,888$307,688$180,872Contractual Issuer Expenses3138,1517,659Total expenses subject to limitation under the Advisory Agreements:92,201315,839188,531Expenses subject to limitation under the ESAs:Interest expense1,209,9141,259,298427,432Management fees562,903542,416405,282Incentive fees339,609277,399195,720Administration fees750,568842,972675,155Professional fees800,939604,265534,433Insurance expense116,89797,60776,550Transfer agent expense101,32791,540102,068Other expenses83,85370,11286,707Total expenses subject to limitation under the ESAs3,966,0103,785,6092,503,347Total operating expenses$4,058,211$4,101,448$2,691,878


Expenses Limited under the Advisory Agreements


Offering expenses . The Advisors incurred offering costs of $57,275, $209,205 and $297,776 during the years ended December 31, 2021, 2020 and 2019, respectively. All offering costs are deferred and amortized over a twelve month period from the date incurred. Offering costs in these periods consist of professional fees of attorneys and other fees related to the preparation of our private placement memorandum and our dealer-manager agreement, due diligence activities, and development of marketing plans and materials for our common stock. The decline in offering costs from 2020 to 2021 was related to the transition of our dealer manager relationship from IAA to CCO.


Amortization of offering costs were $91,888, $307,688 and $180,872 for the years ended December 31, 2021, 2020 and 2019, respectively.


Contractual Issuer Expenses . The Advisors incurred Contractual Issuer Expenses of $313, $8,151 and 7,659 for the years ended December 31, 2021, 2020 and 2019, respectively, related to salaries and direct expenses of personnel of the Advisors and their affiliates directly involved in the Offering. The decline in Contractual Issuer Expenses from 2020 to 2021 was related to the transition of our dealer manager relationship from IAA to CCO.


Expenses Limited under the ESAs


Interest expense . We incurred interest expense of $1,209,914, $1,259,298 and $427,432 for the years ended December 31, 2021, 2020 and 2019, respectively. The decrease in interest expense during the year ended December 31, 2021 was primarily related to amendments to each of the PWB Credit Facility and Unsecured Note to reduce their stated interest rates. The increase in interest costs from 2019 to 2020 was due to increased borrowing associated with our Unsecured Note.


Management fees . Management fees were $562,903, $542,416, and $405,282 for the years ended  December 31, 2021, 2020 and 2019, respectively. The increase in management fees during the year ended December 31, 2021 was due to an increase in our average total assets, primarily due to deploying the proceeds from the issuance of the Unsecured Note and borrowings from the PWB Credit Facility.


Incentive fees . Incentive fees were $339,609, $277,399 and $195,720 for the years ended December 31, 2021, 2020 and 2019, respectively. The increase in incentive fees during the year ended December 31, 2021 was due to an increase in net investment income.


Administrative fees . Administrative fees were $750,568, $842,972 and $675,155 for the years ended December 31, 2021, 2020 and 2019, respectively, primarily related to accounting and record-keeping services, preparation and filing of required periodic reports with the SEC and research. During the year ended December 31, 2021, the decrease in administrative fees was primarily due to a decrease in legal and investor relation services.


Professional fees . We incurred professional fees of $800,939, $604,265 and $534,433 for the years ended  December 31, 2021, 2020 and 2019, respectively, primarily comprised of consulting fees and professional fees of our attorneys,


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independent registered public accounting firm and a third-party valuation service provider. The increase in professional fees during the year ended December 31, 2021 was primarily due to an increase in these professional services in connection with an increased level of investment activity and other fund operations.


Insurance. transfer agent and other expenses . We incurred insurance, transfer agent and other expenses of $302,077, $259,259 and $265,325 for the years ended  December 31, 2021, 2020 and 2019, respectively. The increase during the year ended December 31, 2021 primarily related to an increase in insurance and transfer agent costs.


Expense Limitations


Expense Limitations under Advisory Agreements . We reimbursed the Advisors $12,675, $27,840 and $96,836 for offering costs and Contractual Issuer Expenses during the years ended December 31, 2021, 2020 and 2019, respectively.


We are conditionally obligated to pay OFS Advisor up to 1.5% of the gross proceeds raised in the Offering until all reimbursable organization and offering costs and Contractual Issuer Expenses paid by the Advisors and their affiliates have been recovered. Reimbursable offering costs and Contractual Issuer Expenses were $580,379 as of  December 31, 2021.


The determination of expense limitations under the the Advisory Agreements are presented below:


Year ended December 31,202120202019Total Expenses limited under the Advisory Agreements$92,201$315,839$188,530Offering costs and Contractual Issuer Expenses reimbursed(12,675)(27,840)(96,836)Offering costs and Contractual Issuer Expenses limitations under the Advisory Agreements$79,526$287,999$91,694


Expense Limitations under the ESAs. All other gross operating expenses (operating expenses exclusive of offering costs and contractual issuer expenses, and before limitations) are subject to limitation under the ESAs. The Advisors' obligation to provide such expense support is a function of declared distributions on our common stock, and the amount of support provided is determined by reference to unsupported investment company taxable income and the amount of the declared distribution; the ESAs provide expense support such that distributions are not paid from Offering proceeds. The determination of expense limitation under the ESAs for the years ended December 31, 2021, 2020, and 2019 are presented below:


Years Ended December 31,202120202019Total investment income$5,054,613$4,384,912$3,527,589Expenses limited under the ESAs(1):Interest expense, base management fees, and incentive fees2,112,4262,079,1131,028,434Other operating expenses as defined in the ESAs(2)1,853,5841,706,4961,474,914Total expenses limited under the ESAs3,966,0103,785,6092,503,348Net investment income prior to limitation1,088,603599,3031,024,241Differences in recognition of ICTI and GAAP net investment income(3)111,546(5,069)—Realized gains in ICTI——(54)ICTI prior to expense limitation977,057604,3721,024,295Declared distributions2,148,1642,220,9882,152,970Expense limitation under ESAs$1,171,107$1,616,616$1,128,675


(1) Expense limitation under ESAs exclude organization costs, amortization of deferred offering costs, Contractual Issuer Expenses, and the related expense support under the Advisory Agreements, and other operating expenses of HPCI-MB as such expenses are permanent differences between GAAP net investment income and ICTI. See “Item 8 – Financial Statements – Note 8 . Federal Income Tax.”


(2) Generally defined in the ESAs as our operating expenses determined in accordance with GAAP excluding organization and offering expenses, Contractual Issuer Expenses, interest expense, base management fees, and incentive fees. The annualized ratio of other operating expenses to net assets for the period support in which support is provided, and the annual ratio for the year in which support is provided, constitute conditions for reimbursement to the Advisors. See “Item 8 – Financial Statements – Note 3 . Related Party Transactions.”


(3)    Includes temporary and permanent differences between GAAP net investment income and ICTI, such as taxable income and operating expenses of HPCI-MB, taxable debt modifications and income recognition on our subordinated notes.


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Expense support provided by the Advisors is reimbursable for three years from the date incurred. Expense limitation under both the Investment Advisory Agreement and Second Amended Expense Support Agreement can be terminated by OFS Advisor, without payment of any penalty, with or without notice, to us at any time.





Net realized and unrealized gain (loss) on investments


During the year ended December 31, 2021, we recognized net gains on investments of $728,088 primarily due to net gains of $591,437 on our senior secured debt investments. We also recognized a realized gain of $479,727 on the sale of our preferred equity investment in TTG Healthcare, LLC.


During the year ended December 31, 2020, we recognized net losses on investments of $942,053 primarily due to an unrealized loss of $758,271 on our subordinated debt investment in Online Tech Stores, LLC.


Comparison of the three months ended December 31, 2021 and September 30, 2021


Investment Income


Investment income for the three months ended December 31, 2021 and September 30, 2021 Three Months EndedDecember 31, 2021September 30, 2021Investment incomeInterest income$1,256,410$1,019,716Fee income177,17632,944Total investment income$1,433,586$1,052,660


Investment income for the three months ended December 31, 2021 consisted primarily of interest income on our debt investments. Fee income increased due to syndication fees of $127,849 in which OFS Advisor sourced, structured, and arranged the lending group, and for which we were additionally compensated.


Gross Expenses


Our gross expenses are limited under the Advisory Agreements and the ESAs; see “—Expense Limitations.” Investment expenses shown with respect to each governing expense limitation agreement:


Three Months EndedDecember 31, 2021September 30, 2021Expenses subject to limitation under the Advisory Agreements:Amortization of deferred offering costs$14,775$9,825Contractual issuer expenses313—Total expenses subject to limitation under the Advisory Agreements:15,0889,825Expenses subject to limitation under the ESAs:Interest expense297,024284,074Management fees145,081139,322Incentive fees84,558137,792Administration fees190,374187,261Professional fees167,596189,857Insurance expense29,64331,470Transfer agent fees20,17221,181Other expenses25,85325,474Total expenses subject to limitation under the ESAs960,3011,016,431Total expenses$975,389$1,026,256


For the three months ended December 31, 2021, total expenses decreased $50,867 primarily due to an decrease in incentive fees.


Liquidity and Capital Resources


Sources and Uses of Cash and Cash Equivalents


We expect to generate cash primarily from (i) the net proceeds of the Offering, (ii) cash flows from our operations, including Expense Support Payments from OFS Advisor, (iii) the PWB Credit Facility and any financing arrangements we may


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enter into in the future and (iv) any future offerings of our equity or debt securities. We may fund a portion of our investments through borrowings from banks, including the PWB Credit Facility, and issuances of senior securities. Our primary use of cash will be for (i) investments in portfolio companies and other investments to comply with certain portfolio diversification requirements, (ii) the cost of operations (including paying OFS Advisor and OFS Services), (iii) debt service of any borrowings, including the Unsecured Note, and (iv) cash distributions to the holders of our stock. Principal sources and uses of cash and liquidity are presented below: Years Ended December 31,202120202019Cash from net investment income(1)$2,499,652$1,937,829$2,069,669Net purchases and origination of portfolio investments(1)1,454,462(10,206,137)(8,413,883)Net cash provided by (used in) operating activities3,954,114(8,268,308)(6,344,214)Net proceeds from issuances of common stock783,3001,711,1826,202,646Repurchase of common stock(2,812,255)(1,713,916)(519,546)Proceeds from unsecured note, net of discount and offering costs——14,690,655Net borrowings under revolving line of credit650,0004,775,000(4,400,000)Payment of debt issuance costs(163,770)(50,000)(50,780)Cash distributions paid(2,177,235)(2,255,703)(2,014,479)Net cash provided by (used in) financing activities(3,719,960)2,466,56313,908,496Net increase (decrease) in cash and cash equivalents$234,154$(5,801,745)$7,564,282


(1) Net purchases and originations/repayments and sales of portfolio investments includes purchase and origination of portfolio investments, proceeds from principal payments on portfolio investments, proceeds from sale or redemption of portfolio investments, changes in receivable for investments sold, payable form investments purchased as reported in our statements of cash flows, as well as the excess of proceeds from distributions received from Structured Finance Notes over accretion of interest income on Structured Finance Notes. Cash from net investment income includes all other cash flows from operating activities reported in our statements of cash flows. Certain amounts in the prior year have been reclassified to conform with the current year presentation.


Comparison of the years ended December 31, 2021 and 2020.


We provided $3,954,114 and used $8,268,308 in cash from operating activities for the years ended December 31, 2021 and 2020, respectively. The increase in cash provided by (used in) operating activities compared to prior year was primarily due to an increase in the prepayment of debt investments. Net cash provided by operating activities benefited from the positive cash flow impact of expenses limitations under the Advisory Agreements and the ESAs of $1,250,633 and $1,904,615 for the years ended December 31, 2021 and 2020, respectively, which reduced the net amount paid to the Advisors and affiliates. Expense support and limitation under both the Investment Advisory Agreement and the Second Amended Expense Support Agreement are cancellable at any time.


Net cash provided by financing activities decreased $6,186,523 primarily due to an increase in the repurchase of common stock and a decrease in net proceeds from the issuance of common stock and net borrowings under the revolving line of credit.


We raised net proceeds from our Offering of $783,300 and $1,711,182 during the years ended December 31, 2021 and 2020, respectively.


Subsequent to December 31, 2021, we paid a $520,126 distribution to our common stockholders and sold no shares of our common stock.


Comparison of the years ended December 31, 2020 and 2019.


We used $8,268,308 and $6,344,214 in cash from operating activities for the years ended December 31, 2020 and 2019, respectively. The increase in cash used in operations compared to prior year was primarily due to an increase in net purchases of portfolio investments. Net cash used in operating activities benefited from the positive cash flow impact of expenses limitations under the Advisory Agreements and the ESAs of $1,904,615 and $1,220,369 for the years ended December 31, 2020 and 2019, respectively, which reduced the net amount paid to the Advisors and affiliates.


Net cash provided by financing activities decreased $11,441,933 primarily due to an increase in the repurchase of common stock and the issuance in November 2019 of the Unsecured Note.


We raised net proceeds from our Offering of $1,711,182 and $6,202,646 during the years ended December 31, 2020 and 2019, respectively.


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Subsequent to December 31, 2020, we paid a $549,197 distribution to our common stockholders and sold an additional 21,708 shares of our common stock for net proceeds of $276,000.


Borrowings


PWB Credit Facility :  We are party to a BLA with Pacific Western Bank, as lender, to provide us with a senior secured revolving credit facility, or the PWB Credit Facility. The PWB Credit Facility is available for general corporate purposes including investment funding. The maximum availability of the PWB Credit Facility is equal to 35% of the aggregate outstanding principal amount of eligible loans included in the borrowing base, which excludes subordinated loan investments and as otherwise specified in the BLA.


The BLA contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, a minimum tangible net asset value, a minimum quarterly net investment income after incentive fees, and a statutory asset coverage test. The BLA also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change in investment advisor, and the occurrence of a material adverse change in our financial condition. As of December 31, 2021, we were in compliance with the applicable covenants.


The key terms of the PWB Credit Facility as of December 31, 2021 were as follows: Maximum AvailabilityFloor RateInterest RateUnused FeeMaturity DatePWB Credit Facility$15,000,0004.25%Prime + 0.75%0.50%February 28, 2023


Availability under the PWB Credit Facility was $6.8 million, based on the stated advance rate of 35% under the borrowing base, and the $5.4 million outstanding as of December 31, 2021.


On February 17, 2021, we amended the BLA with Pacific Western Bank. The amendment, among other things: (i) increased the maximum amount available under the PWB Credit Facility from $10.0 million to $15.0 million; (ii) decreased the interest rate floor from 5.50% per annum to 5.25% per annum; (iii) restricts the transfer of certain assets to our subsidiaries or incurrence of debt by, or the encumbrance of assets of our subsidiaries; and (iv) extended the maturity date from February 28, 2021 to February 28, 2023.


On November 15, 2021, we amended the BLA with Pacific Western Bank to decrease the interest rate floor from 5.25% to 4.25%, effective as of November 1, 2021.


Unsecured Note :  On November 27, 2019, we entered into an agreement with a qualified institutional investor (“Note Purchase Agreement”) pursuant to which we issued the Unsecured Note. The purchase price of the Unsecured Note was $14.7 million after deducting the offering price discount. Interest on the Unsecured Note is due quarterly. In addition,we are obligated to repay the Unsecured Note at par if certain change in control events occur. The Unsecured Note is a general unsecured obligation that ranks pari passu with all outstanding and future unsecured unsubordinated indebtedness we may issue.


On September 23, 2021, we executed an amendment to our Note Purchase Agreement. The amendment, among other things: (i) extended the scheduled maturity date of the Unsecured Note from November 27, 2024 to November 27, 2026; (ii) reduced the coupon rate of the Unsecured Note from 6.50% to 5.50%; and (iii) reduced the default rate of the Unsecured Note, if applicable, from 8.50% to 7.50%. In addition, under the Note Purchase Agreement, as amended, we may, at our option, upon notice to the purchaser, redeem at any time all, or from time to time any part of, the Unsecured Note, in an amount not less than 10% of the aggregate principal amount of the Unsecured Note then outstanding in the case of a partial redemption, at 100% of the principal amount so redeemed, together with interest on such Unsecured Note accrued to, but excluding, the date of redemption, and with no redemption settlement amount paid by us in connection with any such redemption. In connection with the amendment, we paid to the purchaser a structuring fee of $150,000.


The Note Purchase Agreement contains customary terms and conditions for unsecured notes issued in a private placement, including, without limitation, affirmative and negative covenants such as information reporting, maintenance of our status as a business development company within the meaning of the 1940 Act and minimum asset coverage ratio. The Note Purchase Agreement also contains customary events of default with customary cure and notice periods, including, without limitation, nonpayment, incorrect representation in any material respect, certain judgements and orders, and certain events of bankruptcy.





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As of December 31, 2021, the Unsecured Note had the following terms and balances: PrincipalUnamortized Discount and Issuance CostsStated Interest RateEffective Interest Rate(1)Maturity2021 Interest Expense(2)Unsecured Note$15,000,000$357,3775.50%5.98%11/27/26$1,016,325


(1) The effective interest rate on the Unsecured Note includes deferred debt issuance cost amortization.


(2) Interest expense includes debt issuance costs amortization of $82,158 for the year ended December 31, 2021.


The average daily dollar borrowings and average interest rate for all of our debt for the years ended December 31, 2021, 2020, and 2019, were as follows: Year endedAverage Dollar BorrowingsWeighted Average Interest RateDecember 31, 2021$17,737,6035.78%December 31, 202017,679,0307.12December 31, 20195,396,3017.92


Other Liquidity Matters


We expect to fund the growth of our investment portfolio through the private placement of our common shares and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act. We cannot assure stockholders that our plans to raise capital will be successful. In addition, we intend to distribute to our stockholders substantially all of our taxable income in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments or make additional investments in our portfolio companies. The illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.


We are permitted to borrow money from time to time within the levels permitted by the 1940 Act which generally prohibits us from incurring indebtedness, unless immediately after such borrowing, we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, Section 61(a)(2) of the 1940 Act provides that a BDC may reduce its asset coverage ratio from 200% to 150%, provided that certain conditions are met.


On November 6, 2018,  a “required majority” (as defined in Section 57(o) of the 1940 Act) of our board of directors approved the application of a reduced 150% asset coverage ratio to us. In accordance with Section 61(a)(2) of the 1940 Act, we extended to each of our stockholders as of November 6, 2018, an offer to repurchase the equity securities held by such stockholders, with 25% of such equity securities to be repurchased in each of the four quarters following November 6, 2018. As a result, the asset coverage ratio test applicable to us decreased from 200% to 150%, effective November 6, 2019. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all.


Contractual Obligations


On July 15, 2016, we, with approval by our Board, entered into the Investment Advisory Agreement, the Prior Expense Support Agreement and the Administration Agreement. The Investment Advisory Agreement became effective as of August 30, 2016, the date that we satisfied the Minimum Offering Requirement and was continued on April 4, 2019.


On August 3, 2020, we, with approval by our Board, entered into the Dealer Manager Agreement, Sub-Advisory Agreement and Amended Expense Support Agreement. Effective February 2, 2022, the Sub-Advisory Agreement was terminated and the Amended Expense support Agreement was amended. See “Item 8 – Financial Statements – Note 3. Related Party Transactions.”


At December 31, 2021, we had $3,246,987 of cash, as well as unfunded commitments under our PWB Credit Facility of $6,794,859, to meet our short-term contractual obligations such as unfunded commitments to portfolio companies of $4,180,448. Long-term contractual obligations, such as our PWB Credit Facility that matures in 2023 and has $5,425,000 outstanding at December 31, 2021, can be repaid by selling portfolio investments.


On February 2, 2022, we, with approval by our Board, entered into the Second Amended Expense Support Agreement and Second Amended Dealer Manager Agreement. See “Item 8 – Financial Statements – Note 3. Related Party Transactions.”


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Off-Balance Sheet Arrangements


The Advisors and their affiliates have incurred organizational and offering costs, and Contractual Issuer Expenses related to us, of which $580,379 and $672,129 were unreimbursed as of December 31, 2021 and 2020, respectively. We remain conditionally liable for organization and offering costs incurred by the Advisors and their affiliates on our behalf. See “Item 8 – Financial Statements – Note 3. Related Party Transactions.”


The Advisors have provided unreimbursed operating expense support of $3,916,398 and $3,898,820 as of December 31, 2021 and 2020, respectively. We remain conditionally liable for operating expense support provided by the Advisors. See “Item 8 – Financial Statements – Note 3. Related Party Transactions.”


We may become a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. We had $4,180,448 of total unfunded commitments to ten portfolio companies at December 31, 2021.


Distributions


We are taxed as a RIC under Subchapter M of the Code. Generally, a RIC is entitled to deduct dividends it pays to its stockholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, and taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest and dividends or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation, and amortization expense.


Our Board maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount not less than 90-100% of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, we may also pay an additional special dividend, or fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was earned, while maintaining the option to spill over our excess taxable income to a following year. See “Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities–Distributions.” Our distributions for the years ended December 31, 2021, 2020  and 2019 were comprised entirely of ordinary income.


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The following table reflects the cash distributions per share that we declared on our common stock during the years ended December 31, 2021, 2020, and 2019. Stockholders of record as of each respective record date were entitled to receive the distribution.


Date DeclaredRecord DatesPayment DateMonthly AmountPer ShareCashDistributionYear ended December 31, 2021January 26, 2021January 27, 2021April 15, 2021$0.0846$184,337February 23, 2021February 24, 2021April 15, 20210.0846184,337March 27, 2021March 29, 2021April 15, 20210.0846186,173April 27, 2021April 28, 2021July 15, 20210.0846181,488May 25, 2021May 26, 2021July 15, 20210.0846182,987June 26, 2021June 28, 2021July 15, 20210.0846178,333July 27, 2021July 28, 2021October 15, 20210.0846178,333August 27, 2021August 27, 2021October 15, 20210.0846178,333September 27, 2021September 28, 2021October 15, 20210.0846173,717October 26, 2021October 27, 2021January 15, 20220.0846173,717November 26, 2021November 26, 2021January 15, 20220.0846175,486December 27, 2021December 28, 2021January 15, 20220.0846170,923$2,148,164Year ended December 31, 2020January 29, 2020January 29, 2020, February 26, 2020 and March 27, 2020April 15, 2020$0.0875$589,261April 28, 2020April 28, 2020July 15, 20200.0825182,996May 27, 2020May 27, 2020July 15, 20200.0792177,251June 25, 2020June 26, 2020July 15, 20200.0822179,554July 28, 2020July 29, 2020October 15, 20200.0810177,250August 26, 2020August 27, 2020October 15, 20200.0825182,672September 25, 2020September 28, 2020October 15, 20200.0846182,807October 27, 2020October 28, 2020January 15, 20210.0846183,130November 25, 2020November 26, 2020January 15, 20210.0846184,065December 28, 2020December 29, 2020January 15, 20210.0846182,002$2,220,988Year ended December 31, 2019January 29, 2019January 29, 2019, February 26, 2019, March 27, 2019April 15, 2019$0.0875$489,715April 26, 2019April 26, 2019, May 29, 2019, June 26, 2019July 15, 20190.0875514,644July 29, 2019July 29, 2019 August 28, 2019, September 26, 2019October 15, 20190.0875564,699October 29, 2019October 29, 2019, November 26, 2019, December 29, 2019January 15, 20200.0875583,912$2,152,970


The above distributions were funded, in part, through the reimbursement of certain operating expenses by the Advisors under the ESAs. The ESAs are designed to ensure no portion of our distribution to stockholders will be paid from Offering proceeds, and will provide for expense reduction payments to us in any quarterly period in which our cumulative distributions to stockholders exceeds our cumulative ICTI and net realized gains. The Second Amended Expense Support Agreement may be terminated by OFS Advisor, without payment of any penalty, with or without notice to us.


Repurchase of common stock


On November 6, 2018,  a “required majority” (as defined in Section 57(o) of the 1940 Act) of our board of directors approved the application of a reduced 150% asset coverage ratio to us. In accordance with Section 61(a)(2) of the 1940 Act, we extended to each of our stockholders as of November 6, 2018, an offer to repurchase the equity securities held by such stockholders, with 25% of such equity securities to be repurchased in each of the four quarters following November 6, 2018. As a result, the asset coverage ratio test applicable to us decreased from 200% to 150%, effective November 6, 2019. Additionally, in November 2019, the Board approved an offering to purchase 2.5% of the weighted average number of shares of the outstanding common stock for the trailing 12-month period.


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The following table summarizes the common stock repurchases by us for the years ended December 31, 2021, 2020 and 2019: Number of SharesAmountJanuary 1, 2019 through April 5, 2019(1)7,407$98,296April 6, 2019 through June 30, 20199,029119,821July 1, 2019 through September 30, 20197,40797,111October 1, 2019 through December 31, 201915,597204,317January 1, 2020 through April 3, 2020(2)32,622364,384April 4, 2020 through June 30, 202053,665654,713July 1, 2020 through September 30, 202055,320694,819October 1, 2020 through December 31, 202055,674700,935January 1, 2021 through April 5, 2021(3)55,377708,272April 6, 2021 through June 30, 202155,016700,354July 1, 2021 through September 30, 202154,557702,694October 1, 2021 through December 31, 202153,941696,391


(1) Our February 11, 2019 tender offer, that was originally scheduled to expire on March 27, 2019, was amended to extend the offer period to April 5, 2019.


(2) Our February 21, 2020 tender offer, that was originally scheduled to expire on March 27, 2020, was amended to extend the offer period to April 3, 2020.


(3)    Our February 19, 2021 tender offer that was originally scheduled to expire on March 26, 2021, was amended to extend the offer period to April 5, 2021.


All repurchased shares were retired upon acquisition.


Recent Developments


On January 5, 2022, the Board, upon the recommendation of the Nominating and Corporate Governance Committee, voted to appoint Ashwin Ranganathan as a Class I director of the Board, chair of the Nominating and Corporate Governance Committee and a member of the Audit Committee, to fill the vacancy created by the retirement of Marc I. Abrams on January 4, 2022. Mr. Ranganathan was appointed to serve as a member of the Board until the 2023 annual meeting of stockholders, or until his successor is duly elected and qualified. The Board and the Nominating and Corporate Governance Committee determined that Mr. Ranganathan is not an “interested person” (as defined in Section 2(a)(19) of the 1940 Act) of the Company.


On January 26, 2022, our Board declared a distribution of $0.0846 per common share, payable on April 15, 2022, to stockholders of record on January 27, 2022.


On February 2, 2022, OFS Advisor and CIM Capital entered into the Termination Agreement pursuant to which the Sub-Advisory Agreement was terminated.


On February 2, 2022, we and OFS Advisor entered into the Second Amended Expense Support Agreement under which OFS Advisor will be responsible for any future Expense Support Payments.


On February 22, 2022, we commenced a tender offer pursuant to which we are offering to purchase up to 53,204 shares of our issued and outstanding common stock at a price equal to our net asset value per share on March 30, 2022.


On February 23, 2022, our Board declared a distribution of $0.0846 per common share, payable on April 15, 2022, to stockholders of record on February 24, 2022.




Item 7A.    Quantitative and Qualitative Disclosures about Market Risk


We are subject to financial market risks, including changes in interest rates and the valuations of our investment portfolio. The economic effects of the COVID-19 pandemic has introduced significant volatility in the financial markets, and the effects of this volatility has impacted and could continue to impact our market risks. The U.S. Federal Reserve and other central banks reduced certain interest rates and LIBOR has decreased. In addition, in a prolonged low interest rate environment, our net interest margin will be compressed and adversely affect our operating results. For additional information concerning the COVID-19 pandemic and its potential impact on our business and our operating results, see “Part I - 1A. Risk Factors ” .


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Investment Valuation Risk


Because there is not a readily available market value for most of the investments in our portfolio, we value a significant portion of our portfolio investments at fair value as determined in good faith by our Board based on independent third-party valuation firms that have been engaged at the direction of our Board to assist in the valuation of each portfolio investment without a readily available market quotation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, some investments may be subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than its current fair value. See “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Estimates” as well as Notes 2 and 5 to our consolidated financial statements for the year ended December 31, 2021 for more information relating to our investment valuation.


Interest Rate Risk


Changes in interest rates affect both our cost of future funding and the valuation of our investment portfolio. As of December 31, 2021, 99% of our debt investments bore interest at floating interest rates and 1% of our debt investments bore interest at fixed rates, at fair value. The interest rates on our debt investments bearing floating interest rates have been based on a floating LIBOR, but will transition away from LIBOR to any one of the various alternative reference rates, and typically contain interest rate re-set provisions that adjust applicable interest rates to current rates on a periodic basis. A significant portion of our loans that are subject to the floating rates are also subject to a minimum base rate, or floor, that we charge on our loans if the current market rates are below the respective floors. a substantial amount of our floating rate loans were based on a floating LIBOR rate, subject to a floor.


Our outstanding Unsecured Note bears interest at a fixed rate. Our PWB Credit Facility has a floating interest rate provision based on the Prime Rate with an effective interest rate of 4.65% as of December 31, 2021.


Interest rate sensitivity refers to the change in our earnings that may result from changes in the level of interest rates. Assuming that our balance sheet as of December 31, 2021, were to remain constant, and that we took no actions to alter our existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates. Basis point increaseInterest incomeInterest expenseNet increase25$5,468$—$5,4685011,150(27,502)(16,352)7527,058(41,253)(14,195)10097,503(55,003)42,500125182,842(68,754)114,088


Basis point decreaseInterest incomeInterest expense(1)Net decrease25$(3,874)$—$(3,874)50—(1)——(1)


(1) Increases or decreases in LIBOR or Prime Rate beyond that presented would not result in a change to interest income or interest expense due to current LIBOR or Prime Rates and a minimum base rate, or floor, that our debt investments and the PWB Credit Facility contain.


Although we believe that the foregoing analysis is indicative of our net investment income sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets in our portfolio including the impact of prepayments, and other business developments, including future borrowings, that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the statement above.


We are subject to financial market risks, including changes in interest rates. Changes in interest rates affect the valuation of our investment. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. Our investment portfolio and investment income may be affected by changes in various interest rates, including the transition away from LIBOR to any one the various alternative reference rates.


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ITEM 8. FINANCIAL STATEMENTS





Index to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firms90Consolidated Statements of Assets and Liabilities as of December 31, 2021 and 202091Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020 and 201992Consolidated Statements of Changes in Net Assets for the Years Ended December 31, 2021, 2020 and 201993Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 201994Consolidated Schedules of Investments as of December 31, 2021 and 2020101Notes to Consolidated Financial Statements107





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Report of Independent Registered Public Accounting Firm





To the Stockholders and Board of Directors


Hancock Park Corporate Income, Inc.:





Opinion on the Consolidated Financial Statements


We have audited the accompanying consolidated statements of assets and liabilities of Hancock Park Corporate Income, Inc. and subsidiaries (the Company),  including the consolidated schedules of investments, as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in net assets, and cash flows for each of the years in the three‐year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations, changes in net assets, and its cash flows for each of the years in the three‐year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.


Basis for Opinion


These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements 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 audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.


Our audits 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. Such procedures also included confirmation of investments owned as of December 31, 2021, by correspondence with custodians, agents, or portfolio companies, or by other appropriate auditing procedures where replies were not received. 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. We believe that our audits provide a reasonable basis for our opinion.





/s/ KPMG LLP


We have served as the Company’s auditor since 2019.


Chicago , Illinois


March 18, 2022


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Hancock Park Corporate Income, Inc.


Consolidated Statements of Assets and Liabilities


December 31,20212020Assets:Non-control/non-affiliate investments at fair value (amortized cost of $43,400,387 and $46,226,581 respectively)$43,608,569$45,314,688Cash and cash equivalents3,246,9873,012,833Interest receivable201,153164,222Receivable for investments sold1,612,224—Due from sub-adviser (see Note 3)—659,003Prepaid expenses and other assets23,1336,676Total assets$48,692,066$49,157,422Liabilities:Revolving line of credit$5,425,000$4,775,000Unsecured note (net of discount and deferred debt issuance costs of $357,377 and $285,765, respectively)14,642,62314,714,235Due to adviser and affiliates (see Note 3)642,836589,318Accrued professional fees234,538161,842Payable for repurchase of common stock696,390700,935Distributions payable520,126549,197Other liabilities286,130225,020Total liabilities22,447,64321,715,547Commitments and contingencies (Notes 3 and 6)Net assets:Common stock, par value of $0.001 per share; 20,000,000 shares authorized as of December 31, 2021 and 2020; 2,020,361 and 2,178,920 shares issued and outstanding as of December 31, 2021 and 2020, respectively$2,020$2,179Paid-in capital in excess of par26,754,91429,042,554Total distributable earnings (accumulated losses)(512,511)(1,602,858)Total net assets$26,244,423$27,441,875Total liabilities and net assets$48,692,066$49,157,422Number of shares outstanding2,020,3612,178,920Net asset value per share$12.99$12.59





See Notes to Consolidated Financial Statements.





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Hancock Park Corporate Income, Inc.


Consolidated Statements of Operations


Years Ended December 31,202120202019Investment incomeInterest income$4,694,065$4,262,609$3,429,780Fee income360,548122,30397,809Total investment income5,054,6134,384,9123,527,589Operating expensesAmortization of deferred offering costs91,888307,688180,872Contractual issuer expenses (see Notes 2 and 3)3138,1517,659Interest expense1,209,9141,259,298427,432Management fees562,903542,416405,282Incentive fees339,609277,399195,720Administrative fees750,568842,972675,155Professional fees800,939604,265534,433Insurance expense116,89797,60776,550Transfer agent expense101,32791,540102,068Other expenses83,85370,11286,707Total operating expenses4,058,2114,101,4482,691,878Less: Expense limitation under agreements with advisers (see Notes 2 and 3)(1,250,633)(1,904,615)(1,220,369)Net operating expenses2,807,5782,196,8331,471,509Net investment income2,247,0352,188,0792,056,080Net realized and unrealized gain (loss) on investmentsNet realized gain (loss) on investments(298,166)(590,347)52Income tax expense on net realized investment gains(179,000)——Net unrealized appreciation (depreciation) on investments1,120,075(266,688)(83,072)Deferred tax benefit (expense) on investments net unrealized appreciation/depreciation85,179(85,018)(20,570)Net gain (loss) on investments728,088(942,053)(103,590)Net increase in net assets resulting from operations$2,975,123$1,246,026$1,952,490Net investment income per common share - basic and diluted$1.06$0.99$1.00Net increase in net assets resulting from operations per common share - basic and diluted$1.40$0.56$0.95Distributions declared per common share$1.02$1.01$1.05Basic and diluted weighted average common shares outstanding2,128,1792,214,9842,053,953





See Notes to Consolidated Financial Statements.





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Hancock Park Corporate Income, Inc.


Consolidated Statements of Changes in Net Assets


Common StockNumber of sharesPar valuePaid-in capital in excess of parTotal distributable earnings (losses)Total net assetsBalances at January 1, 20191,818,799$1,819$24,200,918$(564,851)$23,637,886Net increase (decrease) in net assets resulting from operations:Net investment income———2,056,0802,056,080Net realized gain on investments, net of taxes———5252Unrealized depreciation on investments, net of deferred taxes———(103,642)(103,642)Tax reclassifications of permanent differences——(96,836)96,836—Common stock issued460,4144606,202,186—6,202,646Repurchase of common stock(39,439)(39)(519,507)—(519,546)Distributions to stockholders———(2,152,970)(2,152,970)Net increase (decrease) for the year ended December 31, 2019420,9754215,585,843(103,644)5,482,620Balances at December 31, 20192,239,774$2,240$29,786,761$(668,495)$29,120,506Net increase (decrease) in net assets resulting from operations:Net investment income———2,188,0792,188,079Net realized loss on investments, net of taxes———(590,347)(590,347)Unrealized depreciation on investments, net of deferred taxes———(351,706)(351,706)Tax reclassifications of permanent differences——(40,599)40,599—Common stock issued136,4271361,711,046—1,711,182Repurchase of common stock(197,281)(197)(2,414,654)—(2,414,851)Distributions to stockholders———(2,220,988)(2,220,988)Net decrease for the year ended      December 31, 2020(60,854)(61)(744,207)(934,363)(1,678,631)Balances at December 31, 20202,178,920$2,179$29,042,554$(1,602,858)$27,441,875Net increase (decrease) in net assets resulting from operations:Net investment income———2,247,0352,247,035Net realized loss on investments, net of taxes———(477,166)(477,166)Unrealized appreciation on investments, net of deferred taxes———1,205,2541,205,254Tax reclassifications of permanent differences——(263,388)263,388—Common stock issued60,33260783,240—783,300Repurchase of common stock(218,891)(219)(2,807,492)—(2,807,711)Distributions to stockholders———(2,148,164)(2,148,164)Net increase (decrease) for the year ended December 31, 2021(158,559)(159)(2,287,640)1,090,347(1,197,452)Balances at December 31, 20212,020,361$2,020$26,754,914$(512,511)$26,244,423


See Notes to Consolidated Financial Statements.





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Hancock Park Corporate Income, Inc.


Consolidated Statements of Cash Flows Years Ended December 31,202120202019Cash flows from operating activitiesNet increase in net assets resulting from operations$2,975,123$1,246,026$1,952,486Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:Net unrealized (appreciation) depreciation on investments, net of deferred taxes(1,205,254)351,706103,642Net realized (gain) loss on investments298,166590,347(52)Amortization of Net Loan Fees(541,777)(144,672)(73,690)Amendment fees collected34,6298,2933,820Amortization of debt issuance costs97,737102,20059,249Payment-in-kind interest(76,763)(10,264)(20,856)Accretion of interest income on Structured Finance Notes(513,343)(51,140)—Purchase of portfolio investments(29,903,711)(18,804,106)(17,712,013)Proceeds from principal payments on portfolio investments30,756,81110,447,9394,163,149Proceeds from the sale or redemption of portfolio investments2,297,1402,517,7941,539,643Distributions received from Structured Finance Notes429,789——Changes in other operating assets and liabilities:——Interest receivable(36,931)(48,182)76,255Receivable from investments sold(1,612,224)——Due from sub-adviser659,003(659,003)—Due to advisor and affiliates53,518482,294(55,973)Accrued professional fees72,69632,707(61,876)Payable for investments purchased—(4,316,624)3,595,338Other assets and liabilities169,505(13,623)86,664Net cash provided by (used in) operating activities3,954,114(8,268,308)(6,344,214)Cash flows from financing activitiesNet proceeds from the issuance of common stock783,3001,711,1826,202,646Distributions paid to stockholders(2,177,235)(2,255,703)(2,014,479)Repurchase of common stock(2,812,255)(1,713,916)(519,546)Proceeds from Unsecured Note, net of discount and offering costs——14,690,655Borrowing under revolving line of credit11,075,00012,275,0007,075,000Repayments under revolving line of credit(10,425,000)(7,500,000)(11,475,000)Payment of debt issuance costs(163,770)(50,000)(50,780)Net cash provided by (used in) financing activities(3,719,960)2,466,56313,908,496Net increase (decrease) in cash and cash equivalents234,154(5,801,745)7,564,282Cash and cash equivalents at beginning of year3,012,8338,814,5781,250,296Cash and cash equivalents at end of year$3,246,987$3,012,833$8,814,578Supplemental disclosure of cash flow information:Organization and offering costs, and contractual issuer expenses paid by investment adviser and its affiliates (see Notes 2 and 3)$57,587$217,356$307,129Amortization of deferred offering costs limited by investment advisers (see Notes 2 and 3)91,888307,688180,872Cash paid during the year for interest1,126,7901,156,040277,592


See Notes to Consolidated Financial Statements.


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Hancock Park Corporate Income, Inc.
 Consolidated Schedule of Investments
 December 31, 2021


Portfolio Company(1) (8)Investment TypeIndustryInterest Rate(3)Spread Above Index(3)Initial Acquisition DateMaturityPrincipalAmountAmortized CostFair Value(4)Percent ofNet AssetsNon-control/Non-affiliate InvestmentsAll Star Auto Lights, Inc.Motor Vehicle Parts (Used) Merchant WholesalersSenior Secured Loan8.25%(L +7.25%)12/19/20198/20/2025$5,283,346$5,208,742$5,219,34719.8%Ball MetalpackMetal Can ManufacturingSenior Secured Loan9.75%(L +8.75%)6/8/20217/31/20261,083,3331,071,6771,083,3334.1BayMark Health Services, Inc.Outpatient Mental Health and Substance Abuse CentersSenior Secured Loan9.50%(L +8.50%)6/10/20216/11/20281,325,7581,307,3861,352,2735.2Senior Secured Loan (Delayed Draw) (12)n/m (5)(L +8.50%)6/10/20216/11/2028—(10,670)15,2580.11,325,7581,296,7161,367,5315.3Constellis Holdings, LLCOther Justice, Public Order, and Safety ActivitiesCommon Equity (1,362 Common shares) (7)3/27/202046,4031,944—Convergint TechnologiesSecurity Systems Services (except Locksmiths)Senior Secured Loan7.50%(L +6.75%)9/28/20183/30/20291,499,9551,490,7791,514,9555.8DRS Imaging Services, LLCData Processing, Hosting, and Related ServicesCommon Equity (115 units) (7) (13)3/8/2018115,154131,0470.5Eblens Holdings, Inc.Shoe StoreSubordinated Loan (2)12.00% cash / 1.00% PIKN/A7/13/20171/13/2023484,565483,191476,2791.8Common Equity (3,750 Class A units) (7)7/13/201737,50015,3880.1484,565520,691491,6671.9Electrical Components International, Inc.Current-Carrying Wiring Device ManufacturingSenior Secured Loan8.60%(L +8.50%)4/8/20216/26/20261,000,000884,448984,5833.8


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Hancock Park Corporate Income, Inc.
 Consolidated Schedule of Investments - Continued
 December 31, 2021


Portfolio Company(1) (8)Investment TypeIndustryInterest Rate(3)Spread Above Index(3)Initial Acquisition DateMaturityPrincipalAmountAmortized CostFair Value(4)Percent ofNet AssetsExcelin Home Health, LLCHome Health Care ServicesSenior Secured Loan11.50%(L +9.50%)10/25/20189/30/2025$1,000,000$984,075$1,000,0003.8%Honor HN Buyer IncServices for the Elderly and Persons with DisabilitiesSenior Secured Loan7.00%(L +6.00%)10/15/202110/15/2027860,634844,037844,0373.2Senior Secured Loan (Delayed Draw) (12)n/m (5)(L +6.00%)10/15/202110/15/2027—(5,210)(5,210)—Senior Secured Loan (Revolver) (12)n/m (5)(L +6.00%)10/15/202110/15/2027—(1,910)(1,910)—860,634836,917836,9173.2Inergex HoldingsOther Computer Related ServicesSenior Secured Loan8.00% cash / 1.00% PIK(L +8.00%)10/1/201810/1/20241,017,3481,002,2031,017,3483.9Senior Secured Loan (Revolver) (12)n/m (5)(L +7.00%)10/1/201810/1/2024—(859)——1,017,3481,001,3441,017,3483.9KNS Acquisition Corp.Electronic Shopping and Mail-Order HousesSenior Secured Loan7.00%(L +6.25%)7/26/20214/21/2027993,750991,328981,4433.7Milrose Consultants, LLCAdministrative Management and General Management Consulting ServicesSenior Secured Loan (6)7.50%(L +6.50%)7/16/20197/16/20253,889,3063,889,1083,830,30614.6Senior Secured Loan (Revolver) (12)7.50%(L +6.50%)12/14/20217/16/2025110,262108,902106,0800.43,999,5683,998,0103,936,38615.0One GI LLC (12)Offices of Other Holding CompaniesSenior Secured Loan (Delayed Draw)7.75%(L +6.75%)12/13/20213/13/2022636,364623,437623,4372.4Senior Secured Loan (Delayed Draw)n/m (5)(L +6.75%)12/13/202112/13/2023—(4,464)(4,464)—Senior Secured Loan (Revolver)n/m (5)(L +6.75%)12/13/202112/22/2025—(3,290)(3,290)—636,364615,683615,6832.4Professional Pipe Holdings, LLCPlumbing, Heating, and Air-Conditioning ContractorsSenior Secured Loan9.75% cash / 1.00% PIK(L +9.75%)3/23/20183/24/2025325,286323,853325,9361.2RPLF Holdings, LLCSoftware PublishersCommon Equity (62,365 Class A units) (7) (13)1/17/201888,917143,3610.5


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Hancock Park Corporate Income, Inc.
 Consolidated Schedule of Investments - Continued
 December 31, 2021


Portfolio Company(1) (8)Investment TypeIndustryInterest Rate(3)Spread Above Index(3)Initial Acquisition DateMaturityPrincipalAmountAmortized CostFair Value(4)Percent ofNet AssetsRSA SecurityComputer and Computer Peripheral Equipment and Software Merchant WholesalersSenior Secured Loan8.50%(L +7.75%)4/16/20214/27/2029$1,000,000$988,036$948,9713.6%RumbleOn, Inc. (11)Other Industrial Machinery ManufacturingSenior Secured Loan9.25%(L +8.25%)8/31/20218/31/20261,047,375990,9551,001,4363.8Senior Secured Loan (Delayed Draw) (12)n/m (5)(L +8.25%)8/31/20212/23/2023—(4,435)(19,737)(0.1)Warrants (warrants to purchase up to $150,000 in common stock) (7)8/31/20212/28/2023 (18)—50,08268,4800.31,047,3751,036,6021,050,1794.0SourceHOV Tax, Inc.Other Accounting ServicesSenior Secured Loan7.50%(L +6.50%)3/16/20203/16/20253,533,9023,505,3183,558,42313.6Senior Secured Loan (Revolver) (12)n/m (5)(L +6.50%)5/17/20213/17/2025—(2,680)——3,533,9023,502,6383,558,42313.6Spring Education Group, Inc. (F/K/A SSH Group Holdings, Inc.,)Child Day Care ServicesSenior Secured Loan8.47%(L +8.25%)7/26/20187/30/20261,241,8001,215,9941,148,0244.4SS Acquisition, LLCSports and Recreation InstructionSenior Secured Loan (6)7.88%(L +6.88%)12/30/202112/30/2026625,000618,757618,7572.4Senior Secured Loan (Delayed Draw) (12)n/m (5)(L +6.88%)12/30/202112/30/2026————625,000618,757618,7572.4STS Operating, Inc.Industrial Machinery and Equipment Merchant WholesalersSenior Secured Loan9.00%(L +8.00%)5/15/20184/30/20261,593,2201,592,7161,593,2206.1The Escape Game, LLCAll other amusement and recreation industriesSenior Secured Loan8.00%(L +7.00%)12/21/202112/22/20241,166,6661,166,6661,170,1634.5Senior Secured Loan (Revolver) (12)n/m (5)(L +7.00%)12/21/202112/22/2024—(3,300)999—1,166,6661,163,3661,171,1624.5Thryv (9)Directory and Mailing List PublishersSenior Secured Loan9.50%(L +8.50%)2/18/20213/1/20261,024,7901,002,1561,042,7244.0


97


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Hancock Park Corporate Income, Inc.
 Consolidated Schedule of Investments - Continued
 December 31, 2021


Portfolio Company(1) (8)Investment TypeIndustryInterest Rate(3)Spread Above Index(3)Initial Acquisition DateMaturityPrincipalAmountAmortized CostFair Value(4)Percent ofNet AssetsTolemar Acquisition, Inc.Motorcycle, Bicycle, and Parts ManufacturingSenior Secured Loan7.00%(L +6.00%)10/14/202110/14/2026$1,276,213$1,270,252$1,270,1084.8%Senior Secured Loan (Revolver) (12)7.00%(L +6.00%)10/14/202110/14/202630,88229,82729,8270.11,307,0951,300,0791,299,9354.9TruGreen Limited PartnershipLandscaping ServicesSenior Secured Loan9.25%(L +8.50%)5/13/202111/2/20281,500,0001,543,1891,530,0005.8Total Debt and Equity Investments$33,549,755$33,438,270$33,612,876128.2%Structured Finance Note Investments (11)Subordinated Notes, Mezzanine Debt and Other CLO-Related Investment (11) (14)Apex Credit CLO 2020Subordinated Notes (15) (16)10.20%11/16/202010/20/2031$3,650,000$3,062,414$2,994,57411.4%Apex Credit CLO 2021 LtdSubordinated Notes (15) (16)14.53%5/28/20217/18/20341,480,0001,337,1981,276,2234.9CLO other (10)29,24529,2450.1Elevation CLO 2021-14 LtdSubordinated Notes (15) (16)16.05%9/21/202110/20/20341,750,0001,466,3881,527,6405.8Elevation CLO 2021-15, Ltd.Subordinated Notes (15) (16)16.91%12/6/20211/5/20351,250,000880,784877,0053.3Monroe Capital MML CLO X, LTD.Mezzanine bond - Class E10.92%(L +8.85%)8/7/20208/20/20311,000,000949,466995,8463.8Regatta II FundingMezzanine bond - Class DR213.42%(L +6.95%)6/5/20201/15/2029800,000736,622795,1603.0


98


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Hancock Park Corporate Income, Inc.
 Consolidated Schedule of Investments - Continued
 December 31, 2021


Portfolio Company(1) (8)Investment TypeIndustryInterest Rate(3)Spread Above Index(3)Initial Acquisition DateMaturityPrincipalAmountAmortized CostFair Value(4)Percent ofNet AssetsTotal Subordinated Notes, Mezzanine Debt and Other CLO-Related Investment$9,930,000$8,462,117$8,495,69332.3%Loan Accumulation FacilitiesAPEX Credit CLO 2021-II Ltd (11) (17)Loan accumulation facility13.50%7/14/20217/14/2022$1,500,000$1,500,000$1,500,0005.7%Total Structured Finance Note Investments$11,430,000$9,962,117$9,995,69338.0%Total Investments$44,979,755$43,400,387$43,608,569166.2%





(1)    The Company's investments are generally classified as "restricted securities" as such term is defined under Rule 6-03(f) of Regulation S-X or Rule 144 of the Securities Act. Equity ownership may be held in shares or units of companies affiliated with the portfolio company.


(2)    The interest rate on this investment contains a PIK provision, whereby the issuer has the option to make interest payments in cash or with the issuance of additional securities as payment of the entire PIK provision. The interest rate in the schedule represents the current interest rate in effect for this investment. The following table provides additional details on this PIK investment, including the maximum annual PIK interest rate allowed as of December 31, 2021: Portfolio CompanyInvestment TypeRange of PIKOptionRange of CashOptionMaximum PIKRate AllowedEblens Holdings, Inc.Subordinated Loan0% or 1.00%13.00% or 12.00%1.00%


(3)    Substantially all of the investments that bear interest at a variable rate are indexed to LIBOR (L), generally between 0.75% and 1.00% at December 31, 2021, and reset monthly, quarterly, or semi-annually. Variable-rate loans with an aggregate cost of $32,617,023 include LIBOR reference rate floor provisions of generally 0.75% to 1.00% at December 31, 2021, the reference rate on such instruments was generally below the stated floor provisions. For each investment, the Company has provided the spread over the reference rate and current interest rate in effect at December 31, 2021. Unless otherwise noted, all investments with a stated PIK rate require interest payments with the issuance of additional securities as payment of the entire PIK provision.


(4)    Unless otherwise noted with footnote 9, fair value was determined using significant unobservable inputs for all of the Company's investments and are considered Level 3 under GAAP. See Note 5 for further details.


(5)    Not meaningful as there is no outstanding balance on the revolver or delayed draw loan. The Company earns unfunded commitment fees on undrawn revolving lines of credit balances, which are reported in fee income.


(6)    The Company has entered into a contractual arrangement with co‐lenders whereby, subject to certain conditions, it has agreed to receive its payment after the repayment of certain co-lenders pursuant to a payment waterfall. The table below provides additional details as of December 31, 2021: Portfolio CompanyReported Interest RateInterest Rate per Credit AgreementAdditional Interest per AnnumSS Acquisition, LLC7.88%7.50%0.38%


99


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Hancock Park Corporate Income, Inc.
 Consolidated Schedule of Investments - Continued
 December 31, 2021


(7)    Non-income producing.


(8)    Investments pledged as collateral under the PWB Credit Facility.


(9)    Fair value was determined by reference to observable inputs other than quoted prices in active markets and are considered Level 2 under GAAP. See Note 5 for further details.


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


(11)    Non-qualifying assets under Section 55(a) of the 1940 Act. Qualifying assets as defined in Section 55 of the 1940 Act must represent at least 70% of the Company's assets immediately following the acquisition of any additional non-qualifying assets. As of December 31, 2021, approximately 77% of the Company's assets were qualifying assets.


(12)    Subject to unfunded commitments. The Company considers undrawn amounts in the determination of fair value on revolving lines of credit. See Note 6 .


(13)    Investment held by HPCI-MB, a wholly owned subsidiary subject to corporate income tax.


(14)    The interest rate disclosed is the estimated effective yield, generally established at purchase and re-evaluated upon receipt of distributions, and based upon projected amounts and timing of projected future distributions and the projected amount and timing of terminal principal payments at the time of estimation. The estimated yield and investment cost may ultimately not be realized.


(15)    Amortized cost reflects accretion of effective yield less any cash distributions received or entitled to be received from CLO subordinated debt investments.


(16)    CLO subordinated debt positions are entitled to recurring distributions generally equal to the residual cash flow of payments received on underlying securities less contractual payments to senior CLO debt holders and fund expenses.


(17)    Loan accumulation facilities are financing structures intended to aggregate loans that may be used to form the basis of a CLO vehicle. Reported yields represent the realized yield since acquisition. Income notes associated with loan accumulation facilities generally pay returns equal to the actual income earned on facility assets less costs of senior financing. As of December 31, 2021, the fair value of loan accumulation facilities were determined by reference to Transaction Price.


(18)    Represents expiration date of the warrants.











See Notes to Consolidated Financial Statements.


100




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Hancock Park Corporate Income, Inc.
 Consolidated Schedule of Investments
 December 31, 2020


Portfolio Company(1) (8)Investment TypeIndustryInterest Rate(3)Spread Above Index(3)Initial Acquisition DateMaturityPrincipalAmountAmortized CostFair Value(4)Percent ofNet AssetsNon-control/Non-affiliate InvestmentsAll Star Auto Lights, Inc.Motor Vehicle Parts (Used) Merchant WholesalersSenior Secured Loan8.50%(L +7.50%)12/19/20198/20/2024$3,235,962$3,207,447$3,074,74411.2%A&A Transfer, LLCConstruction and Mining (except Oil Well) Machinery and Equipment Merchant WholesalersSenior Secured Loan8.25%(L +6.50%)2/7/20202/7/20251,848,0001,825,1851,866,4806.8Senior Secured Loan (Revolver)(12n/m(5)(L +6.50%)2/7/20202/7/2025—(3,891)(2,373)—1,848,0001,821,2941,864,1076.8BayMark Health ServicesOutpatient Mental Health and Substance Abuse CentersSenior Secured Loan9.25%(L +8.25%)3/22/20183/1/20251,000,000994,0061,000,0003.6Chemical Resources Holdings, Inc.Custom Compounding of Purchased ResinsSenior Secured Loan(6)9.17%(L +7.67%)1/25/20191/25/20241,256,8501,246,4691,256,8504.6Common Equity (168 Class A shares)(7) (13)1/25/2019166,469314,0001.11,256,8501,412,9381,570,8505.7Confie Seguros Holdings II Co.Insurance Agencies and BrokeragesSenior Secured Loan8.73%(L +8.50%)6/6/201711/1/20251,447,6401,405,6771,391,3315.1Constellis Holdings, LLCOther Justice, Public Order, and Safety ActivitiesSenior Secured Loan8.50%(L +7.50%)3/27/20203/7/20242,6502,6502,650—Senior Secured Loan12.00%(L +11.00%)3/27/20203/27/20253,5223,0803,593Common Equity (1,362 common shares)3/27/2020—46,40334,0360.16,17252,13340,2790.1Convergint TechnologiesSecurity Systems Services (except Locksmiths)Senior Secured Loan7.50%(L +6.75%)9/28/20182/2/20262,393,7502,353,8852,330,9218.5DRS Imaging Services, LLCData Processing, Hosting, and Related ServicesCommon Equity (115 units)(7) (13)3/8/2018115,154178,0000.6


101


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Hancock Park Corporate Income, Inc.
 Consolidated Schedule of Investments - Continued
 December 31, 2020


Portfolio Company(1) (8)Investment TypeIndustryInterest Rate(3)Spread Above Index(3)Initial Acquisition DateMaturityPrincipalAmountAmortized CostFair Value(4)Percent ofNet AssetsDuPage Medical GroupOffices of Physicians, Mental Health SpecialistsSenior Secured Loan(9)3.50%(L +2.75%)8/22/20178/15/2024$96,100$95,851$95,6400.3%Senior Secured Loan7.75%(L +7.00%)8/22/20178/15/20251,939,4351,935,7281,939,4357.12,035,5362,031,5792,035,0757.4Eblens Holdings, Inc.Shoe StoreSubordinated Loan(2)12% cash / 1.00% PIKN/A7/13/20171/13/2023479,683475,323229,8850.8Common Equity (3,750 Class A units)(7)7/13/201737,500479,683512,823229,8850.8Excelin Home Health, LLCHome Health Care ServicesSenior Secured Loan11.50%(L +9.50%)10/25/20184/25/20241,000,000987,9541,000,0003.6Hyland Software, Inc.Software PublishersSenior Secured Loan(9)4.25%(L +3.50%)10/24/20187/1/202421,73321,71221,8140.1Senior Secured Loan7.75%(L +7.00%)10/24/20187/7/2025293,452294,593293,4521.1315,185316,305315,2671.2Inergex HoldingsOther Computer Related ServicesSenior Secured Loan8.00%(L +7.00%)10/1/201810/1/20241,094,7971,084,3341,060,8973.9Senior Secured Loan (Revolver)(12)n/m(5)(L +7.00%)10/1/201810/1/2024—(1,171)——1,094,7971,083,1631,060,8973.9Institutional Shareholder Services Inc.Administrative Management and General Management Consulting ServicesSenior Secured Loan8.75%(L +8.50%)3/4/20193/5/20271,068,7501,043,9661,068,7503.9I&I Sales Group, LLCMarketing Consulting ServicesSenior Secured Loan9.50%(L +8.50%)12/31/20207/10/20251,000,000982,521982,5213.6Senior Secured Loan (Revolver)(12)n/m(5)(L +8.50%)12/31/20207/10/2025—(512)(512)—1,000,000982,009982,0093.6Milrose Consultants, LLCAdministrative Management and General Management Consulting ServicesSenior Secured Loan(6)7.62%(L +6.62%)7/16/20197/16/20253,925,9263,892,7983,910,45514.2Online Tech Stores, LLCStationery and Office Supplies Merchant WholesalersSubordinated Secured Loan(10)13.50% PIKN/A2/1/20188/1/20231,147,4871,007,141151,6310.6


102


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Hancock Park Corporate Income, Inc.
 Consolidated Schedule of Investments - Continued
 December 31, 2020


Portfolio Company(1) (8)Investment TypeIndustryInterest Rate(3)Spread Above Index(3)Initial Acquisition DateMaturityPrincipalAmountAmortized CostFair Value(4)Percent ofNet AssetsParfums Holding Company, Inc.Cosmetics, Beauty Supplies, and Perfume StoresSenior Secured Loan9.75%(L +8.75%)11/16/20176/30/2025$1,636,364$1,624,785$1,636,3646.0%Pelican Products, Inc.Unlaminated Plastics Profile Shape ManufacturingSenior Secured Loan8.75%(L +7.75%)9/24/20185/1/20262,000,0002,007,1001,979,9007.2Professional Pipe Holdings, LLCPlumbing, Heating, and Air-Conditioning ContractorsSenior Secured Loan9.75% cash / 1.50% PIK(L +8.75%)3/23/20183/23/2023379,552375,340368,8701.3Common Equity (86 Class A units)(7)3/23/201885,71473,0000.3379,552461,054441,8701.6Resource Label Group, LLCCommercial Printing (except Screen and Books)Senior Secured Loan5.50%(L +4.50%)6/7/20175/26/202368,10567,83167,3370.2Senior Secured Loan9.50%(L +8.50%)6/7/201711/26/2023178,571177,371178,2040.6246,676245,202245,5400.8Rocket Software, Inc.Software PublishersSenior Secured Loan8.46%(L +8.25%)11/20/201811/28/20261,285,4061,268,0541,278,5494.7RPLF Holdings, LLCSoftware PublishersCommon Equity (62,365 Class A units)(7)(13)1/17/2018—88,917109,0000.4SourceHOV Tax, Inc.Other Accounting ServicesSenior Secured Loan(6)7.61%(L +6.11%)3/16/20203/17/20253,552,1243,525,9443,569,55513.0Spring Education Group, Inc. (F/K/A SSH Group Holdings, Inc.,)Child Day Care ServicesSenior Secured Loan8.50%(L+8.25%)7/26/20187/30/2026704,000699,087628,47513.0STS Operating, Inc.Industrial Machinery and Equipment Merchant WholesalersSenior Secured Loan(9)5.25%(L +4.25%)5/15/201812/11/2024103,836103,68199,7050.4Senior Secured Loan9.00%(L +8.00%)5/15/20184/30/20261,593,2201,593,1921,506,2145.61,697,0561,696,8731,605,9196.0


103


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Hancock Park Corporate Income, Inc.
 Consolidated Schedule of Investments - Continued
 December 31, 2020


Portfolio Company(1) (8)Investment TypeIndustryInterest Rate(3)Spread Above Index(3)Initial Acquisition DateMaturityPrincipalAmountAmortized CostFair Value(4)Percent ofNet AssetsThe Escape Game, LLCAll other amusement and recreation industriesSenior Secured Loan9.75%(L +8.75%)7/18/201912/22/2022$500,000$498,036$474,7771.7%Senior Secured Loan9.75%(L +8.75%)12/22/201712/31/2021166,667166,667158,2590.6Senior Secured Loan8.00%(L +7.00%)7/20/201812/31/2021333,333333,333318,7651.2Senior Secured Loan (Delayed Draw)9.75%(L +8.75%)7/20/201812/22/2022500,000500,000474,7771.71,500,0001,498,0361,426,5785.2Truck Hero, Inc.Truck Trailer ManufacturingSenior Secured Loan(9)3.90%(L +3.75%)5/30/20174/22/202415,82615,75015,8290.1Senior Secured Loan9.25%(L +8.25%)5/30/20174/21/20251,878,4561,821,3471,878,4566.81,894,2821,837,0971,894,2856.9TTG Healthcare, LLCDiagnostic Imaging CentersSenior Secured Loan8.50%(L +7.50%)3/1/201911/28/20251,625,3541,609,2241,619,2835.9Preferred Equity (191 Class B units)(7) (13)3/1/2019191,409338,0001.21,625,3541,800,6331,957,2837.1Wastebuilt Environmental Solutions, LLC.Industrial Supplies Merchant WholesalersSenior Secured Loan10.25%(L +8.75%)10/11/201810/11/20241,500,0001,480,1831,256,5504.6XperiSemiconductor & Related Device ManufacturingSenior Secured Loan4.15%(L +4.00%)6/1/20206/1/202583,21476,74783,4920.3Total Debit and Equity Investments$41,359,765$41,529,984$40,317,562146.9%Structured Finance Note InvestmentsApex Credit CLO 2020Subordinated Notes(16)14.16%(14)11/16/202011/19/2031(11)3,650,0003,116,775(15)3,295,73812.0Monroe Capital MML CLO X, LTD.Mezzanine bond - Class E9.08%(L +8.85%)8/7/20208/20/2031(11)862,500801,944838,0433.1Park Avenue Institutional Advisers CLO 2017-1 -Class DMezzanine bond - Class D6.44%(L +6.22%)6/5/202011/14/29(11)100,00082,56495,2690.3


104


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Hancock Park Corporate Income, Inc.
 Consolidated Schedule of Investments - Continued
 December 31, 2020


Portfolio Company(1) (8)Investment TypeIndustryInterest Rate(3)Spread Above Index(3)Initial Acquisition DateMaturityPrincipalAmountAmortized CostFair Value(4)Percent ofNet AssetsRegatta II Funding - Class DR2Mezzanine bond - Class DR27.19%(L +6.95%)6/5/20201/15/29(11)$800,000$695,314$768,0762.8%Total Structured Finance Note Investments$5,412,500$4,696,597$4,997,12618.2%Total Investments$46,772,265$46,226,581$45,314,688165.1%


(1)    The Company's investments are generally classified as "restricted securities" as such term is defined under Rule 6-03(f) of Regulation S-X or Rule 144 of the Securities Act. Equity ownership may be held in shares or units of companies affiliated with the portfolio company.


(2)    The interest rate on this investment contains a PIK provision, whereby the issuer has the option to make interest payments in cash or with the issuance of additional securities as payment of the entire PIK provision. The interest rate in the schedule represents the current interest rate in effect for this investment. The following table provides additional details on this PIK investment, including the maximum annual PIK interest rate allowed as of December 31, 2020.


Portfolio CompanyInvestment TypeRange of PIKOptionRange of CashOptionMaximum PIKRate AllowedEblens Holdings, Inc.Subordinated Loan0% or 1.00%13.00% or 12.00%1.00%


(3)    Substantially all of the debt investments bear interest at rates determined by reference to LIBOR (L), generally between 0.75% and 1.0% at December 31, 2020  and which are reset monthly, quarterly and semi-annually.  Variable-rate loans with an aggregate cost of $39,315,954 include LIBOR reference rate floor provisions of generally 0.75% to 1.0% at December 31, 2020, the reference rate on such instruments was generally below the stated floor provisions.  For each investment, the Company has provided the spread over the reference rate and current interest rate in effect at December 31, 2020.  Unless otherwise noted, all investments with a stated PIK rate require interest payments with the issuance of additional securities as payment of the entire PIK provision.


(4)    Unless otherwise noted with footnote 9, fair value was determined using significant unobservable inputs for all of the Company's investments and are considered Level 3 under GAAP. See Note 5 for further details.


(5)    Not meaningful as there is no outstanding balance on the revolver. The Company earns unfunded commitment fees on undrawn revolving lines of credit balances, which are reported in fee income. The Company considers undrawn amounts in the determination of fair value on revolving lines of credit.


(6)    The Company has entered into a contractual arrangement with co-lenders whereby, subject to certain conditions, it has agreed to receive its payment after the repayment of certain co-lenders pursuant to a payment waterfall.  The table below provides additional details of  December 31, 2020: Portfolio CompanyReported Interest RateInterest Rate per Credit AgreementAdditional Interest per AnnumChemical Resources Holdings, Inc.9.17%7.50%1.67%Milrose Consultants, LLC7.62%7.00%0.62%SourceHOV Tax, Inc7.61%7.00%0.61%


(7)    Non-income producing.


(8)    Investments pledged as collateral under the PWB Credit Facility.


105


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Hancock Park Corporate Income, Inc.
 Consolidated Schedule of Investments - Continued
 December 31, 2020


(9)    Fair value was determined by reference to observable inputs other than quoted prices in active markets and are considered Level 2 under GAAP. See Note 5 for further details.


(10)    Investment was on non-accrual status as of December 31, 2020, meaning the Company has suspended recognition of all or a portion of income on the investment.  See Note 4 for further details.


(11)    Maturity date represents the contractual maturity date of the Structured Finance Notes.  Projected cash flows, including the projected amount and timing of terminal principal payments which may be projected to occur prior to contractual maturity date, were utilized in deriving the effective yield of the investments.


(12)    Subject to unfunded commitments. See Note 6 for further details.


(13)    Investment held by HPCI-MB, a wholly owned subsidiary subject to corporate income tax.


(14)    The rate disclosed is the estimated effective yield, generally established at purchase and re-evaluated upon receipt of distributions, and based upon projected amounts and timing of projected future distributions and the projected amount and timing of terminal principal payments at the time of estimation. The estimated yield and investment cost may ultimately not be realized.


(15)    Amortized cost reflects accretion of effective yield less any cash distributions received or entitled to be received from CLO subordinated debt investments.


(16)    CLO subordinated debt positions are entitled to recurring distributions which are generally equal to the remaining cash flow of payments made by underlying securities less contractual payments to senior CLO debt holders and fund expenses.








See Notes to Consolidated Financial Statements.


106




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Hancock Park Corporate Income, Inc.
 Notes to Consolidated Financial Statements







Note 1. Organization


Hancock Park Corporate Income, Inc. (the “Company”) is a Maryland corporation formed on December 8, 2015, as an externally managed, non-diversified, closed-end investment company. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”) and as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).


The Company’s objective is to provide stockholders with both current income and capital appreciation through its strategic investment focus primarily on debt investments and, to a lesser extent, equity investments in middle-market companies principally in the United States. In addition, the Company may invest in collateralized loan obligation (“CLO”) mezzanine debt, CLO subordinated debt and loan accumulation facility positions (collectively referred to as “Structured Finance Notes”). OFS Capital Management, LLC (“OFS Advisor”), an affiliate of the Company, a registered investment adviser, and a subsidiary of Orchard First Source Asset Management, LLC (“OFSAM”), serves as investment adviser to, and manages the day-to-day operations of the Company. From of August 3, 2020 through February 1, 2022, CIM Capital IC Management, LLC (“CIM Capital”), an affiliate of the Company, OFS Advisor and CCO Capital, LLC (“CCO”), and a registered investment adviser under the the 1940 Act, served as sub-adviser to the Company. OFS Advisor also serves as the investment adviser to CLO funds and other assets, including OFS Capital Corporation (“OFS Capital”). OFS Capital is a publicly-traded BDC with an investment strategy similar to the Company's. OFS Advisor also serves as the investment adviser for OFS Credit Company, Inc. (“OCCI”), a non-diversified, externally managed, closed-end management investment company that has registered as an investment company under the 1940 Act that primarily invests in Structured Finance Notes. Additionally, OFS Advisor serves as the collateral manager to CLOs and sub-advisor to investment companies manged by an affiliate.


The Company intends to raise up to $200,000,000 through offering shares of its common stock to investors in a continuous offering (the “Offering”) in reliance on exemptions from the registration requirements of the U.S. Securities Act of 1933, as amended (the “Securities Act”). Through August 3, 2020, the Company and OFS Advisor were party to a dealer manager agreement (the “Dealer Management Agreement”) with International Asset Advisory, LLC (“IAA”). Placement activities were conducted by IAA and participating broker dealers who solicited subscriptions to purchase shares of the Company’s common stock.


On August 3, 2020, the Dealer Manager Agreement was amended and restated to include CCO, an affiliate of the Company, OFS Advisor and CIM Capital, as an additional dealer manager for the Offering. From August 3, 2020 through August 31, 2020, CCO and IAA served as “co-dealer managers” and, effective September 1, 2020, IAA assigned and transferred all of IAA’s rights, obligations, interests and benefits under the Dealer Manager Agreement to CCO. On February 2, 2022, the Company entered into a second amended and restated dealer manager agreement (the “Second Amended Dealer Manager Agreement”). Among other things, the Second Amended Dealer Manager Agreement removed IAA as a dealer manager in the Offering.


The Company may make investments through HPCI-MB, Inc. (“HPCI-MB”), a wholly owned and consolidated subsidiary taxed under subchapter C of the Code, that generally holds the equity investments of the Company that are taxed as pass-through entities..




Note 2. Summary of Significant Accounting Policies


Basis of presentation: The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”), including Accounting Standards Codification (“ASC”) Topic 946, Financial Services–Investment Companies (“ASC Topic 946”) and the reporting requirements on Form 10-K, the 1940 Act, and Articles 6 and 12 of Regulation S-X. The consolidated financial statements include all adjustments, consisting only of normal and recurring accruals and adjustments, necessary for fair presentation in accordance with GAAP.


Reclassifications : Certain prior period amounts have been reclassified to conform to the current period presentation in the consolidated financial statements and the accompanying notes thereto. Reclassifications did not impact net increase in net assets resulting from operations, total assets, total liabilities or total net assets, or consolidated statements of changes in net assets and consolidated statements of cash flows classifications.


Principles of consolidation: The Company consolidates majority-owned investment company subsidiaries. The Company does not own any controlled operating company whose business consists of providing services to the Company, which would also require consolidation. All intercompany balances and transactions are eliminated upon consolidation.


Investments:  The Company applies fair value accounting in accordance with ASC Topic 820, Fair Value Measurements, which defines fair value, establishes a framework to measure fair value, and requires disclosures regarding fair value measurements. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is determined through the use of models and other valuation techniques, valuation inputs, and


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assumptions market participants would use to value the investment. Highest priority is given to prices for identical assets quoted in active markets (Level 1) and the lowest priority is given to unobservable valuation inputs (Level 3). The availability of observable inputs can vary significantly and is affected by many factors, including the type of product, whether the product is new to the market, whether the product is traded on an active exchange or in the secondary market, and the current market conditions. To the extent that the valuation is based on unobservable inputs, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for financial instruments classified as Level 3 (i.e., those instruments valued using unobservable inputs), which comprise the majority of the Company’s investments. See Note 5 for details.


Changes to the valuation policy are reviewed by management and the Company’s board of directors (the “Board”). As the Company’s investments change, markets change, new products develop, and valuation inputs become more or less observable, the Company will continue to refine its valuation methodologies.


See Note 5 for more detailed disclosures of the Company’s fair value measurements of its financial instruments.


Investment classification: The Company classifies its investments in accordance with the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in those companies in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of board representation, “Affiliate Investments” are defined as investments in those companies in which the Company owns between 5% and 25% of the voting securities, and “Non-Control/Non-Affiliate Investments” are those that neither qualify as Control Investments nor Affiliate Investments. As of December 31, 2021 and 2020, the Company did not have any investments classified as Affiliate Investments or Control Investments.


Reportable segments: The Company has a single reportable segment and single operating segment structure.


Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of investment income, expenses, gains and losses during the reporting period. Actual results could differ significantly from those estimates.


Cash and cash equivalents : Cash and cash equivalents consist of cash and highly liquid investments not held for resale with initial maturities of three months or less. The Company’s cash and cash equivalents are maintained with a member bank of the Federal Deposit Insurance Corporation (“FDIC”) and at times, such balances may be in excess of the FDIC insurance limits. Included in cash and cash equivalents is $3,246,987 and $3,012,833 held in a US Bank Money Market Deposit Account as of December 31, 2021 and 2020, respectively.


Offering costs:  Offering costs include legal, accounting, printing and other expenses pertaining to the preparation of the Offering, the related dealer-manager agreement, and other underwriting expenses, which include permissible due diligence reimbursements to the dealer manager and participating broker-dealers. Offering costs related to the continuous Offering are amortized over the twelve-months following the period incurred. The recognition of offering costs and deferred offering costs is limited under agreements with OFS Advisor and affiliates, and are subject to conditional reimbursement. See Note 3 . Amortization of deferred offering costs for the years ended December 31, 2021, 2020 and 2019, were $91,888, $307,688 and $180,872 respectively.


Deferred offering costs as of December 31, 2021 and 2020, were as follows: December 31,20212020Total deferred offering costs$37,151$69,293Deferred offering costs limitation under the Advisory Agreements (see below and Note 3)(37,151)(69,293)Deferred offering costs recognized by the Company$—$—


Contractual issuer expenses:  Contractual issuer expenses are those expenses defined in the advisory agreements with OFS Advisor and affiliates, as amended, related to the Offering but not included in GAAP offering costs and include (a) costs associated with technology integration between the Company’s systems and those of its participating broker-dealers, (b) marketing expenses, including development of marketing materials and marketing presentations, training and educational meetings, and generally coordinating the marketing process for the Company, and (c) the salaries and direct expenses of OFS Advisors’ employees, employees of their affiliates and others while engaged in the Offering and these other contractually-defined activities (“Contractual Issuer Expenses”).


Expense Limitation Agreements:  The Company benefits from expense limitation agreements with OFS Advisor that operate separately on (i) the amortization of offering costs and Contractual Issuer Expenses; and (ii) all other operating expenses not


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constituting such costs. The initial effect of the expense limitation agreements is a reduction in the gross expenses recognized in the consolidated statement of operations, and elimination of associated assets and liabilities in the consolidated statement of assets and liabilities in the period of limitation.


The Company recognizes the liability to reimburse OFS Advisor and affiliates, and the associated expense, as the substantive conditions for reimbursement are satisfied. Reimbursement of expense limitations are reported as reductions in the net expense limitation or as a reimbursement expense. The Company is conditionally liable to reimburse OFS Advisor for the expense support it has received for three years from the date such support is provided, after which—if the conditions for reimbursement have not been satisfied—the conditional reimbursement obligation expires. See Note 3.


Revenue recognition:


Interest income : Interest income is recognized on an accrual basis and reported as an interest receivable until collected. Interest income is accrued daily based on the outstanding principal amount on the consolidated statements of assets and liabilities and the contractual terms of the debt investment. Certain of the Company’s investments contain a payment-in-kind interest income provision (“PIK interest”). The PIK interest, computed at the contractual rate specified in the applicable investment agreement, is added to the principal balance of the investment, rather than being paid in cash. Recognition of PIK interest includes assessments of collectibility. The Company discontinues accrual of interest income, including PIK interest, when there is reasonable doubt that the interest income will be collected.


Loan origination fees, original issue discount (“OID”), market discount or premium, and loan amendment fees (collectively, “Net Loan Fees”) are recorded as an adjustment to the amortized cost of the investment, and accreted or amortized as an adjustment to interest income over the life of the respective debt investment using a method that approximates the effective interest method. When the Company receives a loan principal payment, the unamortized Net Loan Fees related to the paid principal is accelerated and recognized in interest income.


Further, the Company may acquire or receive equity, warrants or other equity-related securities (“Equity”) in connection with the Company’s acquisition of, subsequent amendment or restructuing to, debt investments. The Company determines the cost basis of Equity based on its fair value, and the fair value of debt investments and other securities or consideration received. Any resulting difference between the face amount of the debt and its recorded cost resulting from the assignment of value to the Equity is treated as OID, and accreted into interest income as described above.


Interest income - Structured Finance Notes : CLO mezzanine debt, CLO subordinated debt and loan accumulation facility positions are defined as Structured Finance Notes. Interest income from investments in CLO mezzanine debt and CLO subordinated debt positions is recognized on the basis of the estimated effective yield to expected redemptions utilizing assumed cash flows in accordance with ASC Sub-topic 325-40, Beneficial Interests in Securitized Financial Assets . The Company monitors the expected cash flows, and the accretable yields are determined and updated periodically. Expected cash flows inherent in the Company's estimates of accretable yields are based on expectations of defaults and loss-on-default severity, as well as other loan-performance assumptions, impacting the loans in the underlying CLO portfolios. These estimated cash flows are subject to a reasonable possibility of near-term change as economic and credit market conditions—including the transition away from LIBOR to any one the various alternative reference rates, including the Secured Overnight Financing Rate (“SOFR”)—become known, and the effect of these changes could be material.


Recognition of interest income on our loan accumulation facilities generally take the form of mandatorily redeemable instruments that mature upon the earlier of closing of the CLO securitization or stated expiration date of the instrument. Interest income is recognized on an accrual basis as earned in accordance with the settlement terms of the instrument.


Dividend income : Dividend income on common equity securities in limited liability companies, partnerships and other private entities, generally payable in cash, is recorded at the time dividends are declared. Dividend income on preferred equity investments is accrued daily based on the contractual terms of the preferred equity investment. Dividends on preferred equity securities may be payable in cash or in additional preferred securities, and are generally not payable unless declared or upon liquidation. Declared dividends payable in cash are reported as dividend receivables until collected. Non-cash dividends payable in additional preferred securities or contractually earned but not declared ("PIK dividends") and are recorded as an adjustment to the cost basis of the investment. Distributions in excess of the accumulated net income of the underlying portfolio company are recorded as a reduction in the cost of the common or preferred stock investment.


Fee income : The Company generates fee revenue in the form of syndication, prepayment, and other contractual fees, that are recognized as the related services are rendered. In the general course of its business, the Company receives certain fees, such as management fees, from portfolio companies which are non-recurring in nature. Prepayment fees are received on certain loans when repaid prior to their scheduled due date, which are recognized as earned when received, and syndication fees are received for capital structuring, loan syndication or advisory services from certain portfolio companies, which are recognized as earned upon closing of the investment.


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Investment Transactions and net realized and unrealized gain or loss on investments :  Investment transactions are reported on a trade-date basis. Unsettled trades as of the statement of assets and liabilities date are included in receivable for investments sold and payable for investments purchased. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of the investment. Investments are valued at fair value as determined in good faith by Company management under the supervision and review of the Board. After recording all appropriate interest, dividend, and other income, some of which is recorded as an adjustment to the cost basis of the investment as described above, the Company reports changes in the fair value of investments as net unrealized appreciation (depreciation) on investments in the consolidated statements of operations.


Non-accrual loans : Management reviews all loans that become past due on principal and interest, or when there is reasonable doubt that principal, cash interest, or PIK interest, will be collected, for placement on non-accrual status. When a loan is placed on non-accrual status, unpaid interest is credited to income and is reversed. Additionally, Net Loan Fees are no longer accreted to interest income as of the date the loan is placed on non-accrual status. Interest payments subsequently received on non-accrual investments may be recognized as income or applied to principal depending upon management’s judgment. Interest accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal, interest, and when, in the judgment of management, the investments are estimated to be fully collectible as to all principal and interest.  See Note 4 for further information on loans on non-accrual status as of December 31, 2021 and December 31, 2020.


Income taxes: The Company has elected to be treated, and intends to qualify annually, as a RIC under Subchapter M of the Code. To qualify as a RIC, the Company must, among other things, meet certain source of income and asset diversification requirements, and timely distribute at least 90% of its investment company taxable income (“ICTI”), which is generally net ordinary income plus net short-term capital gains in excess of net long-term capital losses to its stockholders.


Depending on the level of ICTI earned in a tax year, the Company may choose to retain ICTI in an amount less than that which would trigger U.S. federal income tax liability under Subchapter M of the Code. However, the Company would be liable for a 4% excise tax on such income. Excise tax liability is recognized when the Company determines its estimated current year annual ICTI, as defined in the Code, exceeds distributions from current year ICTI.


The Company may utilize HPCI-MB, a wholly owned holding company taxed under Subchapter C of the Code, when making equity investments in portfolio companies taxed as pass-through entities to meet its source-of-income requirements as a RIC. HPCI-MB is an investment company under GAAP, is consolidated in the Company’s GAAP financial statements, and may incur current and deferred federal and state income tax expenses or benefits with respect to income derived from those investments. Such income, net of applicable income taxes, is not included in the Company’s tax-basis net investment income until distributed by HPCI-MB, which may result in timing and character differences between the Company’s GAAP and tax-basis net investment income and realized gains and losses. Income tax expense from HPCI-MB related to net investment income is included in general and administrative expenses. The federal and state income tax from net investment gains, which includes taxes on realized gains upon the sale of the investment as well as deferred taxes or benefits on unrealized gains/losses, are included in net gain (loss) on investments in the statements of operations. See Note 8 for further information.


The Company evaluates tax positions taken in the course of preparing its tax returns to determine whether they are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold could result in greater and undistributed ICTI, income and excise tax expense, and, if involving multiple years, a re-assessment of the Company’s RIC status. GAAP requires recognition of accrued interest and penalties related to uncertain tax benefits as income tax expense. There were no uncertain income tax positions at December 31, 2021, 2020 and 2019. The current and prior three tax years generally remain subject to examination by U.S. federal and most state tax authorities.


Distributions: Distributions to common stockholders are recognized on the record date. The timing of distributions as well as the amount to be paid out as a distribution is determined by the Board each quarter. Distributions from net investment income and net realized gains are determined in accordance with the Code. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment. Distributions paid in excess of ICTI and not capital gains are considered returns of capital to stockholders.


Deferred debt issuance costs: Deferred debt issuance costs represent fees and other direct incremental costs incurred in connection with the Company’s borrowings. Deferred debt issuance costs are presented as a direct reduction of the related debt liability on the consolidated statements of assets and liabilities except for deferred debt issuance costs associated with the Company's line of credit, which are included in prepaid expenses and other assets on the consolidated statements of assets and liabilities. Unamortized debt issuance costs included in prepaid expenses and other assets on the consolidated statements of assets and liabilities as of December 31, 2021 and 2020 were $-0- and $5,517, respectively. Deferred debt issuance costs are amortized to interest expense over the term of the related debt.


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Interest expense: Interest expense is recognized on an accrual basis as incurred.


Concentration of credit risk: Aside from its debt instruments, financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits at financial institutions. At various times during the year, the Company may exceed the federally insured limits. To mitigate this risk, the Company places cash deposits only with high credit quality institutions. Management believes this risk of loss is minimal.  The amount of loss due to credit risk from debt investments if borrowers fail to perform according to the terms of the contracts, and the collateral or other security for those instruments proved to be of no value to the Company, is equal to the Company's recorded investment in debt instruments and the unfunded loan commitments as disclosed in Note 6.




Note 3. Related Party Transactions


Investment Advisory and Management Agreement: OFS Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company pursuant to the investment advisory and management agreement between the Company and OFS Advisor, dated July 15, 2016 (“Investment Advisory Agreement”), which became effective on August 30, 2016. Under the terms of the Investment Advisory Agreement, which are in accordance with the 1940 Act and subject to the overall supervision of the Board, OFS Advisor is responsible for sourcing potential investments, conducting research and diligence on potential investments and equity sponsors, analyzing investment opportunities, structuring investments, and monitoring investments and portfolio companies on an ongoing basis. OFS Advisor is a subsidiary of OFSAM and a registered investment advisor under the Investment Advisers Act of 1940, as amended.


OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to us and OFS Advisor is free to furnish similar services to other entities, including other BDCs managed by OFS Advisor, so long as its services to us are not impaired. OFS Advisor also serves as the investment adviser or collateral manager to CLOs and other assets, including OFS Capital and OCCI.


OFS Advisor receives fees for providing services, consisting of two components: a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.25% and based on the average value of the Company’s total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) at the end of the two most recently completed calendar quarters, adjusted for any share issuances or repurchases during the quarter.


The base management fee was $562,903, $542,416 and $405,282 for the years ended December 31, 2021, 2020 and 2019, respectively.


The incentive fee has two parts. The first part of the incentive fee ("Income Incentive Fee") is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination and sourcing, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement (as defined below) and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest or dividend feature (such as OID, debt instruments with PIK interest, equity investments with accruing or PIK dividend and zero coupon securities), accrued income that the Company has not yet received in cash.


Pre-incentive fee net investment income is expressed as a rate of return on the value of the Company’s net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter. The incentive fee with respect to pre-incentive fee net income is 100.0% of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 1.75% (which is 7.0% annualized) “hurdle rate” but is less than 2.1875% (or 8.75% annually), referred to as the “catch-up” provision, and 20.0% of the amount of pre-incentive fee net investment income, if any, that exceeds 2.1875%. The “catch-up” is meant to provide OFS Advisor with 20.0% of the pre-incentive fee net investment income as if a hurdle rate did not apply if pre-incentive fee net investment income exceeds 2.1875% in any calendar quarter.


Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter in which the Company incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that quarter due to realized and unrealized capital losses. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the base


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management fee. These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during such quarter.


The second part of the incentive fee (the “Capital Gains 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 will equal 20.0% of the Company’s aggregate realized capital gains, if any, on a cumulative basis through the end of each calendar year, computed net of all realized capital losses, income taxes from realized capital gains and unrealized capital depreciation through the end of such year, less all previous amounts paid in respect of the Capital Gain Fee.


The Company accrues the Capital Gains Fee if, on a cumulative basis, the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation) is positive. An accrued Capital Gains Fee relating to net unrealized appreciation is deferred until, and not due to OFS Advisor, until the close of the year in which such gains are realized. If, on a cumulative basis, the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation) decreases during a period, the Company will reverse any excess Capital Gains Fee previously accrued such that the amount of Capital Gains Fee accrued is no more than 20% of the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation). The Company has not accrued a capital gains incentive since commencement of operations.


Unless terminated earlier as described below, the Investment Advisory Agreement will remain in effect from year-to-year if approved annually by the Company’s Board or by the affirmative vote of the holders of a majority of the Company’s outstanding voting securities, and, in either case, if also approved by a majority of the Company’s directors who are not “interested persons” as defined in the 1940 Act. The Investment Advisory Agreement will automatically terminate in the event of its assignment, as defined in the 1940 Act, and may be terminated by the Company or OFS Advisor without penalty upon not less than 60 days’ written notice to the other. The holders of a majority of our outstanding voting securities may also terminate the Investment Advisory Agreement without penalty upon not less than 60 days’ written notice.


The Company incurred incentive fee expense related to the Income Incentive Fee of $339,609, $277,399 and $195,720 for the years ended December 31, 2021, 2020 and 2019, respectively. The Company has not incurred a Capital Gains Fee since inception.


Sub-Advisory Agreement: Evolv Capital Advisors, LLC (“Evolv”) served as the Company’s sub-adviser pursuant to an investment sub-advisory agreement dated July 15, 2016, (‘‘Prior Sub-Advisory Agreement’’) among Evolv, OFS Advisor, and the Company. Effective March 26, 2019, Evolv resigned as the Company’s sub-advisor, thereby terminating Evolv’s services under the Prior Sub-Advisory Agreement.


Effective August 3, 2020, OFS Advisor engaged CIM Capital to serve the Company as sub-adviser in accordance with an agreement dated as of August 3, 2020, by and between OFS Advisor and CIM Capital (the “Sub-Advisory Agreement”). Pursuant to the terms of the Sub-Advisory Agreement, CIM Capital evaluated and advised the Company on private capital market strategy, including market trends and terms, provided financial and strategic planning advice and analysis, interpreted market demand for products, assisted in establishing the Company's operational readiness and selecting and negotiating engagements with third-party service providers, and coordinated the dissemination of customary information to interested parties. On February 2, 2022, OFS Advisor and CIM Capital entered into an agreement to terminate the Sub-Advisory Agreement (the “Termination Agreement”).


Dealer Manager Agreement: Pursuant to the Second Amended Dealer Manager Agreement, CCO provides certain sales, promotional and marketing services to the Company in connection with the Offering. The Company pays CCO an aggregate dealer manager fee of 3.0% of the gross proceeds from sales of the Offering. CCO may, in its discretion, reallow a portion of the dealer manager fee to participating broker-dealers in support of the Offering.


Administration Agreement: OFS Capital Services, LLC (“OFS Services”), a wholly owned subsidiary of OFSAM and affiliate of OFS Advisor, furnishes the Company with office facilities and equipment, necessary software licenses and subscriptions, and clerical, bookkeeping and record keeping services at such facilities pursuant to an administration agreement between the Company and OFS Services, dated July 15, 2016 (“Administration Agreement”). Under the Administration Agreement, OFS Services performs, or oversees the performance of, the Company’s required administrative services, which include being responsible for the financial records that the Company is required to maintain and preparing reports to its stockholders and all other reports and materials required to be filed with the SEC or any other regulatory authority. In addition, OFS Services assists the Company in determining and publishing its net asset value, oversees the preparation and filing of its tax returns and the printing and dissemination of reports to its stockholders, and generally oversees the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. Under the Administration Agreement, OFS Services also provides managerial assistance on the Company’s behalf to those portfolio companies that have accepted the Company’s offer to provide such assistance. Payment under the Administration Agreement is equal to an amount based upon the Company’s allocable portion of OFS Services’s overhead in performing its obligations under the Administration Agreement, including, but not limited to, rent, information technology services and the


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Company’s allocable portion of the cost of its officers, including its chief executive officer, chief financial officer, chief compliance officer, chief accounting officer, and their respective staffs. To the extent that OFS Services outsources any of its functions, the Company will pay the fees associated with such functions on a direct basis without profit to OFS Services. Amounts charged under the Administration Agreement exclude Contractual Issuer Expenses.


Administrative fees were $750,568, $842,972 and $675,155 for the years ended December 31, 2021, 2020 and 2019, respectively.


Equity Ownership: As of December 31, 2021, affiliates of OFS Advisor held 74,084 shares of common stock, which is approximately 3.7% of the Company's outstanding shares of common stock.


Expense Limitation Agreements: The table below presents the contractual agreements between the Company and OFS Advisor and affiliates that provide or provided expense limitation for the period December 8, 2015 (inception) to date. The expense limitation clauses in these agreements were substantially identical, and as of December 31, 2021, all amounts are conditionally reimbursable to OFS Advisor for three years from the date such support is provided.


Offering Costs and Contractual Issuer Expenses (collectively, the “Advisory Agreements”)All OtherOperating Expenses(collectively, the “ESAs”)From from December 8, 2015 (inception), to August 3, 2020Investment Advisory and Management Agreement between the Company and OFS Advisor, dated July 15, 2016Expense Support and Conditional Reimbursement Agreement dated July 15, 2016, between the Company and OFS AdvisorFrom August 3, 2020, to February 1, 2022Sub-Advisory Agreement dated as of August 3, 2020, by and between OFS Advisor and CIM Capital, which was terminated on February 2, 2022Amended and Restated Expense Support and Conditional Reimbursement Agreement, dated as of August 3, 2020, by and among the Company, OFS Advisor and CIM CapitalFrom February 2, 2022Investment Advisory and Management Agreement between the Company and OFS Advisor, dated July 15, 2016 (as a result of the Termination Agreement)Second Amended and Restated Expense Support and Conditional Reimbursement Agreement dated February 2, 2022, between the Company and OFS Advisor, agreed to and accepted by CIM Capital (the “Second Amended Expense Support Agreement”)


OFS Advisor’s obligation to provide expense support to the Company can be terminated at any time.


Expense limitations provided under the Advisory Agreements and ESAs for the years ended December 31, 2021, 2020 and 2019, are presented below:


Years Ended December 31,202120202019Offering costs and Contractual Issuer Expenses limitations under the Advisory Agreements$79,526$287,999$91,694Operating expense limitations under the ESAs1,171,1071,616,6161,128,675Total expense limitations$1,250,633$1,904,615$1,220,369


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The Company is conditionally obligated at December 31, 2021 and 2020, to reimburse OFS Advisor for aggregate expense support provided since inception, as presented below:


December 31,20212020Unreimbursed costs under the Advisory Agreements:Offering costs:Unamortized as of balance sheet date$37,151$69,293Amortized as of balance sheet date527,105572,063Contractual Issuer Expenses16,12330,773Total unreimbursed costs under the Advisory Agreements580,379672,129Unreimbursed operating expense limitations under the ESAs3,916,3983,898,820Total conditional reimbursement obligation under expense limitation agreements$4,496,777$4,570,949


Offering costs and Contractual Issuer Expense limitations:  The Company received aggregate expenses limited under the Advisory Agreements of $1,981,872 through December 31, 2021, and OFS Advisor expects to continue to incur offering costs and Contractual Issuer Expenses on behalf of the Company throughout the Offering. Under the terms of the Investment Advisory Agreement, the Company is conditionally liable for these costs, which are eligible for reimbursement for three years from the date incurred. The Investment Advisory Agreement entitles OFS Advisor to receive up to 1.5% of the gross proceeds raised in the Offering until all amounts eligible for reimbursement have been recovered. The Company reimbursed OFS Advisor organization and offering costs of $12,675, $27,840 and $96,836 for the years ended December 31, 2021, 2020 and 2019, respectively.


Unreimbursed organization and offering costs, and Contractual Issuer Expenses as of December 31, 2021 are summarized below based on the period in which the costs were incurred:


Period incurredUnreimbursed TotalExpiration of reimbursement eligibility(1)Three months ended March 31, 2019$4,112March 31, 2022Three months ended June 30, 2019137,749June 30, 2022Three months ended September 30, 201985,068September 30, 2022Three months ended December 31, 201978,507December 31, 2022Year ended December 31, 2020217,356December 31, 2023Year ended December 31, 202157,587December 31, 2024Total unreimbursed offering costs and Contractual Issuer Expenses$580,379


(1)    Expenses are pooled monthly for the determination of their reimbursement expiration date and are summarized into quarterly and yearly pools for presentation purposes. Expiration of reimbursement eligibility for portions of each pool occurs at each month-end within the periods presented above.


All Other Operating Expenses: All other operating expenses, not separately limited under the Advisory Agreements, are limited under the Second Amended Expense Support Agreement such that no distribution by the Company is deemed to be a return of capital contributed by its stockholders. The Second Amended Expense Support Agreement provides for reimbursement of expense reduction payments (“Reimbursement Payments”) by the Company only (i) to the extent they do not cause the then-current annualized year-to-date and quarterly “Other Operating Expense Ratio” (defined below) to exceed such ratios for the annual and quarterly periods, respectively, for which the Company will reimburse OFS Advisor and (ii) if the then-current annualized rate of distribution per share equals or exceeds the annualized rate of distribution per share of the supported period for which the Company will reimburse OFS Advisor. The Other Operating Expense Ratio is defined as total operating expenses reported in the statement of operations excluding interest expense, management fees, incentive fees, organization cost, amortization of deferred offering costs, and Contractual Issuer Expenses as a percentage of net assets. OFS Advisor will not be entitled to reimbursement (i) if the Other Operating Expenses Ratio at the time of reimbursement, after consideration of the impact of reimbursement on such ratio, exceeds the Other Operating Expenses Ratio in effect at the time the expenses were reimbursed or (ii) if our current distribution rate is lower than the distribution rate for the period the expenses will be reimbursed.


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Unreimbursed support for operating expenses provided under the ESAs and conditions for reimbursement to OFS Advisor as of December 31, 2021, are summarized below:


Other Operating Expense RatioSupported periodAmount of expense limitationAnnualized for the quarter limitation was providedAnnual for year limitation was providedAnnualized rate of distribution per share(1)Expiration of reimbursement eligibilityThree months ended March 31, 2019$272,5476.1%5.5%7.0%March 31, 2022Three months ended June 30, 2019238,8475.7%5.5%7.0%June 30, 2022Three months ended September 30, 2019231,7375.1%5.5%7.1%September 30, 2022Three months ended December 31, 2019385,5444.9%5.5%7.2%December 31, 2022Three months ended March 31, 2020334,1605.9%6.2%7.2%March 31, 2023Three months ended June 30, 2020425,7186.1%6.2%7.2%June 30, 2023Three months ended September 30, 2020452,4806.7%6.2%7.2%September 30, 2023Three months ended December 31, 2020404,2586.6%6.2%7.2%December 31, 2023Three months ended March 31, 2021253,8006.5%6.8%7.2%March 31, 2024Three months ended June 30, 2021264,5337.6%6.8%7.1%June 30, 2024Three months ended September 30, 2021652,7746.8%6.8%7.1%September 30, 2024Total unreimbursed operating expense limitations provided under the ESAs$3,916,398


(1)    The annualized rate of distributions per share is expressed as a percentage equal to the annualized distribution amount as of the end of the applicable period (which is calculated by annualizing the regular quarterly cash distribution per share as of such date without compounding), divided by our offering price per share as of such date.




Note 4. Investments


As of December 31, 2021, the Company had loans to 23 portfolio companies, of which 99% were senior secured loans and 1% were subordinated loans, at fair value, as well as equity investments in five of these portfolio companies. The Company also held equity investments in three portfolio companies in which it did not hold a debt investment and seven investments in Structured Finance Notes.


At December 31, 2021, the Company's investments consisted of the following: Percentage of TotalPercentage of TotalAmortized CostAmortized CostNet AssetsFair ValueFair ValueNet AssetsSenior secured debt investments(1)$32,617,02375.2%124.3%$32,776,37775.2%124.9%Subordinated debt investments483,1911.11.8476,2791.11.8Common equity investments338,0560.81.3360,2200.81.4Total debt and equity investments33,438,27077.1127.433,612,87677.1128.1Structured Finance Notes9,962,11722.938.09,995,69322.938.1Total$43,400,387100.0%165.4%$43,608,569100.0%166.2%


(1) Includes debt investments in which we entered into contractual arrangements with co-lenders whereby, subject to certain conditions, we agreed to receive our principal payments after the repayment of certain co‐lenders pursuant to a payment waterfall. Amortized cost and fair value of these investments were $618,757 and $618,757, respectively.


At December 31, 2021, the Company had no portfolio companies on non-accrual.


At December 31, 2021, all of the Company’s debt and equity investments were domiciled in the United States, while its subordinated notes and mezzanine debt securities were domiciled in the Cayman Islands, and loan accumulation facility was domiciled in Canada. These CLO investments generally hold underling portfolios of debt investments of United States domiciled companies. Geographic composition is determined by the location of the corporate headquarters of the portfolio company. The industry compositions of the Company’s portfolio were as follows: Percentage of TotalPercentage of TotalAmortized CostAmortized CostNet AssetsFair ValueFair ValueNet AssetsAdministrative and Support and Waste Management and Remediation ServicesLandscaping Services$1,543,1893.6%5.9%$1,530,0003.5%5.8%Security Systems Services (except Locksmiths)1,490,7793.45.71,514,9553.55.8Arts, Entertainment, and RecreationAll other amusement and recreation industries1,163,3662.74.41,171,1622.74.5ConstructionPlumbing, Heating, and Air-Conditioning Contractors323,8530.71.2325,9360.71.2Education ServicesSports and Recreation Instruction618,7571.42.4618,7571.42.4Health Care and Social AssistanceChild Day Care Services1,215,9942.84.61,148,0242.64.4Home Health Care Services984,0752.33.71,000,0002.33.8Outpatient Mental Health and Substance Abuse Centers1,296,7163.04.91,367,5303.15.2Services for the Elderly and Persons with Disabilities836,9171.93.2836,9171.93.2InformationData Processing, Hosting, and Related Services115,1540.30.4131,0470.30.5Directory and Mailing List Publishers1,002,1562.33.81,042,7242.44.0Software Publishers88,9170.20.3143,3610.30.5Management of Companies and EnterprisesOffices of Other Holding Companies615,6821.42.3615,6821.42.3ManufacturingCurrent-Carrying Wiring Device Manufacturing884,4482.03.4984,5832.33.8Metal Can Manufacturing1,071,6772.54.11,083,3332.54.1Motorcycle, Bicycle, and Parts Manufacturing1,300,0793.05.01,299,9353.05.0Other Industrial Machinery Manufacturing1,036,6022.43.91,050,1792.44.0National industryOther Accounting Services3,502,6378.113.33,558,4238.213.6Professional, Scientific, and Technical ServicesAdministrative Management and General Management Consulting Services3,998,0119.215.33,936,3859.015.0Other Computer Related Services1,001,3442.33.81,017,3482.33.9


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Percentage of TotalPercentage of TotalAmortized CostAmortized CostNet AssetsFair ValueFair ValueNet AssetsPublic AdministrationOther Justice, Public Order, and Safety Activities$46,4030.1%0.2%$1,944—%—%Retail TradeElectronic Shopping and Mail-Order Houses991,3282.33.8981,4432.33.7Shoe Store520,6911.22.0491,6661.11.9Wholesale TradeComputer and Computer Peripheral Equipment and Software Merchant Wholesalers988,0362.33.8948,9712.23.6Industrial Machinery and Equipment Merchant Wholesalers1,592,7163.76.11,593,2203.76.1Motor Vehicle Parts (Used) Merchant Wholesalers5,208,74312.019.95,219,35112.019.9Total debt and equity investments$33,438,27077.1%127.4%$33,612,87677.1%128.2%Structured Finance Notes9,962,11722.938.09,995,69322.938.1Total investments$43,400,387100.0%165.4%$43,608,569100.0%166.3%


As of December 31, 2021, approximately 22% of the Company’s net assets were comprised of Structured Finance Notes managed by a single adviser.


As of December 31, 2020, the Company had loans to 29 portfolio companies, of which 99% were senior secured loans and 1% were subordinated loans, at fair value, as well as equity investments in five of these portfolio companies. The Company also held an equity investment in two portfolio companies in which it did not hold a debt investment and four investments in Structured Finance Notes. At December 31, 2020, investments consisted of the following:


Percentage of TotalPercentage of TotalAmortized CostAmortized CostNet AssetsFair ValueFair ValueNet AssetsSenior secured debt investments$39,315,95485.1%143.3%$38,890,01085.8%141.8%Subordinated debt investments1,482,4643.25.4381,5160.81.4Preferred equity investments191,4090.40.7338,0000.71.2Common equity investments540,1571.22.0708,0361.62.6Total debt and equity investments41,529,98489.8151.440,317,56289.0147.0Structured Finance Notes4,696,59710.217.14,997,12611.018.2Total$46,226,581100.0%168.5%$45,314,688100.0%165.2%


(1) Includes debt investments in which we entered into contractual arrangements with co‐lenders whereby, subject to certain conditions, we agreed to receive our principal payments after the repayment of certain co‐lenders pursuant to a payment waterfall. Amortized cost and fair value of these investments were $8,665,211 and $8,736,860, respectively.


At December 31, 2020, the Company had one portfolio company, Online Tech Stores, LLC, on non-accrual status with respect to all interest and Net Loan Fee amortization, with an aggregate amortized cost and fair value of $1,007,141 and $151,631, respectively.


At December 31, 2020, all of the Company’s debt and equity investments were domiciled in the United States, while its Structured Finance Notes were domiciled in the Cayman Islands. Structured Finance Notes generally represent beneficial interests in underling portfolios of investments in companies domiciled in the United States of America. Geographic composition is determined by the location of the corporate headquarters of the portfolio company. The industry compositions of the Company’s portfolio were as follows: Percentage of TotalPercentage of TotalAmortized CostAmortized CostNet AssetsFair ValueFair ValueNet AssetsAdministrative and Support and Waste Management and Remediation ServicesSecurity Systems Services (except Locksmiths)$2,353,8855.1%8.6%$2,330,9215.1%8.5%Arts, Entertainment, and RecreationAll other amusement and recreation industries1,498,0363.25.51,426,5793.15.2ConstructionPlumbing, Heating, and Air-Conditioning Contractors461,0541.01.7441,8701.01.6Health Care and Social AssistanceChild Day Care Services699,0871.52.5628,4751.42.3Diagnostic Imaging Centers1,800,6333.96.61,957,2834.37.1Home Health Care Services987,9542.13.61,000,0002.23.6Offices of Physicians, Mental Health Specialists2,031,5794.47.42,035,0754.57.4Outpatient Mental Health and Substance Abuse Centers994,0062.23.61,000,0002.23.6IndustryConstruction and Mining (except Oil Well) Machinery and Equipment Merchant Wholesalers1,821,2943.96.61,864,1074.16.8InformationData Processing, Hosting, and Related Services115,1540.20.4178,0000.40.6Software Publishers1,673,2763.66.11,702,8163.86.2Finance and InsuranceInsurance Agencies and Brokerages1,405,6773.05.11,391,3313.15.1ManufacturingCommercial Printing (except Screen and Books)245,2020.50.9245,5400.50.9Custom Compounding of Purchased Resins1,412,9383.15.11,570,8503.55.7Truck Trailer Manufacturing1,837,0974.06.71,894,2854.26.9Unlaminated Plastics Profile Shape Manufacturing2,007,1004.37.31,979,9004.47.2National IndustryMarketing Consulting Services982,0092.13.6982,0092.23.6Other Accounting Services3,525,9447.612.83,569,5557.913.1Semiconductor and Related Device Manufacturing76,7470.20.383,4920.20.3Professional, Scientific, and Technical ServicesAdministrative Management and General Management Consulting Services4,936,76410.818.14,979,20511.018.2Other Computer Related Services1,083,1632.33.91,060,8972.33.9Public AdministrationOther Justice, Public Order, and Safety Activities52,1330.10.240,2790.10.1


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Percentage of TotalPercentage of TotalAmortized CostAmortized CostNet AssetsFair ValueFair ValueNet AssetsRetail TradeCosmetics, Beauty Supplies, and Perfume Stores$1,624,7853.5%5.9%$1,636,3643.6%6.0%Shoe Store512,8231.11.9229,8850.50.8Wholesale TradeIndustrial Machinery and Equipment Merchant Wholesalers1,696,8733.76.21,605,9193.55.9Industrial Supplies Merchant Wholesalers1,480,1833.25.41,256,5502.84.6Motor Vehicle Parts (Used) Merchant Wholesalers3,207,4477.011.73,074,7446.811.2Stationery and Office Supplies Merchant Wholesalers1,007,1412.23.7151,6310.30.6Total debt and equity investments$41,529,98489.8%151.4%$40,317,56289.0%147.0%Structured Finance Notes4,696,59710.217.14,997,12611.018.2Total investments$46,226,581100.0%168.5%$45,314,688100.0%165.2%







Note 5. Fair Value of Financial Instruments


Investments


The Company’s investments are carried at fair value as determined by the Board. These fair values are determined in accordance with a documented valuation policy and a consistently applied valuation process.


Fair value is defined 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. Fair values are determined with models or other valuation techniques, valuation inputs, and assumptions market participants would use in pricing an asset or liability. Valuation inputs are organized in a hierarchy that gives the highest priority to prices for identical assets or liabilities quoted in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of inputs in the fair value hierarchy are described below:


Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.


Level 2: Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include: (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived principally from or corroborated by observable market data.


Level 3: Unobservable inputs for the asset or liability, and situations where there is little, if any, market activity for the asset or liability at the measurement date.


The inputs into the determination of fair value are based upon the best information under the circumstances and may require significant management judgment or estimation. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. The Company generally categorizes its investment portfolio into Level 2 and Level 3 of the hierarchy.


The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the measurement date. Senior securities with a fair value of $-0- and $115,534 were transferred from Level 3 to Level 2 during the years ended December 31, 2021 and 2020, respectfully.


Certain of the Company's investments are exchanged in the non-public market among banks, CLOs and other institutional investors for loans to large U.S. corporations. The Company classifies these loan investments as Level 2 when a sufficient number of market quotations or indicative prices from pricing services or broker/dealers (collectively, “Indicative Prices”) are


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available, and the depth of the market is sufficient to transact to those prices in amounts approximating the Company's investment position at the measurement date. Additionally, observed transactions at or near the measurement date are also considered Indicative Prices. Investments for which sufficient Indicative Prices exist are generally valued consistent with such Indicative Prices.


In addition, each quarter, the Company assesses whether an arm’s length transaction occurred in the same security, including the Company's new investments during the quarter, the cost of which (“Transaction Prices”), may be considered a reasonable indication of fair value for up to six months after the transaction date. Senior secured debt investments with a fair value of $3,371,291 and $982,009 were valued at their Transaction Price at December 31, 2021 and December 31, 2020, respectively. Also, as of December 31, 2021, a loan accumulation facility investment with a fair value of $1,500,000 was valued at Transaction Price. Based on liquidity and other market factors; these securities are designated as Level 3 in the fair value hierarchy based on assessments of market liquidity and other factors.


Investments that are not valued using Indicative Prices or Transaction Prices are typically valued using two different valuation techniques. The Company typically estimates the fair value of debt investments by a discounted cash flows technique in which a current price is imputed for the investment based upon an assessment of the expected market yield (or discount rate) for similarly structured investments with a similar level of risk. The Company considers the current contractual interest rate, the maturity and other terms of the investment relative to risk of the portfolio company and various market indices. A key determinant of portfolio-company risk is the leverage through the investment relative to earnings metrics of the portfolio company.


The fair value of Structured Finance Notes are also estimated primarily by discounted cash flow techniques. In valuing such investments, the Company considers CLO performance metrics, including prepayment rates, default rates, loss-on-default and recovery rates, and other metrics, as well as estimated market yields provided by a recognized industry pricing service as a primary source for discounted cash flow fair value estimates, supplemented by actual trades executed in the market at or around period-end, as well as the indicative prices provided by broker-dealers in its estimate of the fair value of such investments. The Company also considers the operating metrics of the CLO vehicle, including compliance with collateralization tests, concentration limits, restructuring activity and prepayment rates on the underlying loans, if applicable.


The fair value of Company’s equity investments as well as certain of its non-performing debt investments are estimated through analysis of the portfolio companies’ enterprise value under a market approach. Enterprise value means the entire value of the portfolio company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. The primary method for determining enterprise value under the market approach involves multiple analysis whereby appropriate multiples are applied to an earnings metric of the portfolio company, typically earnings before net interest expense, income tax expense, depreciation and amortization (“EBITDA”). EBITDA multiples are typically determined based upon review of market comparable transactions and publicly traded comparable companies, if any. The Company may also utilize other portfolio-company earnings metrics to determine enterprise value, such as recurring monthly revenue or a delineated measure of portfolio company EBITDA. Application of these valuation methodologies involves a significant degree of judgment by management.


Due to the inherent uncertainty of determining the fair value of Level 3 investments, the fair value of the investments may differ significantly from the values that would have been used had a ready market or observable inputs existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other restrictions, or otherwise are less liquid than publicly traded instruments. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, the Company might realize significantly less than the value at which such investment had previously been recorded. The Company’s investments are subject to market risk. Market risk is the potential for changes in the value due to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments are traded.


The following tables present the Company's investment portfolio measured at fair value on a recurring basis as of December 31, 2021 and 2020, respectively. SecurityLevel 1Level 2Level 3Fair Value at December 31, 2021Debt investments$—$1,042,724$32,209,932$33,252,656Equity investments——360,220360,220Structured Finance Notes——9,995,6939,995,693$—$1,042,724$42,565,845$43,608,569


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SecurityLevel 1Level 2Level 3Fair Value at December 31, 2020Debt investments$—$316,480$38,954,956$39,271,436Equity investments1,046,0361,046,036Structured Finance Notes——4,997,2164,997,216$—$316,480$44,998,208$45,314,688





The following table provides quantitative information about the Company's significant unobservable inputs to the Company's Level 3 fair value measurements as of December 31, 2021 and December 31, 2020. Fair Value at December 31, 2021Valuation techniquesUnobservable  inputsRange(Weighted average)Debt investments:Senior secured$28,362,361Discounted cash flowDiscount rates8.27% - 12.32% (9.61%)Senior secured3,371,292Market approachTransaction PriceSubordinated476,279Discounted cash flowDiscount rates15.90% - 15.90% (15.90%)Structured Finance Notes:Subordinated notes and other CLO equity related investments(1)6,704,687Discounted cash flowDiscount rates8.00% - 17.00% (11.57%)Constant default rate(2)0.00% - 2.00% (1.16%)Constant default rate(3)2.00% - 2.00% (2.00%)Recovery rate60.00% - 60.00% (60.00%)Mezzanine debt1,791,006Discounted cash flowDiscount margin7.10% - 8.95% (8.13%)Constant default rate(2)2.00% - 3.00% (2.56%)Constant default rate(3)2.00% - 3.00% (2.56%)Recovery rate60.00% - 60.00% (60.00%)Loan accumulation facility1,500,000Market approachTransaction PriceEquity investments:Common equity360,220Market approachEBITDA multiples4.50x - 12.00x (8.82x)$42,565,845


(1)    The cash flows utilized in the discounted cash flow calculations assume immediate liquidation of (a) certain distressed investments and (b) all investments currently in default held by the issuing CLO at their current market prices, and redeployment of proceeds at the issuing CLO's assumed reinvestment rate.


(2)    Constant default rates for the six months ended June 30, 2022.


(3)    Constant default rates for the period between June 30, 2022 and the assumed optional redemptions of the instruments.


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Fair Value at December 31, 2020Valuation techniquesUnobservable  inputsRange(Weighted average)Debt investments:Senior secured$37,591,521Discounted cash flowDiscount rates6.24% - 24.43% (10.02%)Senior secured982,009Market approachTransaction PriceSenior secured381,516Market approachEBITDA multiples7.05 - 9.10x (7.86x)Structured Finance Notes:Subordinated notes(1)3,295,738Discounted cash flowDiscount rates15.00% - 15.00% (15.00%)Constant default rate(2)0.00% - 0.00% (0.00%)Constant default rate(3)2.00% - 2.00% (2.00%)Recovery rate60.00% - 60.00% (60.00%)Mezzanine debt1,701,388Discounted cash flowDiscount margin7.25% - 9.45% (8.58%)Constant default rate(4)0.00% - 2.00% (1.01%)Constant default rate(5)2.00% - 3.00% (2.49%)Recovery rate60.00% - 60.00% (60.00%)Equity investments:Preferred equity338,000Market approachEBITDA multiples7.00x - 7.00x (7.00x)Common equity708,036Market approachEBITDA multiples3.75x - 11.50x (8.43x)$44,998,208


(1)    The cash flows utilized in the discounted cash flow calculations assume immediate liquidation of (a) certain distressed investments and (b) all investments currently in default held by the issuing CLO at their current market prices, and redeployment of proceeds at the issuing CLO's assumed reinvestment rate.


(2)    Constant default rates for the six months ended June 30, 2021.


(3)    Constant default rates for the period between June 30, 2021, and the assumed optional redemptions of the instruments.


(4)    Constant default rates for the nine months ended September 30, 2021.


(5)    Constant default rates for the period between September 30, 2021, and the assumed optional redemptions of the instruments.


Averages in the preceding two tables were weighted by the fair value of the related instruments.


Changes in market credit spreads or events impacting the credit quality of the underlying portfolio company (both of which could impact the discount rate), as well as changes in EBITDA and/or EBITDA multiples, among other things, could have a significant impact on fair values, with the fair value of a particular debt investment susceptible to change in inverse relation to the changes in the discount rate. Changes in EBITDA and/or EBITDA multiples, as well as changes in the discount rate, could have a significant impact on fair values, with the fair value of an equity investment susceptible to change in tandem with the changes in EBITDA and/or EBITDA multiples, and in inverse relation to changes in the discount rate. Due to wide range of approaches towards developing input assumptions to these valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.


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The following tables present changes in the investments measured at fair value using Level 3 inputs for the years ended December 31, 2021 and 2020: SeniorSecured DebtInvestmentsSubordinatedDebtInvestmentsPreferred EquityCommon EquityStructured Finance NotesTotalLevel 3 assets, January 1, 2021$38,573,440$381,516$338,000$708,036$4,997,216$44,998,208Net unrealized appreciation (depreciation) on investments547,5911,094,036(146,591)(145,715)(266,953)1,082,368Net realized gain (loss) on investments(1,505)(1,007,141)462,538195,308—(350,800)Amortization of Net Loan Fees456,9551,327——70,738529,020Paid-in kind interest and dividend income70,2226,541———76,763Accretion of interest income on Structured Finance Notes———513,343513,343Proceeds from principal payments on portfolio investments(27,132,850)———(1,600,000)(28,732,850)Purchase of portfolio investments21,853,705——50,0826,711,13828,614,925Sale or redemption of portfolio investments(2,599,276)—(653,947)(447,491)—(3,700,714)Distributions received from Structured Finance Notes————(429,789)(429,789)Amendment fees collected(34,629)————(34,629)Level 3 assets, December 31, 2021$31,733,653$476,279$—$360,220$9,995,693$42,565,845


SeniorSecured DebtInvestmentsSubordinatedDebtInvestmentsPreferred EquityCommon EquityStructured Finance NotesTotalLevel 3 assets, January 1, 2020$34,592,771$1,384,896$201,006$585,675$—$36,764,348Net unrealized appreciation (depreciation) on investments308,399(1,007,033)136,99432,931300,529(228,180)Net realized loss on investments(540,001)————(540,001)Amortization of Net Loan Fees149,8021,040——30,099180,941Paid-in kind interest and dividend income6,4593,805———10,264Accretion of interest income on Structured Finance Notes————51,14051,140Proceeds from principal payments on portfolio investments(7,262,243)————(7,262,243)Purchase of portfolio investments12,316,311——43,0274,615,44816,974,786Sale or redemption of portfolio investments(828,071)————(828,071)Conversion from debt investment to equity investment(46,403)——46,403——Amendment fees collected and other(8,050)(1,192)———(9,242)Transfers to Level 2(115,534)————(115,534)Level 3 assets, December 31, 2020$38,573,440$381,516$338,000$708,036$4,997,216$44,998,208


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The net unrealized appreciation (depreciation) reported in the Company’s consolidated statements of operations for the year ended December 31, 2021 and 2020, attributable to the Company’s Level 3 assets still held at each respective year end was as follows: Year Ended December 31,20212020Senior secured debt investments$421,390$(282,553)Subordinated debt investments238,526(1,007,033)Preferred equity—136,994Common equity(10,898)33,162Structured Finance Notes(254,248)300,529Net unrealized appreciation (depreciation) on investments held$394,770$(818,901)


Other Financial Assets and Liabilities


GAAP requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. The Company believes that the carrying amounts of its other financial instruments such as cash, receivables and payables approximate the fair value of such items due to the short maturity of such financial instruments. The senior secured revolving credit facility between the Company and Pacific Western Bank, as lender (“PWB Credit Facility”) is a variable rate instrument and fair value approximates book value as of December 31, 2021 and December 31, 2020.


The following tables present the fair value measurements of the Company's debt and the level within the fair value hierarchy of the significant unobservable inputs used to determine such fair values as of December 31, 2021 and 2020: December 31, 2021DescriptionLevel 1Level 2Level 3(1)TotalPWB Credit Facility$—$—$5,425,000$5,425,000Unsecured Note——14,987,58314,987,583Total debt$—$—$20,412,583$20,412,583


December 31, 2020DescriptionLevel 1Level 2Level 3(1)TotalPWB Credit Facility$—$—$4,775,000$4,775,000Unsecured Note——15,723,41515,723,415Total debt$—$—$20,498,415$20,498,415


(1) For Level 3 measurements, fair value is estimated by discounting remaining payments using current market rates for similar instruments at the measurement date and considering such factors as the legal maturity date.





The following are the carrying values and fair values of the Company’s debt as of December 31, 2021 and 2020: As of December 31, 2021As of December 31, 2020DescriptionCarrying ValueFair ValueCarrying ValueFair ValuePWB Credit Facility$5,425,000$5,425,000$4,775,000$4,775,000Unsecured Note14,642,62314,987,58314,714,23515,723,415Total debt$20,067,623$20,412,583$19,489.235$20,498.415


The information presented should not be interpreted as an estimate of the fair value of the entire Company since fair value measurements are only required for a portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.


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Note 6. Commitments and Contingencies


The Company has outstanding commitments to fund investments totaling $4,180,448 and $454,107 under various undrawn revolvers and other credit facilities as of December 31, 2021 and 2020, respectively.


Legal and regulatory proceedings: From time to time, the Company is involved in legal proceedings in the normal course of its business. Although the outcome of such litigation cannot be predicted with any certainty, management is of the opinion, based on the advice of legal counsel, that final disposition of any litigation should not have a material adverse effect on the financial position of the Company as of December 31, 2021.


Additionally, the Company is subject to periodic inspection by regulators to assess compliance with applicable BDC regulations.


Indemnifications:  In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide general 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. The Company believes the risk of any material obligation under these indemnifications to be low.




Note 7. Borrowings


PWB Credit Facility: The Company is party to the business loan agreement (“BLA”) with Pacific Western Bank, as lender, to provide the Company with a $15,000,000 senior secured revolving credit facility. The PWB Credit Facility is available for general corporate purposes including investment funding and is scheduled to mature on February 28, 2023. The PWB Credit Facility is guaranteed by HPCI-MB and secured by all of our current and future assets of the Company. The maximum availability of the PWB Credit Facility is equal to 35% of the aggregate outstanding principal amount of eligible loans included in the borrowing base, which excludes subordinated loan investments and as otherwise specified in the BLA. The PWB Credit Facility bears interest at a variable rate of the Prime Rate plus a 0.75% margin, with a 4.25% floor, and includes an unused commitment fee for any unused portion in excess of $3.0 million, payable monthly in arrears, equal to 0.50% per annum on any unused portion. As of December 31, 2021, the interest rate on the PWB Credit Facility was 4.25%.


During the year ended December 31, 2021, the average dollar amount of outstanding borrowings under the PWB Credit Facility was $2,737,603. The effective interest rate, which includes amortization of deferred debt issuance costs as of December 31, 2021, was 4.65% based on the maximum amount available under the PWB Credit Facility. Interest expense on the PWB Credit Facility was $193,590, $216,615 and $329,453 for the years ended December 31, 2021, 2020 and 2019, respectively, which includes $15,579, $34,517 and $53,354 of deferred financing amortization, respectively.


As of December 31, 2021, the Company had $5,425,000 outstanding debt under the PWB Credit Facility and $6,794,859 of availability under the terms of the borrowing base.


On February 17, 2021, the Company executed an amendment to the BLA with Pacific Western Bank. The amendment, among other things: (i) increased the maximum amount available under the PWB Credit Facility from $10.0 million to $15.0 million; (ii) decreased the interest rate floor from 5.50% per annum to 5.25% per annum; (iii) restricts the transfer of certain assets to the Company's subsidiaries or incurrence of debt by, or the encumbrance of assets of, the Company's subsidiaries; and (iv) extended the maturity date from February 28, 2021 to February 28, 2023.


On November 15, 2021, the Company amended the BLA to decrease the interest rate floor from 5.25% to 4.25%, effective as of November 1, 2021.


The BLA contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, a minimum tangible net asset value, a minimum quarterly net investment income after incentive fees, and a statutory asset coverage test. The BLA also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change in investment advisor, and the occurrence of a material adverse change in our financial condition. As of December 31, 2021, the Company was in compliance with the applicable covenants.


Unsecured Note: On November 27, 2019, the Company entered into an agreement with a qualified institutional investor (“Note Purchase Agreement”) in which the Company sold in a private placement an unsecured note in an aggregate principal amount of $15,000,000 (the “Unsecured Note”). The purchase price of the Unsecured Note was $14,690,655 after deducting the offering price discount and legal costs. The Unsecured Note has a fixed interest rate of 5.50% and is due on November 27, 2026, unless redeemed, purchased or prepaid prior to such date by the Company or its affiliates in accordance with its terms. The Unsecured Note is a general unsecured obligation of the Company that ranks pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.


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Interest expense on the Unsecured Note was $1,016,325, $1,042,685 and $97,979 for the years ended December 31, 2021, 2020 and 2019, respectively, which includes $82,158, $67,685 and $5,895 of deferred financing amortization, respectively.


On September 23, 2021, the Company executed an amendment (the “Amendment”) to its Note Purchase Agreement. The Amendment, among other things: (i) extended the scheduled maturity date of the Unsecured Note from November 27, 2024 to November 27, 2026; (ii) reduced the coupon rate of the Unsecured Note from 6.50% to 5.50%; and (iii) reduced the default rate of the Unsecured Note, if applicable, from 8.50% to 7.50%. In addition, under the Note Purchase Agreement as amended by the Amendment, the Company may, at its option, upon notice to the purchaser, redeem at any time all, or from time to time any part of, the Unsecured Note, in an amount not less than 10% of the aggregate principal amount of the Unsecured Note then outstanding in the case of a partial redemption, at 100% of the principal amount so redeemed, together with interest on such Unsecured Note accrued to, but excluding, the date of redemption, and with no redemption settlement amount paid by the Company in connection with any such redemption. In connection with the Amendment, the Company paid to the purchaser a structuring fee of $150,000.


The Note Purchase Agreement, as amended, contains customary terms and conditions for unsecured notes issued in a private placement, including, without limitation, affirmative and negative covenants such as information reporting, maintenance of the Company’s status as a business development company within the meaning of the 1940 Act, and minimum asset coverage ratio. The Note Purchase Agreement, as amended, also contains customary events of default with customary cure and notice periods, including, without limitation, nonpayment, incorrect representation in any material respect, certain judgements and orders, and certain events of bankruptcy.


As of December 31, 2021, the Unsecured Note had the following terms and balances: PrincipalUnamortized Discount and Issuance CostsStated Interest RateEffective Interest Rate(1)Maturity2021 Interest ExpenseUnsecured Note$15,000,000$357,3775.50%5.98%11/27/26$1,016,325


(1) The effective interest rate on the Unsecured Note includes deferred debt issuance cost amortization.


The average dollar borrowings and average interest rate for all Company debt in the years ended December 31, 2021, 2020, and 2019, were as follows: Year endedAverage Dollar BorrowingsWeighted Average Interest RateDecember 31, 2021$17,737,6036.82%December 31, 202017,679,0307.12December 31, 20195,396,3017.92







Note 8. U.S. Federal Income Tax


The Company has elected to be taxed as a RIC under Subchapter M of the Code. In order to maintain its status as a RIC, the Company is required to distribute annually to its stockholders at least 90% of its ICTI, as defined by the Code. Additionally, to avoid a 4% U.S. federal excise tax on undistributed earnings the Company is required to distribute each calendar year the sum of (i) 98% of its ordinary income for such calendar year, (ii) 98.2% of its net capital gains for the one-year period ending October 31 of that calendar year, and (iii) any income recognized, but not distributed, in preceding years and on which the Company paid no U.S. federal income tax. Maintenance of the Company's RIC status also requires adherence to certain source of income and asset diversification requirements. The Company has met the required distribution, source of income and asset diversification requirements and intends to continue to meet these requirements. Accordingly, there is no provision for U.S. excise taxes for the years ended December 31, 2021, 2020 and 2019.


HPCI-MB, an entity taxed as a corporation under Subchapter C of the Code, is consolidated in the Company’s GAAP financial statements but is not included in the determination of ICTI or the RIC compliance requirements of the Company. The income of HPCI-MB, net of applicable income taxes, is not included in the Company’s ICTI until distributed by HPCI-MB, which may result in timing and character differences between the Company’s GAAP and tax-basis net investment income and realized gains and losses. During the year ended December 31, 2021, HPCI-MB distributed earnings and profits of $273,769 to the RIC.


The Company’s ICTI differs from the net increase in net assets resulting from operations primarily due to differences in net unrealized appreciation (depreciation) of investments, and expense recognition related to organization costs, amortization of


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deferred offering costs, Contractual Issuer Expenses, and the related expense support under the Investment Advisory Agreement (together, “Net O&O Costs”).


The distributions paid to stockholders consisted entirely of ordinary income during the years ended December 31, 2021, 2020 and 2019, respectively.


Tax-basis components of distributable earnings (accumulated losses) as of December 31, 2021 and 2020, were as follows: December 31,20212020Ordinary income (RIC)$22,774$—Undistributed earnings and profits (HPCI-MB; C-Corporation)305,617—Capital loss carryforwards:RIC–short-term, non-expiring173,85157,177RIC–long-term, non-expiring1,227,611522,559


The Company records reclassifications to its capital accounts primarily related to (i) permanent differences between the GAAP and tax treatment of Net O&O Costs, (ii) permanent differences related to HPCI-MB distributions and (iii) temporary differences between GAAP and tax treatment of realized gains and losses and other temporary differences. The Company recorded reclassifications to decrease additional paid-in capital against total distributable earnings (accumulated losses) of $263,388, $40,599 and $96,836 for the years ended December 31, 2021, 2020 and 2019, respectively.


The tax-basis cost of investments and associated tax-basis gross unrealized appreciation (depreciation) inherent in the fair value of investments as of December 31, 2021 and 2020, were as follows: December 31,20212020Tax-basis amortized cost of investments$43,342,471$46,218,369Tax-basis gross unrealized appreciation on investments641,277946,021Tax-basis gross unrealized depreciation on investments(375,179)(1,849,702)Tax-basis net unrealized appreciation (depreciation) on investments266,098(903,681)Fair value of investments$43,608,569$45,314,688


Deferred taxes: The Company recognizes deferred taxes on the unrealized appreciation or depreciation of securities held through HPCI-MB, and other basis differences including available loss carry forwards and suspended interest expense deductions reported by portfolio companies. Deferred tax assets and liabilities are measured using enacted corporate federal tax rates expected to apply to taxable income in the years in which those unrealized gains and losses are realized. The recoverability of deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more likely than not that any portion of the deferred tax asset will not be realized on the basis of the projected taxable income or other taxable events in HPCI-MB.


Deferred tax liabilities as of December 31, 2021 and 2020, were as follows: December 31,20212020Total deferred tax liabilities$(23,127)$(108,306)


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Note 9. Financial Highlights


The following is a schedule of financial highlights for each year in the five-year period ended December 31, 2021: Year Ended December 31,20212020201920182017Per share operating performance:Net asset value per share at beginning of year$12.59$13.00$13.00$13.33$13.33Net investment income(6)1.060.991.000.880.61Net realized loss on investments(6)(0.14)(0.27)———Income tax expense from realized gains on investments(6)(0.08)————Net unrealized appreciation (depreciation) on investments, net of deferred taxes(6)0.56(0.16)(0.05)(0.45)0.04Total from investment operations1.400.560.950.430.65Distributions(1)(1.02)(1.01)(1.05)(1.05)(1.05)Issuance of common stock(2) (6)0.020.040.100.290.40Net asset value per share at end of year$12.99$12.59$13.00$13.00$13.33Total return based on net asset value(3)11.5%5.1%8.2%5.5%8.1%Shares issued or subscribed at end of year2,020,3612,178,9202,239,7741,818,799845,700Weighted average shares issued or subscribed2,128,1792,214,9842,053,9531,288,439359,549Ratio/Supplemental DataAverage net asset value(4)$27,090,918$27,285,509$27,038,864$17,489,604$5,621,403Net asset value at end of year$26,244,423$27,441,875$29,120,506$23,637,886$11,270,032Net investment income$2,247,035$2,188,079$2,056,080$1,129,456$219,338Ratio of total net operating expenses to average net assets10.4%8.1%5.4%3.2%(0.4)%Ratio of net investment income to average net assets8.3%8.0%7.6%6.5%3.9%Portfolio turnover(5)67.2%30.2%17.5%18.8%6.4%


(1) The per share data for distributions is the actual amount of distributions declared per share during the year. The determination of the tax attributes of the Company’s distributions is made annually as of the end of its fiscal year based upon its ICTI for the full year and distributions paid for the full year. The Company anticipates its distributions to be comprised 100% from net investment income.


(2) The issuance of common stock on a per share basis reflects the incremental net asset value change as a result of the issuance of shares of common stock in the Company’s continuous public offering, the retirement of shares from the Company's repurchases of common stock and and the dilutive or anti-dilutive impact from significant changes in weighted-average shares outstanding during the year.


(3) Calculated as ending net asset value less beginning net asset value, adjusting for distributions reinvested at the Company’s most recent quarter-end net asset value prior to the respective payment date of the distributions.


(4) Based on the average of the net asset value as the beginning of the indicated year and the end of each calendar quarter within the year indicated.


(5) Portfolio turnover rate is calculated using the lesser of year-to-date sales, principal payments and distributions from Structured Finance Notes or year to-date purchases over the average of the invested assets at fair value.


(6) Calculated on the average share method.


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Note 10. Capital Transactions


Common stock transactions


Below is a summary of transactions with respect to shares of the Company’s common stock issued in the Offering during the years ended December 31, 2021, 2020 and 2019: Year Ended December 31,202120202019SharesAmountSharesAmountSharesAmountGross proceeds from the Offering60,332$845,000136,427$1,855,992460,414$6,500,527Commissions and dealer manager fees—(61,700)—(144,810)—(419,917)Dealer manager fees paid by OFS Advisor—————122,036Net proceeds to the Company60,332$783,300136,427$1,711,182460,414$6,202,646


From May 19, 2017 through June 30, 2019, OFS Advisor paid the dealer manager fee on sales of shares of the Company's common stock in the Offering. Payments of dealer manager fees by OFS Advisor were not subject to reimbursement by the Company. The Company has agreed to pay the dealer manager fees on sales of shares of its common stock in the Offering subsequent to June 30, 2019.


Repurchase of common stock transactions


Section 61(a)(2) of the 1940 Act permits a BDC to reduce its asset coverage ratio from 200% to 150% so long as such BDC complies with certain requirements. For BDCs, like the Company, that do not have shares of common stock listed on a national securities exchange, in order to take advantage of the modified asset coverage ratio, they must, among other things, extend to each of the BDC’s stockholders as of the date of approval from the BDC’s board of directors, the opportunity to sell the securities held by that stockholder as of that date.


On November 6, 2018,  a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s Board approved the application of a reduced 150% asset coverage ratio. In accordance with Section 61(a)(2) of the 1940 Act, the Company extended to each of its stockholders as of November 6, 2018, an offer to repurchase the equity securities held by such stockholders, with 25% of such equity securities to be repurchased in each of the four quarters following November 6, 2018. As a result, the asset coverage ratio test applicable to the Company decreased from 200% to 150%, effective November 6, 2019. Additionally, the Company's Board approved an offering to purchase 2.5% of the weighted average number of shares of the outstanding common stock for the trailing 12-month period.


The following table summarizes the common stock repurchases by the Company during the years ended December 31, 2021, 2020 and 2019: Number of SharesAmountJanuary 1, 2019 through April 5, 2019(1)7,407$98,296April 6, 2019 through June 30, 20199,029119,821July 1, 2019 through September 30, 20197,40797,111October 1, 2019 through December 31, 201915,597204,317January 1, 2020 through April 3, 2020(2)32,622364,384April 4, 2020 through June 30, 202053,665654,713July 1, 2020 through September 30, 202055,320694,819October 1, 2020 through December 31, 202055,674700,935January 1, 2021 through April 5, 2021(3)55,377708,272April 6, 2021 through June 30, 202155,016700,354July 1, 2021 through September 30, 202154,557702,694October 1, 2021 through December 31, 202153,941696,391


(1) The Company’s February 11, 2019 tender offer, that was originally scheduled to expire on March 27, 2019, was amended to extend the offer period to April 5, 2019.


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(2) The Company's February 21, 2020 tender offer, that was originally scheduled to expire on March 27, 2020, was amended to extend the offer period to April 3, 2020.


(3)    The Company's February 19, 2021 tender offer that was originally scheduled to expire on March 26, 2021, was amended to extend the offer period to April 5, 2021.


All repurchased shares were retired upon acquisition.


Distributions


The following tables reflects the cash distributions per share that the Company declared on its common stock during the years ended December 31, 2021, 2020 and 2019, respectively. Stockholders of record as of each respective record date were entitled to receive the distribution. Date DeclaredRecord DatesPayment DateMonthlyPer Share Amount(1)CashDistributionYear ended December 31, 2021January 26, 2021January 27, 2021April 15, 2021$0.0846$184,337February 23, 2021February 24, 2021April 15, 20210.0846184,337March 27, 2021March 29, 2021April 15, 20210.0846186,173April 27, 2021April 28, 2021July 15, 20210.0846181,488May 25, 2021May 26, 2021July 15, 20210.0846182,987June 26, 2021June 28, 2021July 15, 20210.0846178,333July 27, 2021July 28, 2021October 15, 20210.0846178,333August 27, 2021August 27, 2021October 15, 20210.0846178,333September 27, 2021September 28, 2021October 15, 20210.0846173,717October 26, 2021October 27, 2021January 15, 20220.0846173,717November 26, 2021November 26, 2021January 15, 20220.0846175,486December 27, 2021December 28, 2021January 15, 20220.0846170,923$2,148,164


Date DeclaredRecord DatesPayment DateMonthlyPer Share Amount(1)CashDistributionYear ended December 31, 2020January 29, 2020January 29, 2020, February 26, 2020 and March 27, 2020April 15, 2020$0.0875$589,261April 28, 2020April 28, 2020July 15, 20200.0825182,996May 27, 2020May 27, 2020July 15, 20200.0792177,251June 25, 2020June 26, 20207/15/20200.0822179,554July 28, 2020July 29, 202010/15/20200.081177,250August 26, 2020August 27, 202010/15/20200.0825182,672September 25, 2020September 28, 202010/15/20200.0846182,807October 27, 2020October 28, 20201/15/20210.0846183,130November 25, 2020November 26, 20201/15/20210.0846184,065December 28, 2020December 29, 20201/15/20210.0846182,002$2,220,988


Date DeclaredRecord DatesPayment DateMonthlyPer Share Amount(1)CashDistributionYear ended December 31, 2019January 29, 2019January 29, 2019, February 26, 2019, March 27, 2019April 15, 2019$0.0875$489,715April 26, 2019April 26, 2019, May 29, 2019, June 26, 2019July 15, 20190.0875514,644July 29, 2019July 29, 2019 August 28, 2019, September 26, 2019October 15, 20190.0875564,699October 29, 2019October 29, 2019, November 26, 2019, December 29, 2019January 15, 20200.0875583,912$2,152,970


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(1) The annual aggregate per share distribution was $1.02, $1.01, and $1.05 for the years ended December 31, 2021, 2020 and 2019, respectively.


The above distributions were funded, in part, through the reimbursement of certain operating expenses under the ESAs. The ESAs are designed to ensure no portion of the Company's distributions to stockholders will be paid from Offering proceeds, and will provide for expense reduction payments to the Company in any quarterly period in which the Company's cumulative distributions to stockholders exceeds the Company's cumulative ICTI and net realized gains.


On February 2, 2022, the Company and OFS Advisor entered into the Second Amended Expense Support Agreement under which OFS Advisor will be responsible for any future Expense Support Payments.




Note 11. Subsequent Events


On January 26, 2022, the Company's Board declared a distribution of $0.0846 per common share, payable on April 15, 2022, to stockholders of record on January 27, 2022.


On February 2, 2022, OFS Advisor and CIM Capital entered into the Termination Agreement pursuant to which the Sub-Advisory Agreement was terminated.


On February 2, 2022, the Company and OFS Advisor entered into the Second Amended Expense Support Agreement under which OFS Advisor will be responsible for any future Expense Support Payments.


On February 22, 2022, the Company commenced a tender offer pursuant to which it is offering to purchase up to 53,204 shares of its issued and outstanding common stock at a price equal to its net asset value per share on March 30, 2022.


On February 23, 2022, the Company's Board declared a distribution of $0.0846 per common share, payable on April 15, 2022, to stockholders of record on February 24, 2022.


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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


Not applicable.




Item 9A.    Controls and Procedures


Evaluation of Disclosure Controls and Procedures


Our management, with the participation of our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021. The term “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.


Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the foregoing evaluation of our disclosure controls and procedures as of December 31, 2021, our Chief Executive Officer and our Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.


Management’s Report on Internal Control Over Financial Reporting


Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. GAAP. 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 the transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that the 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. 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 polices or procedures may deteriorate.


Our management (with the supervision and participation of our Chief Executive Officer and Chief Financial Officer) conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2021.


Changes in Internal Control over Financial Reporting


No change in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act), occurred during the fiscal quarter ended December 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




Item 9B.    Other Information


None.




Item 9C.    Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.


Not applicable.


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PART III







Item 10.    Directors, Executive Officers and Corporate Governance


Our business and affairs are managed under the direction of our board of directors. The responsibilities of our board of directors include, among other things, the oversight of our investment activities, the quarterly valuation of our assets, oversight of our financing arrangements and corporate governance activities. Our board of directors consists of three members, two of whom are not “interested persons” of the Company or of OFS Advisor as defined in Section 2(a)(19) of the 1940 Act and are “independent,” as determined by our board of directors. We refer to these individuals as our independent directors. Our board of directors elects our executive officers, who serve at the discretion of our board of directors.


Board of Directors


Under our charter, our directors are divided into three classes. Each class of directors holds office for a three year term. However, the initial members of the three classes have initial terms of one, two and three years respectively. At each annual meeting of our stockholders, the successors to the class of directors whose terms expire at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. Each director will hold office for the term to which he or she is elected and until his or her successor is duly elected and qualified.


Information regarding our board of directors is as follows: NameAgePositionDirector SinceExpiration of TermInterested Director:Bilal Rashid51Director, Chairman, President and Chief Executive Officer20152021Independent Directors:Ashwin Ranganathan(1)52Director20222023Elaine Healy59Director20212022


(1)  On January 5, 2022, the Board, upon the recommendation of the Nominating and Corporate Governance Committee, voted to appoint Ashwin Ranganathan as the Class I director of the Board, chair of the Nominating and Corporate Governance Committee and a member of the Audit Committee, to fill the vacancy created by the retirement of Marc I. Abrams on January 4, 2022. Mr. Ranganathan was appointed to serve as a member of the Board until the 2023 annual meeting of stockholders, or until his successor is duly elected and qualified.


Executive Officers


Our executive officers hold their office until their successors are chosen and qualified, or until the earlier of the resignation or removal. Information regarding the Company’s executive officers who are not directors is as follows: NameAgePositionOfficer SinceJeffrey A. Cerny58Chief Financial Officer and Treasurer2016Mukya S. Porter47Chief Compliance Officer2017Jeffery S. Owen57Chief Accounting Officer2016Tod K. Reichert60Corporate Secretary2017


Biographical Information


The following is information concerning the business experience of our board of directors and executive officers. The directors have been divided into two groups — interested directors and independent directors. Interested directors are “interested persons” as defined in the 1940 Act.


Interested Director


Bilal Rashid is the Chairman of our board of directors, the Chief Executive Officer and President of the Company, and is the Chairman of the board of directors and the Chief Executive Officer of OFS Capital, Chairman of the board of trustees, President, and Chief Executive Officer of OFS Credit Company, Inc. (“OFS Credit”), a member of the board of directors of CIM Real Assets and Credit Fund (“RACR”), President and a Senior Managing Director of Orchard First Source Capital, Inc. (“OFSC”) and OFS Advisor, Chief Executive Officer at OFSAM and a member of the investment and executive committees of OFSAM and OFS Advisor. Prior to joining OFSC in 2008, Mr. Rashid was a managing director in the global markets and


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investment banking division at Merrill Lynch. Mr. Rashid has more than 25 years of experience investing as it relates to corporate credit and structured credit and corporate credit, investment banking and debt capital markets. Before joining Merrill Lynch in 2005, he was a vice president at Natixis Capital Markets, which he joined from Canadian Imperial Bank of Commerce (“CIBC”). Prior to CIBC, he worked as an investment analyst in the project finance area at the International Finance Corporation, which is part of the World Bank. Prior to that, Mr. Rashid was a financial analyst at Lehman Brothers. Mr. Rashid has a B.S. in Electrical Engineering from Carnegie Mellon University and an MBA from Columbia University. Through his years of work in investment banking, capital markets and in sourcing, leading and managing investments, Mr. Rashid has developed expertise and skills that are relevant to understanding the risks and opportunities that the Company faces and which are critical to implementing our strategic goals and evaluating our operational performance.


Independent Directors


Elaine E. Healy is a co-founder and Managing Partner of NexGen Venture Partners, LLC, dba Aura Wireless, a provider of wireless infrastructure technology. Prior to co-founding NexGen, Ms. Healy was a co-founder, president and chief operating officer of Accel Networks, LLC, a fixed cellular wireless broadband service provider founded in November 2002 and acquired in June 2015. Ms. Healy currently serves on the board of directors of OFS Capital. She is a senior executive with a broad investment background investing in operating companies ranging from start-ups to emerging growth to publicly traded entities and serving as a director of companies in a wide range of industries prior to becoming an entrepreneur. Throughout her career, she has participated in, or been responsible for, the periodic valuation of both debt and equity portfolios. Ms. Healy graduated from The Florida State University in 1984 with a Bachelor of Science in Finance. Ms. Healy has vast experience in the financial and operational aspects of complex businesses, and her skills gained through service as a president and chief operating officer is essential to our board of directors. She brings to our board of directors a unique perspective on a wide range of investment vehicles, including closed-end funds, SBICs, business development companies and both limited and general partnerships. Ms. Healy’s background has enabled her to cultivate an enhanced understanding of operations and strategy with an added layer of risk management experience that is an important aspect of the composition of our board of directors.


Ashwin Ranganathan Mr. Ranganathan is the founder and CEO of Sikander Capital, a multi-asset family office focused on equity, venture capital and real estate, which he founded in 2013. Prior to that, from 2005 until 2013, he was a partner and managing director at Tudor Capital, a $13 billion global multi-strategy hedge fund and a member of the board of directors of Tudor Capital Singapore. From 2001 to 2005, Mr. Ranganathan was a senior vice president and an equity partner at Oaktree Capital Management, a global asset management firm specializing in alternative investment strategies, where he served as head of the global emerging markets group. Mr. Ranganathan began his career at Goldman Sachs Asset Management in 1994, where he worked as a portfolio manager in the firm’s Hong Kong and New York offices. Mr. Ranganathan currently serves on the board of directors of RACR and OFS Capital. Mr. Ranganathan graduated from St. Stephens College, Delhi University in 1991 with a Bachelor in English Literature and Exeter College, Oxford University in 1994 with a Master in Philosophy, Politics and Economics. Mr. Ranganathan has vast experience in asset management and expertise in investments that qualify him for service on our board of directors. Mr. Ranganathan’s background has enabled him to cultivate an enhanced understanding of operations and strategy with an added layer of risk management experience that is an important aspect of the composition of our board of directors.


Executive Officers Who Are Not Directors


Jeffrey A. Cerny serves as the Chief Financial Officer and Treasurer of the Company and is a director, the Chief Financial Officer, and Treasurer of OFS Capital and OCCI. Mr. Cerny also serves as a Senior Managing Director of OFS Advisor and OFSC, as a Vice President of OFSAM, and as a member of various OFSAM, and OFSAM affiliate, investment committees. Mr. Cerny oversees the finance and accounting functions of the aforementioned entities as well as underwriting, credit monitoring and CLO portfolio compliance for OFS Advisor’s syndicated senior loan business. Prior to joining OFSC in 1999, Mr. Cerny held various positions at Sanwa Business Credit Corporation, American National Bank and Trust Company of Chicago and Charter Bank Group, a multi-bank holding company. Mr. Cerny holds a B.S. in Finance from Northern Illinois University, a Masters of Management in Finance and Economics from Northwestern University’s J.L. Kellogg School of Management, and a J.D. from DePaul University’s School of Law. Mr. Cerny brings extensive accounting and financial experience and expertise. He is also an experienced investor, including lending, structuring and workouts which makes him an asset to HPCI. The breadth of his background and experience enables Mr. Cerny to provide unique insight into our strategic process and into the management of our investment portfolio.


Mukya S. Porter serves as the Chief Compliance Officer of  the Company and is the Chief Compliance Officer of OFS Capital, OCCI, RACR, OFSC, and OFS Advisor, in which capacity she oversees the compliance and risk management functions. Ms. Porter has over 10 years of experience advising investment advisers, investment banks and other financial institutions. Prior to joining OFSC, Ms. Porter served as a Senior Vice President of Compliance at Oaktree Capital Management, an alternative investment adviser from 2012 to 2016, where she was responsible for oversight of the firm’s code of ethics program and the day-to-day management of an affiliated limited-purpose broker dealer. Prior to Oaktree, Ms. Porter held the position of Vice President and Senior Compliance Officer at Pacific Investment Management Company, also known as


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PIMCO, from 2010 to 2012 and prior to that, from 2004 to 2010, worked, first, as a Vice President in the Legal department at Morgan Stanley Global Wealth Management and, subsequently, as a Vice President of Compliance at Morgan Stanley Investment Management. Ms. Porter received a Bachelor of Science degree, magna cum laude, in Biology from Howard University in 1996 and a J.D. from the University of California, Berkeley School of Law in 2001.


Jeffery S. Owen serves as the Chief Accounting Officer of the Company and is the Chief Accounting Officer of OFS Capital and OCCI, and the Controller of OFS Advisor. Mr. Owen has over 30 years of experience in public and private accounting. Prior to joining OFSC in November of 2015, Mr. Owen served as Senior Vice President of Corporate Accounting for Northern Trust Corporation. Before joining Northern Trust Corporation in 2010, he held various positions at Aon Corporation, Web Street, Inc., CNA Financial Corporation, and Ernst & Young LLP, an international public accounting firm. Mr. Owen holds a Bachelor of Accountancy from the University of Oklahoma and a Masters of Business Administration from The University of Chicago Graduate School of Business. Mr. Owen is also a Certified Public Accountant and a CFA charterholder.


Tod K. Reichert currently serves as our Corporate Secretary and as the Corporate Secretary of OFS Capital and OCCI, and as Managing Director, Chief Administrative Officer and General Counsel of OFS Advisor, in which capacity he oversees the legal and operational functions of the firm. Mr. Reichert has over 25 years of experience as a strategic business partner, providing advice on general corporate governance and transactional matters, with a focus on securities laws, compliance, corporate finance, debt and equity investments, and mergers and acquisitions. Prior to joining OFS Advisor, Mr. Reichert served as General Counsel, Chief Compliance Officer and Corporate Secretary of MCG Capital Corporation (Nasdaq: MCGC), managing the legal and compliance departments, overseeing complex litigation, and providing securities law, disclosure and transactional advice to the Board of Directors and senior management team, while serving as a member of the MCG credit committee and SBIC investment committee. Prior to joining MCG, Mr. Reichert worked as an attorney in private practice in New York, Princeton and Boston. Mr. Reichert received his J.D. from the Rutgers University School of Law - Newark and his BFA from the University of North Carolina.


Code of Business Conduct


We have adopted a Code of Business Conduct that applies to, among others, our executive officers, including our Principal Executive Officer and Principal Financial Officer, as well as every officer, director and employee of the Company. The Company’s Code of Business Conduct is available on our website at www.hancockparkbdc.com.


If we make any substantive amendment to, or grant a waiver from, a provision of our Code of Business Conduct, we will promptly disclose the nature of the amendment or waiver on our website at www.hancockparkbdc.com. as well as file a Form 8-K with the SEC.


Committees of the Board of Directors


Our board of directors currently has two committees: an Audit Committee and a Nominating and Corporate Governance Committee.


Audit Committee. The Audit Committee operates pursuant to a charter approved by our board of directors. The charter sets forth the responsibilities of the Audit Committee. The primary function of the Audit Committee is to serve as an independent and objective party to assist our board of directors in selecting, engaging and discharging our independent accountants, reviewing the plans, scope and results of the audit engagement with our independent accountants, approving professional services provided by our independent accountants (including compensation therefor), reviewing the independence of our independent accountants and reviewing the adequacy of our internal controls over financial reporting. The Audit Committee is composed of Mr. Ranganathan and Ms. Healy, both of whom are considered independent for purposes of the 1940 Act. Ms. Healy serves as the chair of the Audit Committee. Ms. Healy qualifies as an “audit committee financial expert” as defined in Item 407 of Regulation S-K under the Exchange Act. Each of the members of the Audit Committee meet the independence requirements of Rule 10A-3 of the Exchange Act and, in addition, is not an “interested person” of the Company or of OFS Advisor as defined in Section 2(a) (19) of the 1940 Act.


A charter of the Audit Committee is available in print to any stockholder who requests it and it is also available on the Company’s website.


Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee operates pursuant to a charter approved by our board of directors. The charter sets forth the responsibilities of the Nominating and Corporate Governance Committee, including making nominations for the appointment or election of independent directors. The Nominating and Corporate Governance Committee consists of Mr. Ranganathan and Ms. Healy, both of whom are considered independent for purposes of the 1940 Act. Mr. Ranganathan serves as the chair of the Nominating and Corporate Governance Committee.


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The Nominating and Corporate Governance Committee will consider nominees to our board of directors recommended by a stockholder, if such stockholder complies with the advance notice provisions of our bylaws. Our bylaws provide that a stockholder who wishes to nominate a person for election as a director at a meeting of stockholders must deliver written notice to our Corporate Secretary. This notice must contain, as to each nominee, all of the information relating to such person as would be required to be disclosed in a proxy statement meeting the requirements of Regulation 14A under the Exchange Act, and certain other information set forth in the bylaws. In order to be eligible to be a nominee for election as a director by a stockholder, such potential nominee must deliver to our Corporate Secretary a written questionnaire providing the requested information about the background and qualifications of such person and a written representation and agreement that such person is not and will not become a party to any voting agreements, any agreement or understanding with any person with respect to any compensation or indemnification in connection with service on our board of directors, and would be in compliance with all of our publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines.


A charter of the Nominating and Corporate Governance Committee is available in print to any stockholder who requests it, and it is also available on the Company’s website.


Compensation Committee. Our board of directors does not currently intend to delegate any authority to a compensation committee because our executive officers will not receive any direct compensation from us.


Board Leadership Structure


Our board of directors monitors and performs an oversight role with respect to our business and affairs, including with respect to investment practices and performance, compliance with regulatory requirements and the services, expenses and performance of service providers to us. Among other things, our board of directors approves the appointment of our investment adviser and our officers, reviews and monitors the service and activities performed by our investment adviser and our executive officers, and approves the engagement, and reviews the performance of, our independent registered public accounting firm.


Chairman and Chief Executive Officer


Our board of directors combines the role of Chairman of the Board with the role of Chief Executive Officer (“CEO”), coupled with a Lead Independent Director position to further strengthen the governance structure. Our board of directors believes this provides an efficient and effective leadership model for the Company. Combining the Chairman and CEO roles fosters clear accountability, effective decision-making, and alignment on corporate strategy.


No single leadership model is right for all companies at all times. Our board of directors recognizes that depending on the circumstances, other leadership models, such as a separate independent chairman of the board of directors, might be appropriate. Accordingly, our board of directors will periodically review its leadership structure.


Moreover, our board of directors believes that its governance practices provide adequate safeguards against any potential risks that might be associated with having a combined Chairman and CEO. Specifically:


• Two of the Company’s three directors are independent directors;


• All of the members of the Audit Committee and Nominating and Corporate Governance Committee are independent directors;


• Our board of directors and its committees intend to regularly conduct scheduled meetings in executive session, out of the presence of Mr. Rashid and other members of management;


• Our board of directors and its committees intend to regularly conduct meetings that specifically include Mr. Rashid; and


• Our board of directors and its committees intend to remain in close contact with, and receive reports on various aspects of the Company’s management and enterprise risk directly from the Company’s senior management and independent auditors.


Lead Independent Director


Our board of directors has appointed a Lead Independent Director to provide an additional measure of balance, ensure our board of directors’ independence, and enhance its ability to fulfill its management oversight responsibilities. Elaine E. Healy currently serves as the Lead Independent Director. The Lead Independent Director:


• Presides over all meetings of the directors at which the Chairman is not present, including executive sessions of the independent directors;


• Frequently consults with the Chairman and CEO about strategic policies;


• Provides the Chairman and CEO with input regarding meetings of our board of directors;


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• Serves as a liaison between the Chairman and CEO and the independent directors; and


• Otherwise assumes such responsibilities as may be assigned to him by the independent directors.


Having a combined Chairman and CEO, coupled with a majority of independent, experienced directors who evaluate our board of directors and themselves at least annually, including a Lead Independent Director with specified responsibilities on behalf of the independent directors, provides the right leadership structure for the Company and is best for the Company at this time.


Board Role in Risk Oversight


Our board of directors performs its risk oversight function primarily through (i) its standing committees, which report to the entire board of directors and are comprised solely of independent directors, and (ii) active monitoring of our Chief Compliance Officer and our compliance policies and procedures. For example, management of cybersecurity risks is the responsibility of the full board of directors. Oversight of other risks is delegated to the committees.


Oversight of our investment activities extends to oversight of the risk management processes employed by OFS Advisor as part of its day-to-day management of our investment activities. Our board of directors anticipates reviewing risk management processes at both regular and special board meetings throughout the year, consulting with appropriate representatives of OFS Advisor as necessary and periodically requesting the production of risk management reports or presentations. The goal of our board of director’s risk oversight function is to ensure that the risks associated with our investment activities are accurately identified, thoroughly investigated and responsibly addressed. Investors should note, however, that our board of directors’ oversight function cannot eliminate all risks or ensure that particular events do not adversely affect the value of investments.


We believe that the role of our board of directors in risk oversight is effective and appropriate given the extensive regulation to which we are subject as a BDC. As a BDC, we are required to comply with certain regulatory requirements that control the levels of risk in our business and operations. For example, we are limited in our ability to enter into transactions with our affiliates, including investing in any portfolio company in which one of our affiliates currently has an investment.


Portfolio Management


The management of our investment portfolio is the responsibility of OFS Advisor and the Middle-Market Investment Committee. The Middle-Market Investment Committee meets regularly to consider our investments, direct our strategic initiatives and supervise the actions taken by OFS Advisor on its behalf. In addition, the Middle-Market Investment Committee reviews and determines whether to make prospective investments, and monitors the performance of the investment portfolio. Follow-on investments in existing portfolio companies may require the Middle-Market Investment Committee’s approval beyond that obtained when the initial investment in the company was made.


The Adviser


OFS Capital Management, LLC serves as the Company’s investment adviser. Subject to the overall supervision of our board of directors, OFS Advisor manages the day-to-day operations of, and provides investment advisory and management services to, the Company.


OFS Advisor capitalizes on the deal origination and sourcing, credit underwriting, due diligence, investment structuring, execution, portfolio management and monitoring experience of OFSC’s senior management. These managers have developed a broad network of contacts within the investment community, averaging over 20 years of experience investing in debt and equity securities of middle-market companies. In addition, these managers have gained extensive experience investing in assets that will constitute our primary focus and have expertise in investing across all levels of the capital structure of middle-market companies.


Former Sub-Adviser


Effective March 26, 2019, Evolv resigned as our sub-advisor, thereby terminating Evolv’s services under the Investment Sub-Advisory Agreement.


Sub-Adviser


Effective August 3, 2020, CIM Capital served as our sub-adviser pursuant to the Sub-Advisory Agreement. Pursuant to the terms of the Sub-Advisory Agreement, CIM Capital evaluated and advised us on private capital market strategy, including market trends and terms, provided financial and strategic planning advice and analysis, interpreted market demand for products, assisted in establishing our operational readiness and selecting and negotiating engagements with third-party service providers, and coordinated the dissemination of customary information to interested parties. Effective February 2, 2022, OFS Advisor and CIM Capital entered into an agreement to terminate the Sub-Advisory Agreement.


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Investment Committees


The Advisor Investment Committees are responsible for the overall asset allocation decisions and the evaluation and approval of investments of OFS Advisor’s advisory clients.


The purpose of the Middle-Market Investment Committee is to evaluate and approve our prospective investments, subject at all times to the oversight of our board of directors. The Middle-Market Investment Committee, comprised of Richard Ressler (Chairman), Jeffrey A. Cerny, Kyde Sharp and Bilal Rashid, is responsible for the evaluation and approval of all debt and equity investments made by us.


The process employed by the Advisor Investment Committees, including the Middle-Market Investment Committee, is intended to bring the diverse experience and perspectives of the committee members to the investment process. The Middle-Market Investment Committee serves to provide investment consistency and adherence to our core investment philosophy and policies. The Middle-Market Investment Committee also determines appropriate investment sizing and implements ongoing monitoring requirements of our investments.


In certain instances, management may seek the approval of our board of directors prior to the making of an investment. In addition to reviewing investments, the meetings of the Middle-Market Investment Committee serve as a forum to discuss credit views and outlooks. Potential transactions and deal flow are reviewed on a regular basis. Members of the investment team are encouraged to share information and views on credits with members of the Middle-Market Investment Committee early in their analysis. We believe this process improves the quality of the analysis and assists the deal team members in working efficiently.


None of OFS Advisor’s investment professionals receive any direct compensation from us in connection with the management of our portfolio. Certain of the Middle-Market Investment Committee members have ownership and financial interests in, and may receive compensation and/or profit distributions from, OFSAM and/or its subsidiaries.


Information regarding the Middle-Market Investment Committee is as follows: NameAgePositionRichard S. Ressler63Chairman of OFSAM, Chairman of the Advisor Investment CommitteesJeffrey A. Cerny58Senior Managing Director of OFS AdvisorBilal Rashid51Senior Managing Director of OFS AdvisorKyde Sharp45Managing Director of OFS Advisor


Biographical information regarding members of the Middle-Market Investment Committee who are not directors or executive officers of the Company is as follows:


Richard S. Ressler is the founder and President of Orchard Capital Corporation (“Orchard Capital”), a firm through which Mr. Ressler oversees companies in which Orchard Capital or its affiliates invest. Through his affiliation with Orchard Capital, Mr. Ressler serves in various senior capacities with, among others, CIM Group, L.P. (together with its controlled affiliates, “CIM”), a community-focused real estate and infrastructure owner, operator, lender and developer, Orchard First Source Asset Management, LLC (together with its controlled affiliates, “OFSAM”), a full-service provider of capital and leveraged finance solutions to U.S. corporations, and OCV Management, LLC (“OCV”), an investor, owner and operator of technology companies. Mr. Ressler also serves as a board member for various public and private companies in which Orchard Capital or its affiliates invest, including as chairman of Ziff Davis, Inc. (Nasdaq: ZD) (f/k/a j2 Global, Inc.). Mr. Ressler served as Chairman and CEO of Ziff Davis, Inc. from 1997 to 2000 and, through an agreement with Orchard Capital, currently serves as its non-executive Chairman. In addition, he has also served as the Chief Executive Officer and President and as a director of CIM Real Estate Finance Trust, Inc. (“CMFT”), a non-listed REIT operated by an affiliate of CIM that invests primarily in net lease core real estate assets as well as real estate loans and other credit investments, since February 2018, and has served as the Chairman of its board of directors since August 2018. Mr. Ressler served as the Chief Executive Officer, President and a director of CIM Income NAV, Inc. (“CIM Income NAV”) from February 2018 to December 2021 and as the Chairman of the board of directors of CIM Income NAV and a member of nominating and corporate governance committee from August 2018 to December 2021 until CIM Income NAV’s merger with and into CMFT in December 2021.  Mr. Ressler served as the Chief Executive Officer and President and as a director of Cole Office & Industrial REIT (CCIT III), Inc. (“CCIT III”) from February 2018 and as the chairman of its board of directors from August 2018 until CCIT III’s merger with and into CMFT in December 2020. Mr. Ressler also served as a director of Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”) from January 2019 until CCIT II’s merger with Griffin Capital Essential Asset REIT, Inc. (“GCEAR”), on March 1, 2021, and as a director of Cole Credit Property Trust V (“CCPT V”) from January 2019 until October 2019.


Mr. Ressler co-founded CIM in 1994 and, through an agreement with Orchard Capital, chairs its Executive, Investment, Allocation, Real Asset Management Committees as well as Investment Committee/Credit Subcommittee (“ICCS”).


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Mr. Ressler co-founded the predecessor of OFSAM in 2001 and, through an agreement with Orchard Capital, chairs its executive committee. Mr. Ressler co-founded OCV in 2016 and, through an agreement with Orchard Capital, chairs its executive committee. Prior to founding Orchard Capital, from 1988 until 1994, Mr. Ressler served as Vice Chairman of Brooke Group Limited, the predecessor of Vector Group, Ltd. (NYSE: VGR) and served in various executive capacities at such entity and its subsidiaries. Prior to Vector Group, Ltd., Mr. Ressler was with Drexel Burnham Lambert, Inc., where he focused on merger and acquisition transactions and the financing needs of middle-market companies. Mr. Ressler began his career in 1983 with Cravath, Swaine and Moore LLP, working on public offerings, private placements, and merger and acquisition transactions. Mr. Ressler holds a B.A. degree from Brown University, and J.D. and M.B.A. degrees from Columbia University. Mr. Ressler has in depth knowledge of CIM Urban’s business and operations and has extensive experience with, and knowledge of, business management and finance as a result of his experience with CIM, including as Co-Founder thereof.


Kyde Sharp is a Managing Director of OFSC and OFS Advisor and is responsible for sourcing and evaluating investment opportunities for the middle market lending business as well as portfolio management. Prior to joining OFSC in 2017, Mr. Sharp was a Managing Director of Fifth Street Asset Management (NASDAQ: FSAM), a credit-focused asset manager located in Greenwich, CT. Earlier in his career he was an Associate with The Ben Barnes Group (formerly Entrecorp) where he priced, structured and negotiated equity-based consulting engagements. Mr. Sharp holds a Master of Business Administration from The Wharton School, University of Pennsylvania, a Juris Doctor from Fordham University School of Law, and a Bachelor of Arts in Philosophy from Hamilton College.




Item 11.    Executive Compensation


Compensation of Executive Officers


None of our officers receive direct compensation from us. Our officers, including our chief executive officer, chief financial officer, chief compliance officer, chief accounting officer, and corporate secretary are paid by OFSC, subject to reimbursement by us, pursuant to the Administration Agreement, for an allocable portion of such compensation for services rendered by such persons to us. To the extent that OFS Services outsources any of its functions under the Administration Agreement, we pay the fees associated with such functions on a direct basis without profit to OFS Services. See “Item 1. Business–Administration Agreement.”


Compensation of Directors


Our independent directors are entitled to receive annual cash retainer fees, determined based on our net assets as of the end of each fiscal quarter. In addition, our independent directors receive an additional annual fee for serving on one or more committees of our board of directors. Amounts payable under this arrangement are determined and paid quarterly in arrears as follows: Net Asset ValueAnnual Cash RetainerAnnual Committee Retainer (regardless of the number of committees the independent directorserves on)$0 to $50 million$10,000$2,500$50 million to $100 million$20,000$2,500Greater than $100 million$30,000$2,500


Compensation paid to our independent directors for the year ended December 31, 2021 was as follows:


NameTotal Compensation from Hancock Park Corporate Income, Inc.Total Compensation from Fund Complex(3)Marc Abrams$12,500$112,500Elaine Healy$12,500$112,500Ashwin Ranganathan(1)$—$—Bilal Rashid(2)$—$—Jeffrey A. Cerny(2)$—$—Total$25,000$225,000


(1) On January 5, 2022, the Board, upon the recommendation of the Nominating and Corporate Governance Committee, voted to appoint Ashwin Ranganathan as the Class I director of the Board, chair of the Nominating and Corporate Governance Committee and a member of the Audit Committee, to fill the vacancy created by the retirement of Marc I. Abrams on January 4, 2022. Mr. Ranganathan was appointed to serve as a member of the Board until the 2023 annual meeting of stockholders, or until his successor is duly elected and qualified.


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(2) No compensation is paid to directors who are "interested persons."


(3) The “Fund Complex” includes the Company, OFS Capital and OCCI.




Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters


The following table sets forth, as of March 14, 2022, the beneficial ownership of the nominee for director, 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. Percentage of beneficial ownership is based on 2,020,361 shares of common stock outstanding as of March 14, 2022.


Beneficial ownership is determined in accordance with the rules of the 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 information furnished by the Company’s transfer agent and other information obtained from such persons, if available.


Name and Address of Beneficial OwnerNumber of Shares Owned BeneficiallyPercentageof ClassInterested DirectorBilal RashidNoneNoneIndependent DirectorsAshwin RanganathanNoneNoneElaine E. HealyNoneNoneOfficers Who Are Not DirectorsJeffrey A. CernyNoneNoneJeffery S. OwenNoneNoneMukya S. PorterNoneNoneTod K. ReichertNoneNone


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 directors are divided into two groups — interested directors and independent directors. Interested directors are “interested persons” of the Company as defined in Section 2(a)(19) of the 1940 Act. Unless otherwise indicated, the address of all executive officers and directors is c/o Hancock Park Corporate Income, Inc., 10 South Wacker Drive, Suite 2500, Chicago, Illinois 60606; and the address for the other investors is their registered investment advisor or broker-dealer.




Item 13.    Certain Relationships and Related Transactions, and Director Independence


Transactions with Related Persons, Promoters and Certain Control Persons


Investment Advisory Agreement; Administration Agreement


We entered into the Investment Advisory Agreement with OFS Advisor on July 15, 2016, pursuant to which we pay management fees and incentive fees to OFS Advisor. See “Item 1. Business–Investment Advisory Agreement,” and “Item 1. Business–Administration Agreement.” The Investment Advisory Agreement was approved by our Board on July 15, 2016, and became effective on August 30, 2016, when we satisfied the Minimum Offering Requirement. The Administration Agreement was approved by our board of directors on March 31, 2016, and became effective of July 15. 2016. The Investment Advisory Agreement and the Administration Agreement were each continued by our Board on April 1, 2021. Unless earlier terminated, the Investment Advisory Agreement and the Administration Agreement will remain in effect from year-to-year if approved annually by a majority of our board of directors, including a majority of independent directors, or by the holders of a majority of our outstanding voting securities.


Relationship with OFS Advisor and Potential Conflicts of Interest


OFS Advisor and its affiliates manage other assets including those of other BDCs and registered investment companies, separately managed accounts, accounts for which OFS Advisor or its affiliates may serve as a sub-adviser and CLOs, and may manage other entities in the future, and these other funds and entities may have similar or overlapping investment strategies. Our executive officers, directors and members of the Middle-Market Investment Committee serve as officers, directors or principals of entities that operate in the same or a related line of business as we do, or of investment funds


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or other investment vehicles managed by OFS Advisor or its affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in our or our stockholders’ best interests or may require them to devote time to services for other entities, which could interfere with the time available to provide services to us. For example, OFS Advisor, currently serves as the investment adviser to OFS Capital, a publicly-traded BDC, that invests in senior secured loans of middle-market companies in the United States, similar to those we target for investment, including first-lien, second-lien and unitranche loans as well as subordinated loans and, to a lesser extent, warrants and other equity securities. OFS Advisor also serves as the investment adviser to OCCI, a closed-end management investment company that primarily invests in CLO debt and subordinated securities. Therefore, many investment opportunities will satisfy the investment criteria for both OFS Capital and us and, in certain instances, investment opportunities may be appropriate for OCCI and us. OFS Capital operates as a distinct and separate public company and any investment in our common stock will not be an investment in OFS Capital. In addition, our executive officers and one of our independent directors serve in substantially similar capacities for OFS Capital. Similarly, OFS Advisor and/or its affiliates may have other clients with, similar, different or competing investment objectives. In serving in these multiple capacities, our executive officers and directors, OFS Advisor and/or its affiliates, and members of the Middle-Market Investment Committee may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the best interests of us or our stockholders. As a result, we may not be given the opportunity to participate in certain investments made by investment funds, accounts or other investment vehicles managed by OFSAM and its other affiliates or by members of the Middle-Market Investment Committee. However, in order to fulfill its fiduciary duties to its clients, OFS Advisor intends to allocate investment opportunities in a manner that is fair and equitable over time and is consistent with its allocation policy, investment objective and strategies so that we are not disadvantaged in relation to any other client. Furthermore, an affiliate of OFS Advisor owns $1 million of shares of our common stock. See “Item 1A. Risk Factors–We have potential conflicts of interest related to obligations that OFS Advisor or its affiliates may have to other clients.”


OFS Advisor, OFSAM and their other affiliates have both subjective and objective procedures and policies in place designed to manage the potential conflicts of interest between OFS Advisor’s fiduciary obligations to us and its similar fiduciary obligations to other clients. For example, such policies and procedures are designed to ensure that investment opportunities are allocated in a fair and equitable manner among us OFS Advisor’s other clients. An investment opportunity that is suitable for multiple clients of OFS Advisor and its affiliates may not be capable of being shared among some or all of such clients and affiliates due to the limited scale of the opportunity or other factors, including regulatory restrictions imposed by the 1940 Act.


Conflicts may arise when we make an investment in conjunction with an investment being made by Affiliated Accounts, or in a transaction where another Affiliated Account has already made an investment. Investment opportunities are, from time to time, appropriate for more than one Affiliated Account in the same, different or overlapping securities of a portfolio company’s capital structure.  Conflicts arise in determining the terms of investments, particularly where these Affiliated Accounts may invest in different types of securities in a single portfolio company. Questions arise as to whether payment obligations and covenants should be enforced, modified or waived, or whether debt should be restructured, modified or refinanced.


We may invest in debt and other securities of companies in which other Affiliated Accounts hold those same securities or different securities, including equity securities. In the event that such investments are made by us, our interests will at times conflict with the interests of such other Affiliated Accounts, particularly in circumstances where the underlying company is facing financial distress. Decisions about what action should be taken, particularly in troubled situations, raises conflicts of interest, including, among other things, whether or not to enforce claims, whether or not to advocate or initiate a restructuring or liquidation inside or outside of bankruptcy, and the terms of any work-out or restructuring. The involvement of multiple Affiliated Accounts at both the equity and debt levels could inhibit strategic information exchanges among fellow creditors, including among us and other Affiliated Accounts. In certain circumstances, we or other Affiliated Accounts may be prohibited from exercising voting or other rights and may be subject to claims by other creditors with respect to the subordination of their interest.


For example, in the event that one Affiliated Account has a controlling or significantly influential position in a portfolio company, that Affiliated Account may have the ability to elect some or all of the board of directors of such a portfolio company, thereby controlling the policies and operations, including the appointment of management, future issuances of securities, payment of dividends, incurrence of debt and entering into extraordinary transactions. In addition, a controlling Affiliated Account is likely to have the ability to determine, or influence, the outcome of operational matters and to cause, or prevent, a change in control of such a portfolio company. Such management and operational decisions may, at times, be in direct conflict with us or other Affiliated Accounts that have invested in the same portfolio company that do not have the same level of control or influence over the portfolio company.


If additional capital is necessary as a result of financial or other difficulties, or to finance growth or other opportunities, we or other Affiliated Accounts may or may not provide such additional capital, and if provided each Affiliated Account will supply such additional capital in such amounts, if any, as determined by OFS Advisor and/or OFS Advisor’s affiliates.


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Investments by more than one Affiliated Account in a portfolio company also raises the risk of using assets of an Affiliated Account of OFS Advisor to support positions taken by other Affiliated Accounts, or that a client may remain passive in a situation in which it is entitled to vote. In addition, there may be differences in timing of entry into, or exit from, a portfolio company for reasons such as differences in strategy, existing portfolio or liquidity needs, different Affiliated Account mandates or fund differences, or different securities being held. These variations in timing may be detrimental to us.


The application of our investment mandate as compared to investment mandates of other Affiliated Accounts and the policies and procedures of OFS Advisor and OFS Advisor's affiliates are expected to vary based on the particular facts and circumstances surrounding each investment by two or more Affiliated Accounts, in particular when those Affiliated Accounts are in different classes of an issuer’s capital structure (as well as across multiple issuers or borrowers within the same overall capital structure) and, as such, there may be a degree of variation and potential inconsistencies, in the manner in which potential or actual conflicts are addressed.


There can be no assurance that OFS Advisor’s or its affiliates’ efforts to allocate any particular investment opportunity fairly and equitably among all clients for whom such opportunity is appropriate will result in an allocation of all or part of such opportunity to us. Not all conflicts of interest can be expected to be resolved in our favor.


Under OFS Advisor’s allocation policy, if OFS Advisor is actively seeking investments for two or more investment vehicles with similar or overlapping investment strategies, an available opportunity will be allocated based on the provisions governing allocations of such investment opportunities under law or in the relevant organizational, offering or similar documents, if any, for such investment vehicles. In the absence of any such provisions, OFS Advisor considers the following factors and the weight that should be given with respect to each of these factors:


• investment guidelines and/or restrictions, if any, under law or set forth in the applicable organizational, offering or similar documents for the investment vehicles;


• status of tax restrictions and tests and other regulatory restrictions and tests;


• risk and return profile of the investment vehicles;


• suitability/priority of a particular investment for the investment vehicles;


• if applicable, the targeted position size of the investment for the investment vehicles;


• the level of investments and available cash for investment with respect to the investment vehicles;


• total amount of funds committed to the investment vehicles; and


• the age of the investment vehicles and the remaining term of their respective investment periods, if any.


When not relying on the Order, priority as to opportunities will generally be given to clients that are in their “ramp-up” period over the accounts that are outside their ramp-up period but still within their investment or re-investment periods. However, application of one or more of the factors listed above, or other factors determined to be relevant or appropriate, may result in the allocation of an investment opportunity to a fund no longer in its ramp-up period over a fund that is still within its ramp-up period.


In situations where co-investment with such other accounts is not permitted or appropriate, such as when there is an opportunity to invest in different securities of the same issuer, OFS Advisor will need to decide which account will proceed with the investment. The decision by OFS Advisor to allocate an opportunity to another entity could cause us to forego an investment opportunity that we otherwise would have made.


We may co-invest on a concurrent basis with OFS Advisor and its affiliates, unless doing so is impermissible under existing regulatory guidance, applicable regulations and OFS Advisor’s allocation policy. The 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting the BDC to do so. On August 4, 2020, we received the Order from the SEC to permit us to co-invest in portfolio companies with certain Affiliated Funds in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions. The Order superseded a previous co-investment order we received on October 12, 2016 and provides us with greater flexibility to enter into co-investment transactions with Affiliated Funds. We are generally permitted to co-invest with Affiliated Funds if under the terms of the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching by us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.


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In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs with exemptive orders, through December 31, 2020, we were permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates that are private funds, even if such other funds had not previously invested in such existing portfolio company. Without this order, such Affiliated Funds that are private funds would not be able to participate in such co-investments with us unless the Affiliated Funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the conditional exemptive order expired on December 31, 2020, the SEC’s Division of Investment Management has indicated that until March 31, 2022, it will not recommend enforcement action, to the extent that any BDC with an existing co-investment order continues to engage in certain transactions described in the conditional exemptive order, pursuant to the same terms and conditions described therein.


We will not make any loans or other financing to OFS Advisor. OFS Advisor is prohibited from commingling our funds with the funds of any other entity or person for which it provides investment advisory or other services. We are permitted to invest in general partnerships and joint ventures with affiliates of OFS Advisor and non-affiliates provided certain conditions are met.


Our senior management, members of the Middle-Market Investment Committee and other investment professionals from OFS Advisor, OFSAM or its affiliates may serve as directors of, or in a similar capacity with, companies in which we invest or in which we are considering making an investment. Through these and other relationships with a company, these individuals may obtain material non-public information that might restrict our ability to buy or sell the securities of such company under the policies of the company or applicable law.


We entered into the ESAs, pursuant to which OFS Advisor and CIM Capital paid, and OFS Advisor will pay, to us a portion of our operating expenses for each quarter in which we declare a distribution to our stockholders. OFS Advisor will not be entitled to reimbursement if our distribution rate is lower than the distribution rate made at the time the expenses were reimbursed or if the other operating expense ratio at the time of reimbursement exceeds the expense ratio that was in effect at the time the expenses were reimbursed. For this purpose, “other operating expenses” means all of our operating expenses, excluding organizational and offering expenses, base management fees and incentive fees, distribution and stockholder servicing fees, financing fees and interest, and brokerage commissions and extraordinary expenses. In addition, all reimbursement payments shall be deemed to relate to the earliest unreimbursed expense payments made by the Advisors to us within three years prior to the last business day of the quarter in which such reimbursement payment obligation is incurred.


Effective February 2, 2022, we and OFS Advisor entered into the Second Amended Expense Support Agreement, agreed to and accepted by CIM Capital, for OFS Advisor to make Expense Support Payments. The Second Amended Expense Support Agreement may be terminated by OFS Advisor, without payment of any penalty, upon written notice to us. In addition, the Second Amended Expense Support Agreement will automatically terminate in the event of (i) our termination of the Investment Advisory Agreement, or (ii) our dissolution or liquidation. The expense reimbursement may not be made for the purpose or effect of increasing the amount of the incentive fee to be paid by us to OFS Advisor. OFS Advisor will not be entitled to reimbursement if our distribution rate is lower than the distribution rate made at the time the expenses were reimbursed or if the other operating expense ratio at the time of reimbursement exceeds the expense ratio that was in effect at the time the expenses were reimbursed.


Relationship with CIM Capital


On February 2, 2022, OFS Advisor and CIM Capital entered into an agreement to terminate the Sub-Advisory Agreement.


Review, Approval or Ratification of Transactions with Related Persons


The Audit Committee of our Board is required to review and approve any transactions with related persons (as such term is defined in Item 404 of Regulation S-K).


Director Independence


For information regarding the independence of our directors, see “Item 10. Directors Executive Officers and Corporate Governance.”


Certain Business Relationships


Our directors and officers are directors or officers of OFS Advisor, OFS Services, OFS Capital and OCCI, as applicable.


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Indebtedness of Management


None.


Promoters and Certain Control Persons


OFS Advisor may be deemed to be a promoter of the Company. We have entered into the Investment Advisory Agreement with OFS Advisor. OFS Advisor, for its services to us, is entitled to receive management fees and incentive fees in addition to the reimbursement of certain expenses. In addition, under the Investment Advisory Agreement, we expect, to the extent permitted by applicable law and in the discretion of our board of directors, to indemnify OFS Advisor and certain of its affiliates. See “Item 1. Business–General.”




Item 14.    Principal Accountant Fees and Services


The following table presents fees incurred by the Company for the years ended December 31, 2021 and 2020 for professional services rendered by the Company’s principal accounting firm, KPMG LLP (“KPMG”), as well as audit fees paid to the Company's former principal accounting firm, BDO US, LLP, for the reissuance of their audit opinion. Year ended December 31,20212020Audit Fees(1)$297,566$215,000Audit-Related Fees——Tax Fees51,46749,730All Other Fees——Total Fees$349,033$264,730


(1)    In addition, the Company incurred $20,000 of audit fees in each year from its former principal accounting firm, BDO USA, LLP. Such amounts are not included in the table above.


Audit Fees.  Audit fees consist of fees billed, including out-of-pocket expenses, for professional services rendered for the audit of our year-end consolidated financial statements, 10-Q reviews, and services that are normally provided by our independent registered public accounting firm in connection with statutory and regulatory filings.


Audit-Related Fees . Audit-related services consist of fees billed, including out-of-pocket expenses, for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated 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, including out-of-pocket expenses, 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.


The Company’s Audit Committee reviews, negotiates and approves in advance the scope of work, any related engagement letter and the fees to be charged by the independent auditors for audit services and permitted non-audit services for the Company and for permitted non-audit services for the Company’s investment adviser and any affiliates thereof that provide services to the Company if such non-audit services have a direct impact on the operations or financial reporting of the Company. All of the audit and non-audit services described above for which KPMG billed or has yet to bill the Company for the fiscal year ended December 31, 2021, were pre-approved by the Audit Committee.


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PART IV







Item 15.    Exhibits and Financial Statement Schedules


Documents Filed as Part of this Report


1. Financial Statements: See “Part II, Item 8. Financial Statements and Supplementary Data” of this report for a list of financial statements.


2. Exhibits required to be filed by Item 601 of Regulation S-K: See Item 15b. below.


Exhibits


The following table lists exhibits filed as part of this report, according to the number assigned to them in Item 601 of Regulation S-K. All exhibits listed in the following table are incorporated by reference except for those exhibits denoted in the last column. Please note that the agreements included as exhibits to this Form 10-K are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about us or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement that have been made solely for the benefit of the other parties to the applicable agreement and may not describe the actual state of affairs as of the date they were made or at any other time. Incorporated by ReferenceExhibitNumberDescriptionForm and SEC File No.Filing Date with SECFiled with this 10-K3.1Articles of IncorporationForm 10(000-55552)December 21, 20153.2Form of Articles of Amendment and RestatementForm 10(000-55552)February 8, 20163.3First Amended and Restated Bylaws of Hancock Park Corporate Income, Inc.8-K (814-001185)August 24, 20174.1Description of Securities*10.1Form of Investment Advisory and Management AgreementForm 10(000-55552)July 6, 201610.2Form of Administration AgreementForm 10(000-55552)June 6, 201610.3Custody Agreement by and between the Registrant and U.S. Bank National AssociationForm 10(000-55552)June 6, 201610.4Form of Indemnification AgreementForm 10(000-55552)February 8, 201610.5Termination Agreement, dated as of February 2, 2022, by and between OFS Capital Management, LLC and CIM Capital IC Management, LLC8-K(814-001185)February 2, 202210.6Second Amended and Restated Expense Support and Conditional Reimbursement Agreement, dated as of February 2, 2022, by and between Hancock Park Corporate Income, Inc. and OFS Capital Management, LLC, and agreed to and accepted by CIM Capital IC Management, LLC8-K(814-001185)February 2, 202210.7Business Loan Agreement between Hancock Park Corporate Income, Inc. and Pacific Western Bank dated September 12, 20188-K (814-001185)September 13, 201810.8Promissory Note between Hancock Park Corporate Income, Inc. and Pacific Western Bank dated September 12, 20188-K (814-001185)September 13, 201810.9Business Loan Agreement between Hancock Park Corporate Income, Inc. and Pacific Western Bank dated September 9, 20198-K(814-001185)September 11, 2019


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Incorporated by ReferenceExhibitNumberDescriptionForm and SEC File No.Filing Date with SECFiled with this 10-K10.10Change in Terms to the Business Loan Agreement between Hancock Park Corporate Income, Inc. and Pacific Western Bank dated September 9, 20198-K(814-001185)September 11, 201910.11Amendment One to the Business Loan Agreement between Hancock Park Corporate Income, Inc. and Pacific Western Bank dated February 17, 20218-K(814-001185)February 19, 202110.12Change in Terms to the Business Loan Agreement between Hancock Park Corporate Income, Inc. and Pacific Western Bank dated February 17, 20218-K(814-001185)February 19, 202110.13Change in Terms to the Business Loan Agreement between Hancock Park Corporate Income, Inc. and Pacific Western Bank dated November 15, 20218-K(814-001185)November 18, 202110.14Amendment Number One to Change in Terms Agreement between Hancock Park Corporate Income, Inc. and Pacific Western Bank date November 23, 2021*10.15Commercial Security Agreement among Hancock Park Corporate Income, Inc. and Pacific Western Bank dated September 9, 20198-K(814-001185)September 11, 201910.16Note Purchase Agreement dated November 27, 2019 by and between Hancock Park Corporate Income, Inc. and the Purchaser party thereto8-K(814-001185)December 2, 201910.17Amendment to the Note Purchase Agreement by and between Hancock Park Corporate Income, Inc. and the Purchaser party thereto, dated September 23, 20218-K(814-001185)September 24, 202111.1Computation of earnings per share+14.1Hancock Park Corporate Income, Inc. Code of Ethics10-Q(814-001185)November 12, 202114.2Hancock Park Corporate Income, Inc. Code of Business Conduct10-Q (814-01185)November 13, 201731.1Certification of Chief Executive Officer pursuant to Rule 13a-14and 15d-14(a)of the Securities Exchange Act of 1934, as amended*31.2Certification of Chief Financial Officer pursuant to Rule 13a-14and 15d-14(a)of the Securities Exchange Act of 1934, as amended*32.1Certification of Chief Executive Officer pursuant to18 U.S.C. Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002†32.2Certificationof Chief Financial Officer pursuant to18 U.S.C. Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002†


*Filed herewith.+Included in statement of operations contained in this report†Furnished herewith.





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Item 16.    Form 10-K Summary


None.


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SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HANCOCK PARK CORPORATE INCOME, INC.Date: March 18, 2022/s/ Bilal RashidBilal RashidChief Executive Officer, President and Chairman of the Board of Directors


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: March 18, 2022/s/ Bilal RashidBilal Rashid, President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)Date: March 18, 2022/s/ Ashwin RanganathanAshwin Ranganathan, DirectorDate: March 18, 2022/s/ Elaine E. HealyElaine E. Healy, DirectorDate: March 18, 2022/s/ Jeffrey A. CernyJeffrey A. Cerny, Chief Financial Officer and Treasurer (Principal Financial Officer)Date: March 18, 2022/s/ Jeffery S. OwenJeffery S. Owen, Chief Accounting Officer (Principal Accounting Officer)





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