OXFORD SQUARE CAPITAL CORP. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections aboutOxford Square Capital Corp. , our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as "anticipates," "expects," "intends," "plans," "will," "may," "continue," "believes," "seeks," "estimates," "would," "could," "should," "targets," "projects," and variations of these words and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this Annual Report on Form 10-K involve risks and uncertainties, including statements as to:
• our future operating results, including our ability to achieve objectives;
• our business prospects and the prospects of our portfolio companies; • the impact of investments that we expect to make; • our contractual arrangements and relationships with third parties;
• the dependence of our future success on the general economy and its impact on the industries in which we invest;
• the ability of our portfolio companies and CLO investments to achieve their objectives;
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• the valuation of our investments in portfolio companies and CLOs, particularly those having no liquid trading market;
• market conditions and our ability to access alternative debt markets and additional debt and equity capital;
• our expected financings and investments; • the adequacy of our cash resources and working capital;
• the timing of cash flows, if any, from the operations of our portfolio companies and CLO investments; and
• the ability of our investment adviser to locate suitable investments for us and monitor and administer our investments .
These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
• an economic downturn could impair our portfolio companies' and CLO investments' ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies and CLO investments;
• the impact of the elimination of the London Interbank Offered Rate ("LIBOR") and implementation of alternatives to LIBOR on our operating results;
• a contraction of available credit and/or an inability to access the equity markets, including as a result of the current COVID-19 pandemic, could impair our lending and investment activities;
• interest rate volatility could adversely affect our results, particularly because we use leverage as part of our investment strategy;
• the elevated levels of inflation and its impact on our investment activities and the industries in which we invest;
• currency fluctuations could adversely affect the results of our investments
in foreign companies, particularly to the extent that we receive payments
denominated in foreign currency rather than
• the impact of information technology system failures, data security breaches, data privacy compliance, network disruptions and cybersecurity attacks; and
• the risks, uncertainties and other factors we identify in Item 1A. - Risk Factors and elsewhere in this Annual Report on Form 10-K and in our filings with theSEC . Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this annual report on Form 10-K should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in Item 1A. - Risk Factors and elsewhere in this annual report on Form 10-K. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report on Form 10-K.
The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this Form 10-K.
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OVERVIEW
Our investment objective is to maximize our portfolio's total return. Our primary focus is to seek an attractive risk-adjusted total return by investing primarily in corporate debt securities and in CLOs, which are structured finance investments that own corporate debt securities. CLO investments may also include warehouse facilities, which are early-stage CLO vehicles intended to aggregate loans that may be used to form the basis of a traditional CLO vehicle. We operate as a closed-end, non-diversified management investment company and have elected to be regulated as a BDC under the 1940 Act. We have elected to be treated for tax purposes as a RIC, under the Code. Our investment activities are managed by Oxford Square Management, a registered investment adviser under the Investment Advisers Act of 1940, as amended. Oxford Square Management is owned by Oxford Funds, its managing member, and a related party,Charles M. Royce , a member of our Board who holds a minority, non-controlling interest in Oxford Square Management.Jonathan H. Cohen , our Chief Executive Officer, andSaul B. Rosenthal , our President, are the controlling members of Oxford Funds. Under the Investment Advisory Agreement, we have agreed to pay Oxford Square Management an annual Base Fee calculated on gross assets, and an incentive fee based upon our performance. Under the Administration Agreement, we have agreed to pay or reimburse Oxford Funds, as administrator, for certain expenses incurred in operating the Company. Our executive officers and directors, and the executive officers of Oxford Square Management and Oxford Funds, serve or may serve as officers and directors of entities that operate in a line of business similar to our own. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. We generally expect to invest between$5 million and$50 million in each of our portfolio companies, although this investment size may vary proportionately as the size of our capital base changes and market conditions warrant. We expect that our investment portfolio will be diversified among a large number of investments with few investments, if any, exceeding 5.0% of the total portfolio. As ofDecember 31, 2022 , our debt investments had stated interest rates of between 7.63% and 14.24% and maturity dates of between 1 and 86 months. In addition, our total portfolio had a weighted average annualized yield on debt investments of approximately 11.85%. The weighted average annualized yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our fees and expenses. The weighted average annualized yield was computed using the effective interest rates as ofDecember 31, 2022 , including accretion of OID and excluding any debt investments on non-accrual status. There can be no assurance that the weighted average annualized yield will remain at its current level. We have historically borrowed funds to make investments and may continue to borrow funds to make investments. As a result, we are exposed to the risks of leverage, which may be considered a speculative investment technique. Borrowings, also known as leverage, magnify the potential for gain and loss on amounts invested and therefore increase the risks associated with investing in our securities. In addition, the costs associated with our borrowings, including any increase in the management fee payable to Oxford Square Management, will be borne by our common stockholders. In addition, as a BDC under the 1940 Act, we are required to make available significant managerial assistance, for which we may receive fees, to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. These fees would be generally non-recurring, however in some instances they may have a recurring component. We have received no fee income for managerial assistance to date. To the extent possible, we will generally seek to invest in loans that are collateralized by a security interest in the borrower's assets or guaranteed by a principal to the transaction. Interest payments, if not deferred, are normally payable quarterly with most debt investments having scheduled principal payments on a monthly or quarterly basis. When we receive a warrant to purchase stock in a portfolio company, the warrant will typically have a nominal strike price, and will entitle us to purchase a modest percentage of the borrower's stock. 65
PORTFOLIO COMPOSITION AND INVESTMENT ACTIVITY
The total fair value of our investment portfolio was approximately$314.7 million and$420.8 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively. The decrease in the value of investments during the year endedDecember 31, 2022 was due primarily to a net change in unrealized depreciation on our investment portfolio of approximately$105.9 million (which incorporates reductions to CLO equity cost value of$20.4 million ), repayments of principal and sales of securities totaling approximately$64.6 million , partially offset by purchases of investments of approximately$84.2 million . Refer to the table below, which reconciles the investment portfolio for the year endedDecember 31, 2022 and the year endedDecember 31, 2021 . A reconciliation of the investment portfolio for the years endedDecember 31, 2022 and 2021 follows: ($ in millions) December 31, 2022 December 31, 2021 Beginning investment portfolio $ 420.8 $ 294.7 Portfolio investments acquired 84.2 178.9 Debt repayments (50.0 ) (24.3 ) Sales of securities (14.6 ) (15.2 ) Reductions to CLO equity cost value(1) (20.4 ) (37.5 ) Accretion of discounts on investments(2) 0.9 0.7
Net change in unrealized (depreciation)/appreciation on investments
(105.9 ) 38.5
Net realized loss on investments (0.3 ) (15.0 )
Ending investment portfolio $ 314.7 $ 420.8
____________
(1) For the year ended December 31, 2022, the reductions to CLO equity cost
value of approximately $20.4 million represented the distributions received, or
entitled to be received, on our investments held in CLO equity subordinated and
income notes of approximately $37.3 million , plus the amortization of cost on
our CLO fee notes of approximately $128,000 , less the effective yield interest
income recognized on our CLO equity subordinated and income notes of
approximately $17.1 million . For the year ended December 31, 2021 , the
reductions to CLO equity cost value of approximately $37.5 million represented
the distributions received, or entitled to be received, on our investments held
in CLO equity subordinated and income notes of approximately $55.8 million , plus
the amortization of cost on our CLO fee notes of approximately $351,000 , less
the effective yield interest income recognized on our CLO equity subordinated
and income notes of approximately $18.7 million .
During the year ended December 31, 2022 , we purchased approximately
$84.2 million in portfolio investments, including additional investments of
approximately $58.9 million in existing portfolio companies and approximately
$25.3 million in new portfolio companies. During the year ended December 31,
2021 , we purchased approximately $178.9 million in portfolio investments,
including additional investments of approximately $65.4 million in existing
portfolio companies and approximately $113.5 million in new portfolio companies.
In certain instances, we receive payments based on scheduled amortization of the
outstanding balances. In addition, we receive principal repayments of some of
our investments prior to their scheduled maturity date. The frequency or volume
of these repayments may fluctuate significantly from period to period.
For the years ended
2022
Portfolio Company Repayments
Keystone Acquisition Corp. $ 20.2
Quest Software, Inc. 18.2
Amerilife Group, LLC 10.8
Net all others 0.7
Total repayments(1) $ 50.0
____________
(1) Totals may not sum due to rounding.
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Portfolio activity also reflects sales of securities in the amounts of
approximately
2022
Portfolio Company Sales
Carlyle Global Market Strategies CLO 2021-6, Ltd.
3.4
Dryden 43 Senior Loan Fund 1.8
Total sales(1) $ 14.6
____________
(1) Totals may not sum due to rounding.
As ofDecember 31, 2022 , we had investments in debt securities of, or loans to, 20 portfolio companies, with a fair value of approximately$211.4 million , and CLO equity investments of approximately$98.9 million . As ofDecember 31, 2021 , we had investments in debt securities of, or loans to, 20 portfolio companies, with a fair value of approximately$264.5 million , and CLO equity investments of approximately$155.6 million .
The following table indicates the quarterly portfolio investment activity for
the years ended
Reductions to
Purchases of Repayments Sales of CLO Equity
($ in millions) Investments of Principal Investments Cost(1)
Quarter ended
December 31, 2022 $ 6.1 $ 0.2 $ - $ 2.3
September 30, 2022 3.9 11.0 1.8 3.9
June 30, 2022 26.9 0.2 9.5 6.4
March 31, 2022 47.4 38.6 3.4 7.8
Total(2) $ 84.2 $ 50.0 $ 14.6 $ 20.4
December 31, 2021 $ 23.3 $ 1.6 $ 10.3 $ 7.4
September 30, 2021 23.1 5.7 - 8.6
June 30, 2021 99.5 0.6 3.0 15.5
March 31, 2021 32.9 16.4 1.8 6.0
Total(2) $ 178.9 $ 24.3 $ 15.2 $ 37.5
____________
(1) Represents reductions to CLO equity cost value (representing distributions received, or entitled to be received, in excess of effective yield interest income and amortized cost adjusted CLO fee note income). (2) Totals may not sum due to rounding.
The following table shows the fair value of our portfolio of investments by
asset class as of
December 31, 2022 December 31, 2021
Investments at Percentage of Investments at Percentage of
($ in millions) Fair Value Total Portfolio Fair Value Total Portfolio
Senior Secured Notes $ 211.4 67.2 % $ 264.5 62.8 %
CLO Equity 98.9 31.4 % 155.6 37.0 %Equity and Other Investments 4.3 1.4 %
0.8 0.2 %
Total(1) $ 314.7 100.0 % $ 420.8 100.0 %
____________
(1) Totals may not sum due to rounding.
Qualifying assets must represent at least 70% of the Company's total assets at the time of acquisition of any additional non-qualifying assets. As ofDecember 31, 2022 and 2021, we held qualifying assets that represented 70.1% and 64.1%, respectively, of the total assets. No additional non-qualifying assets were acquired during the periods, if any, when qualifying assets were less
than
70% of the total assets.
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The following table shows our portfolio of investments by industry at fair
value, in millions, as of
December 31, 2022
Investments at Percentage of Investments at Percentage of
Fair Value Fair Value Fair Value Fair Value
($ in millions) ($ in millions)
Structured finance(1) $ 98.9 31.4 % $ 155.6 36.9 %
Software 69.0 21.9 % 50.9 12.1 %
Business services 53.4 17.0 % 88.7 21.0 %
Healthcare 33.6 10.7 % 63.0 15.0 %Telecommunication services 22.2 7.1 %
15.8 3.8 %
Diversified insurance 14.7 4.7 % 25.9 6.2 %
Plastics Manufacturing 11.7 3.7 % 12.7 3.0 %
Utilities 6.8 2.2 % 7.5 1.8 %
IT consulting 4.3 1.4 % 0.8 0.2 %
Total(2) $ 314.7 100.0 % $ 420.8 100.0 %
____________
(1) Reflects our equity investments in CLOs as of
The following tables present the top ten industries (based upon Moody's industry
classifications) of the aggregate holdings of the CLOs included in our
portfolio, based on par value, as of
December 31 ,Top Ten Industries 2022High Tech Industries 10.1 % Healthcare & Pharmaceuticals 9.8 %
Banking, Finance, Insurance & Real Estate 9.6 % Business Services
8.8 %
Media: Broadcasting & Subscription 5.0 %
Telecommunications 4.8 %
Hotels, Gaming & Leisure 4.7 %
Chemicals, Plastics & Rubber 4.5 %
Beverage, Food & Tobacco 3.7 %
Construction & Building 3.6 %
Total 64.6 %
December 31 ,
Top Ten Industries 2021
Healthcare & Pharmaceuticals 9.9 %
Banking, Finance, Insurance & Real Estate 9.7 %
9.5 %
Business Services 8.4 %
Hotels, Gaming & Leisure 5.2 %
Media: Broadcasting & Subscription 5.0 %
Telecommunications 4.6 %
Chemicals, Plastics & Rubber 4.1 %
Beverage, Food & Tobacco 3.8 %
Construction & Building 3.6 %
Total 63.8 %
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PORTFOLIO GRADING
We have adopted a credit grading system to monitor the quality of our debt
investment portfolio. Equity securities are not graded. As of
AtDecember 31, 2022 and 2021, our debt investment portfolio was graded as follows: ($ in millions) December 31, 2022 Principal Percentage of Portfolio at Percentage of Grade Summary Description Value Debt
Portfolio Fair Value Debt Portfolio
1 Company is ahead of expectations
and/or outperforming financial
covenant requirements of the
specific tranche and such trend is
expected to continue. $ - - % $ - - %
2 Full repayment of the outstanding
amount of OXSQ's cost basis and
interest is expected for the
specific tranche. 230.1 74.9 % 180.0 85.1 %
3 Closer monitoring is required. Full
repayment of the outstanding amount
of OXSQ's cost basis and interest is
expected for the specific tranche. 48.9 15.9 % 31.3 14.8 %
4 A loss of interest income has
occurred or is expected to occur
and, in most cases, the investment
is placed on non-accrual status.
Full repayment of the outstanding
amount of OXSQ's cost basis is
expected for the specific tranche. - - % - - %
5 Full repayment of the outstanding
amount of OXSQ's cost basis is not
expected for the specific tranche
and the investment is placed on
non-accrual status 28.2 9.2 % 0.2 0.1 %
Total(1) $ 307.2 100.0 % $ 211.4 100.0 %
____________
(1) Totals may not sum due to rounding.
($ in millions)
Percentage of Portfolio at Percentage of
Grade Summary Description Principal Value Debt Portfolio Fair Value Debt Portfolio
1 Company is ahead of expectations
and/or outperforming financial
covenant requirements of the
specific tranche and such trend is
expected to continue. $ - - % $ - - %
2 Full repayment of the outstanding
amount of OXSQ's cost basis and
interest is expected for the
specific tranche. 256.3 86.1 % 249.2 94.2 %
3 Closer monitoring is required. Full
repayment of the outstanding amount
of OXSQ's cost basis and interest is
expected for the specific tranche. 14.7 4.9 % 13.9 5.3 %
4 A loss of interest income has
occurred or is expected to occur
and, in most cases, the investment
is placed on non-accrual status.
Full repayment of the outstanding
amount of OXSQ's cost basis is
expected for the specific tranche. - - % - - %
5 Full repayment of the outstanding
amount of OXSQ's cost basis is not
expected for the specific tranche
and the investment is placed on
non-accrual status. 26.9 9.0 % 1.3 0.5 %
Total(1) $ 297.8 100.0 % $ 264.5 100.0 %
____________
(1) Totals may not sum due to rounding.
We expect that a portion of our investments will be in the Grades 3, 4 or 5 categories from time to time, and, as such, we will be required to work with troubled portfolio companies to improve their business and protect our investment. The number and amount of investments included in Grade 3, 4 or
5 may
fluctuate from year to year.
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RESULTS OF OPERATIONS
Set forth below is a comparison of our results of operations for the years endedDecember 31, 2022 and 2021. For information regarding results of operations for the year endedDecember 31, 2020 , refer to Part II Item 7 in our Form 10-K for the year endedDecember 31, 2021 , as filed with theSEC onMarch 7, 2022 , which is incorporated by reference herein.
Investment Income
The following table sets forth the components of investment income for the years
ended
December 31, December 31,
2022 2021
Interest Income
Stated interest income $ 23,954,078 $ 16,142,294 Original issue discount and market discount income 880,671
740,731
Discount income derived from unscheduled remittances at par 399,566
557,204
Total interest income 25,234,315
17,440,229
Income from securitization vehicles and investments 17,093,203
18,691,631
Other income Fee letters 544,267
405,010
Loan prepayment and bond call fees -
300,000
All other fees 246,327 338,143
Total other income 790,594 1,043,153
Total investment income $ 43,118,112 $ 37,175,013
The increase in total investment income for the year ended December 31, 2022
compared to the year ended December 31, 2021 was largely due to an increase of
stated interest income from our debt investments (approximately $7.8 million )
resulting from higher weighted average yields in 2022 compared to 2021. That
increase was partially offset by decreased income from our securitization
vehicles and investments due to lower weighted average effective yields and
decreased discount income derived from unscheduled remittances at par.
The total principal outstanding on income producing debt investments as of
December 31, 2022 and December 31, 2021 was approximately $279.0 million and
$297.8 million , respectively. As of December 31, 2022 , our debt investments had
stated interest rates of between 7.63% and 14.24% and maturity dates of between
1 and 86 months. As of December 31, 2021 , our debt investments had stated
interest rates of between 3.85% and 10.50% and maturity dates of between 3 and
91 months. In addition, our total portfolio had a weighted average yield on debt
investments of approximately 11.85% as of December 31, 2022 , compared to a
weighted average yield on debt investments of 7.70% as of December 31, 2021 .
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Operating Expenses
The following table sets forth the components of operating expenses for
the years ended
December 31, December 31,
2022 2021
Interest expense $ 12,354,392 $ 10,495,897
Base Fee 5,903,986 6,287,173
Professional fees 1,393,116 1,910,390
Compensation expense 915,583 723,931
General and administrative 835,912 521,541
Director's fees 417,500 490,500
Insurance 378,804 422,805
Transfer agent and custodian fees 231,241 222,581
Net Investment Income Incentive Fees - -
Total operating expenses $ 22,430,534 $ 21,074,818
Total operating expenses for the year ended December 31, 2022 increased by
approximately $1.4 million compared to the year ended December 31, 2021 . The
increase in 2022 is attributable primarily to higher interest expense, partially
offset by lower Base Fees and professional fees.
Interest expense increased by approximately $1.9 million in 2022 compared to
2021. The increase in 2022 was due to interest expense recognized for the full
year ended December 31, 2022 on the 5.50% Unsecured Notes compared with interest
expense recognized for a partial year for the year ended December 31, 2021 , as
those notes were issued on May 20, 2021 . The aggregate accrued interest which
remained payable as of December 31, 2022 and 2021 was approximately
$1.2 million .
The Base Fee decreased approximately $383,000 in 2022 compared to 2021 due to
lower average adjusted gross assets in 2022. The Base Fee which remained payable
to Oxford Square Management as of December 31, 2022 and 2021 was approximately
$1.3 million and $1.7 million , respectively.
Professional fees, largely consisting of legal, valuation, consulting, audit and
tax fees decreased by approximately $517,000 in 2022 compared to 2021 primarily
due to decreased legal fees.
Compensation expense was approximately $916,000 for the year ended December 31,
2022 , compared to approximately $724,000 for the year ended December 31, 2021 ,
reflecting the allocation of compensation expenses for the services of our Chief
Financial Officer, accounting personnel, and other administrative support staff.
As of December 31, 2022 , approximately $31,000 in compensation expenses remained
payable. As of December 31, 2021 , no compensation expenses remained payable.
General and administrative expenses, which consist primarily of listing fees,
office supplies, facilities costs and other miscellaneous expenses, increased by
approximately $314,000 in 2022 compared to 2021. That increase was primarily
driven by approximately $252,000 of excise tax attributable to the tax year
ended December 31, 2021 , which was expensed and paid during the year ended
December 31, 2022 . Office supplies, facilities costs and other expenses are
allocated to us under the terms of the Administration Agreement.
The calculation of the Net Investment Income Incentive Fee had no change in 2022
compared to 2021. There was no Net Investment Income Incentive Fee in 2022, nor
in 2021, primarily as a result of the Net Investment Income Incentive Fee being
reduced as the result of the Total Return Requirement. The Net Investment Income
Incentive Fee is calculated and payable quarterly in arrears based on the amount
by which (x) the "Pre-Incentive Fee Net Investment Income" for the immediately
preceding calendar quarter exceeds (y) the "Preferred Return Amount" for the
calendar quarter. For this purpose, "Pre-Incentive Fee Net Investment Income"
means interest income, dividend income and any other income accrued during the
calendar quarter minus our operating expenses for the quarter (including the
Base Fee, expenses payable under the Administration Agreement with Oxford Funds,
and any interest expense and dividends paid on any issued and outstanding
preferred stock, but excluding the incentive fee). Refer to "Note 7. Related
Party Transactions" in the notes to our financial statements.
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The expense attributable to the capital gains incentive fee, as reported under
GAAP, is calculated as if the Company's entire portfolio had been liquidated at
period end, and therefore is calculated on the basis of net realized and
unrealized gains and losses at the end of each period. That expense (or the
reversal of such an expense) related to that hypothetical liquidation of the
portfolio (and assuming no other changes in realized or unrealized gains and
losses) would only become payable to our investment adviser in the event of a
complete liquidation of our portfolio as of period end and the termination of
the Investment Advisory Agreement on such date. For the years ended December 31,
2022 and 2021, no accrual was required as a result of the impact of accumulated
net unrealized depreciation and net realized losses on our portfolio.
The amount of the Capital Gains Incentive Fee which will actually be payable is
determined in accordance with the terms of the Investment Advisory Agreement and
is calculated as of the end of each calendar year (or upon termination of the
Investment Advisory Agreement). The terms of the Investment Advisory Agreement
state that the Capital Gains Incentive Fee calculation is based on net realized
gains, if any, offset by gross unrealized depreciation for the calendar year. No
effect is given to gross unrealized appreciation in this calculation.
Realized and Unrealized Gains/Losses on Investments
For the year ended
For the year endedDecember 31, 2022 , our net change in unrealized depreciation was approximately$105.9 million , composed of approximately$3.8 million in gross unrealized appreciation, approximately$109.0 million in gross unrealized depreciation and approximately$0.7 million relating to the reversal of prior period net unrealized depreciation as investment gains and losses were realized. This includes net unrealized appreciation of approximately$20.4 million resulting from reductions to the cost value of our CLO equity investments representing the difference between distributions received, or entitled to be received, on our investments held in CLO equity subordinated notes and fee notes, of approximately$37.3 million and the effective yield interest income recognized on our CLO equity subordinated notes and the amortized cost adjusted income on our CLO equity fee notes of approximately$17.0 million .
The components of the net change in unrealized depreciation during the year
ended
Changes in
unrealized
Portfolio Company depreciation
ConvergeOne Holdings, Inc. $ (10.3 )
Quest Software, Inc. (8.3 )
Sound Point CLO XVI, Ltd. (7.6 )
Octagon Investment Partners 49, Ltd. (6.4 )
RSA Security, LLC (6.4 )
Dodge Data & Analytics, LLC (5.9 )
Nassau 2019-I Ltd. (5.5 )
HealthChannels, Inc. (f/k/a ScribeAmerica, LLC) (4.2 )
Careismatic Brands, Inc. (f/k/a New Trojan Parent, Inc.) (4.1 )
Telos CLO 2014-5, Ltd. (3.7 )
Net all other (43.4 )
Total(1) $ (105.9 )
____________
(1) Total may not sum due to rounding.
For the year ended
For the year endedDecember 31, 2021 , our net change in unrealized appreciation was approximately$38.5 million , composed of approximately$40.0 million in gross unrealized appreciation, approximately$20.4 million in gross unrealized depreciation and approximately$18.9 million relating to the reversal of prior 72 period net unrealized depreciation as investment gains and losses were realized. This includes net unrealized appreciation of approximately$37.5 million resulting from reductions to the cost value of our CLO equity investments representing the difference between distributions received, or entitled to be received, on our investments held in CLO equity subordinated notes and fee notes, of approximately$55.8 million and the effective yield interest income recognized on our CLO equity subordinated notes and the amortized cost adjusted income on our CLO equity fee notes of approximately$18.3 million .
The components of the net change in unrealized appreciation/depreciation during
the year ended
Changes in
unrealized
appreciation/
Portfolio Company (depreciation)
Imagine! Print Solutions, Inc. $ 13.4
Sound Point CLO XVI, Ltd. 7.4
Vibrant CLO V, Ltd. 5.8
Global Tel Link Corp. 4.0
Telos CLO 2014-5, Ltd. 3.7
Cedar Funding II CLO, Ltd. 3.0
Zais CLO 6, Ltd. 2.1
Nassau 2019-I Ltd. 2.0
Carlyle Global Market Strategies CLO 2021-6, Ltd. (2.4 )
Premiere Global Services, Inc. (14.6 )
Net all other 13.9
Total(1) $ 38.5
____________
(1) Totals may not sum due to rounding.
Net Increase in Net Assets Resulting from Net Investment Income
Net investment income for the year endedDecember 31, 2022 was approximately$20.7 million , compared to$16.1 million for the year endedDecember 31, 2021 . The change was primary the result of higher investment income, partially offset by an increase in operating expenses, as discussed above. For the year endedDecember 31, 2022 , the net increase in net assets resulting from net investment income per common share was$0.42 (basic and diluted), compared to$0.32 (basic and diluted) for the year endedDecember 31, 2021 , based on the weighted average common shares outstanding for the respective period.
Net decrease in net assets resulting from operations for the year endedDecember 31, 2022 was approximately$85.6 million , compared to a net increase of$39.6 million for year endedDecember 31, 2021 . These changes were largely due to a net change in unrealized depreciation, as discussed above. For the year endedDecember 31, 2022 , the net decrease in net assets resulting from operations per common share was$1.72 (basic and diluted), compared to a net increase in net assets per common share of$0.80 (basic and diluted) for the year endedDecember 31, 2021 , based on the weighted average common shares outstanding for the respective periods.
LIQUIDITY AND CAPITAL RESOURCES
During the year endedDecember 31, 2022 , cash and cash equivalents increased from$9,015,700 at the beginning of the period to$9,019,164 at the end of the period. Net cash used in operating activities for the year endedDecember 31, 2022 , consisting primarily of the items described in "- Results of Operations," was approximately$20.4 million , largely reflecting purchases of new investments of approximately$84.2 million , partially offset by repayments of principal of approximately$50.0 million and proceeds from the sale of investments of approximately$14.6 million . During the year endedDecember 31, 2022 , net cash used in by financing activities was approximately$20.4 million , reflecting
the
payment of distributions.
73
Contractual Obligations
We have certain obligations with respect to the investment advisory and
administration services we receive. Refer to "- Overview". We incurred
approximately $5.9 million for the Base Fee and approximately $2.1 million for
administrative services for the year ended December 31, 2022 . There were no Net
Investment Income Incentive Fees incurred during the year ended December 31,
2022 . Refer to "Note 7. Related Party Transactions" in the notes to our
financial statements.
A summary of our significant contractual payment obligations is as follows as of
December 31, 2022 . Refer to "Note 5. Borrowings" in the notes to our financial
statements.
Payments Due by Period
Principal Less than More thanContractual obligations (in millions) Amount 1 year 1 - 3 years 3 - 5 years 5 years Long-term debt obligations: 6.50% Unsecured Notes$ 64.4 $ -$ 64.4 $ - $ - 6.25% Unsecured Notes 44.8 - - 44.8 - 5.50% Unsecured Notes 80.5 - - - 80.5$ 189.7 $ -$ 64.4 $ 44.8 $ 80.5
Off-Balance Sheet Arrangements
OnOctober 18, 2019 , we entered into a$10 million repurchase transaction facility (the "Repo Facility") withNomura Securities International, Inc. ("Nomura"). Pursuant to the Master Repurchase Agreement ("MRA") and a transaction facility confirmation, the Company may sell securities to Nomura from time to time with a corresponding repurchase obligation at an agreed-upon price 30 to 60 days after the sale date ("Reverse Repo"). The Repo Facility had a funding cost of 1-month LIBOR plus 2.05% per annum for each Reverse Repo transaction and was subject to a facility fee of 0.85% per annum on the full$10 million facility amount. The Company accounts for these Reverse Repo transactions as secured financings for financial reporting purposes in accordance with GAAP. As ofDecember 31, 2022 and 2021, there was no outstanding principal, or securities sold under the Repo Facility, as the Repo Facility expired onOctober 18, 2020 .
Share Issuance and Repurchase Programs
OnAugust 1, 2019 , we entered into an Equity Distribution Agreement withLadenburg Thalmann & Co. through which we offered for sale, from time to time, up to$150.0 million of the Company's common stock through an At-the-Market ("ATM") offering. We did not sell any shares of common stock under the ATM program during the years endedDecember 31, 2022 and 2021.
Borrowings
In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, is at least 150% immediately after such borrowing. As ofDecember 31, 2022 , our asset coverage for borrowed amounts was approximately 171%. As ofDecember 31, 2021 , our asset coverage for borrowed amounts was approximately 227%. The following are our outstanding principal amounts, carrying values and fair values of our borrowings as ofDecember 31, 2022 andDecember 31, 2021 . The fair value of the 6.50% Unsecured Notes, 6.25% Unsecured Notes and 5.50% Unsecured Notes are based upon the closing price on the last day of the period. The 6.50% Unsecured Notes, 6.25% Unsecured Notes and 5.50% Unsecured Notes are listed on the NASDAQ Global Select Market (trading symbol "OXSQL","OXSQZ" and "OXSQG", respectively). As of December 31, 2022 December 31, 2021 Principal Carrying Principal Carrying ($ in millions) Amount Value Fair Value Amount Value Fair Value 6.50% Unsecured Notes$ 64.4 $ 64.0 $ 63.4 $ 64.4 $ 63.6 $ 65.1 6.25% Unsecured Notes 44.8 44.0 42.6 44.8 43.8 45.5 5.50% Unsecured Notes 80.5 78.3 70.0 80.5 78.0 80.7 Total$ 189.7 $ 186.3 $ 176.0 $ 189.7 $ 185.4 $ 191.3 74
The weighted average stated interest rate and weighted average maturity on all
our debt outstanding as of
The tables below summarize the components of interest expense for the years
ended
Year Ended December 31, 2022
Amortization
Stated of Deferred
Interest Debt Issuance
($ in thousands) Expense Costs Total
6.50% Unsecured Notes $ 4,184.1 $ 324.7 $ 4,508.8
6.25% Unsecured Notes 2,799.4 233.2 3,032.6
5.50% Unsecured Notes 4,427.5 385.5 4,813.0
Total $ 11,411.0 $ 943.4 $ 12,354.4
Year Ended December 31, 2021
Amortization
Stated of Deferred
Interest Debt Issuance
($ in thousands) Expense Costs Total
6.50% Unsecured Notes $ 4,184.1 $ 324.7 $ 4,508.8
6.25% Unsecured Notes 2,799.4 233.2 3,032.6
5.50% Unsecured Notes 2,718.0 236.6 2,954.5
Total(1) $ 9,701.5 $ 794.4 $ 10,495.9
____________
(1) Totals may not sum due to rounding.
Distributions
In order to qualify for tax treatment as a RIC, we are required, under Subchapter M of the Code, to distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses to our stockholders on an annual basis.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable regulated investment company tax treatment. We cannot assure stockholders that they will receive any distributions. To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our taxable ordinary income or capital gains. Stockholders should read any written disclosure accompanying a distribution payment carefully and should not assume that the source of any distribution is taxable ordinary income or capital gains. The final determination of the nature of our distributions can only be made upon the filing of our tax return. We have untilOctober 15, 2023 to file ourU.S. federal income tax return for the year endedDecember 31, 2022 . 75 The following table reflects the cash distributions, including distributions reinvested, if any, per share that we have paid on our common stock since the beginning of the 2020 fiscal year through 2022: Distributions in excess of/ (less than) GAAP net GAAP net Payment Total investment investment Date Declared Record Date Date Distributions income income(1) Fiscal 2022 December December July 21, 2022 16, 2022 30, 2022$ 0.035 $ N/A $ - November November July 21, 2022 16, 2022 30, 2022 0.035 N/A - October 17, October 31, July 21, 2022 2022 2022 0.035 N/A - Total (Fourth Quarter 2022) 0.105 0.13 (0.03 ) September September April 21, 2022 16, 2022 30, 2022$ 0.035 $ N/A $ - August 17, August 31, April 21, 2022 2022 2022 0.035 N/A - July 15, July 29, April 21, 2022 2022 2022 0.035 N/A - Total (Third Quarter 2022) 0.105 0.11 (0.01 ) June 16, June 30, March 1, 2022 2022 2022$ 0.035 $ N/A $ - May 17, May 31, March 1, 2022 2022 2022 0.035 N/A - April 15, April 29, March 1, 2022 2022 2022 0.035 N/A - Total (Second Quarter 2022) 0.105 0.09 0.02 March 17, March 31, October 22, 2021 2022 2022$ 0.035 $ N/A $ - February February October 22, 2021 14, 2022 28, 2022 0.035 N/A - January 17, January 31, October 22, 2021 2022 2022 0.035 N/A - Total (First Quarter 2022) 0.105 0.09 0.02 Total (2022)$ 0.420 (1)$ 0.42 $ - Fiscal 2021 December December July 22, 2021 17, 2021 31, 2021$ 0.035 $ N/A $ - November November July 22, 2021 16, 2021 30, 2021 0.035 N/A - October 15, October 29, July 22, 2021 2021 2021 0.035 N/A - Total (Fourth Quarter 2021) 0.105 0.09 0.02 September September April 22, 2021 16, 2021 30, 2021$ 0.035 $ N/A $ - August 17, August 31, April 22, 2021 2021 2021 0.035 N/A - July 16, July 30, April 22, 2021 2021 2021 0.035 N/A - Total (Third Quarter 2021) 0.105 0.08 0.02 June 16, June 30, February 23, 2021 2021 2021$ 0.035 $ N/A $ - May 14, May 28, February 23, 2021 2021 2021 0.035 N/A - April 16, April 30, February 23, 2021 2021 2021 0.035 N/A - Total (Second Quarter 2021) 0.105 0.06 0.05 March 17, March 31, October 22, 2020 2021 2021$ 0.035 $ N/A $ - February February October 22, 2020 12, 2021 26, 2021 0.035 N/A - January 15, January 29, October 22, 2020 2021 2021 0.035 N/A - Total (First Quarter 2021) 0.105 0.10 - Total (2021)$ 0.420 (2)$ 0.32 (4)$ 0.10 (4) Fiscal 2020 December December
November November
September 11, 2020 13, 2020 30, 2020 0.035 N/A -
October 16, October 30,
September 11, 2020 2020 2020 0.035 N/A -
Total (Fourth
Quarter 2020) 0.105 0.10 -
September September
June 1, 2020 16, 2020 30, 2020 $ 0.035 $ N/A $ -
August 17, August 31,
June 1, 2020 2020 2020 0.035 N/A -
July 17, July 31,
June 1, 2020 2020 2020 0.035 N/A -
Total (Third Quarter
2020) 0.105 0.09 0.01
June 15, June 30,
February 24, 2020 2020 2020 $ 0.067 $ N/A $ -
May 14, May 29,
February 24, 2020 2020 2020 0.067 N/A -
April 15, April 30,
February 24, 2020 2020 2020 0.067 N/A -
Total (Second
Quarter 2020) 0.201 0.09 0.11
March 17, March 31,
October 25, 2019 2020 2020 $ 0.067 $ N/A $ -
February February
October 25, 2019 14, 2020 28, 2020 0.067 N/A -
January 17, January 31,
October 25, 2019 2020 2020 0.067 N/A -
Total (First Quarter
2020) 0.201 0.13 0.07
Total (2020) $ 0.612 (3) $ 0.40 (4) $ 0.21 (4)
76
____________
(1) The tax characterization of cash distributions for the year ended
December 31, 2022 will not be known until the tax return for such year is
finalized. For the year ended December 31, 2022 , the amounts and sources of
distributions reported are only estimates and are not being provided for
U.S. tax reporting purposes. The final determination of the source of all
distributions in 2022 will be made after year-end and the amounts represented
may be materially different from the amounts disclosed in the final
Form 1099-DIV notice. The actual amounts and sources of the amounts for tax
reporting purposes will depend upon the Company's investment performance and may
be subject to change based on tax regulations.
(2) Cash distributions for the year ended December 31, 2021 represented 100%
net investment income and therefore there was no tax return of capital.
(3) Cash distributions for the year ended December 31, 2020 include a tax
return of capital of approximately $0.38 per share.
(4) Totals may not sum due to rounding.
RELATED PARTIES
We have a number of business relationships with affiliated or related parties, including the following:
• We have entered into the Investment Advisory Agreement with Oxford Square Management. Oxford Square Management is controlled by Oxford Funds, its managing member. In addition to Oxford Funds, Oxford Square Management is owned byCharles M. Royce , a member of our Board, who holds a minority, non-controlling interest in Oxford Square Management as the non-managing member. Oxford Funds, as the managing member of Oxford Square Management, manages the business and internal affairs of Oxford Square Management. In addition, Oxford Funds provides us with office facilities and administrative services pursuant to the Administration Agreement. • Messrs. Cohen and Rosenthal also currently serve as Chief Executive Officer and President, respectively, atOxford Gate Management, LLC , the investment adviser to theOxford Gate Funds andOxford Bridge II, LLC . Oxford Funds is the managing member ofOxford Gate Management, LLC . In addition,Bruce L. Rubin serves as the Chief Financial Officer and Secretary, andGerald Cummins serves as the Chief Compliance Officer, respectively, ofOxford Gate Management, LLC . • Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and President, respectively, of Oxford Lane Capital Corp., a non-diversified closed-end management investment company that invests primarily in equity and junior debt tranches of CLO vehicles, and its investment adviser,Oxford Lane Management, LLC . Oxford Funds provides Oxford Lane Capital Corp. with office facilities and administrative services pursuant to an administration agreement and also serves as the managing member ofOxford Lane Management, LLC . In addition,Bruce L. Rubin serves as the Chief Financial Officer, Treasurer and Corporate Secretary of Oxford Lane Capital Corp. and Chief Financial Officer and Treasurer ofOxford Lane Management, LLC , andMr. Cummins serves as the Chief Compliance Officer of Oxford Lane Capital Corp. andOxford Lane Management, LLC . As a result, certain conflicts of interest may arise with respect to the management of our portfolio by Messrs. Cohen and Rosenthal on the one hand, and the obligations of Messrs. Cohen and Rosenthal to manage Oxford Lane Capital Corp.,Oxford Bridge II, LLC and the Oxford Gate Funds, respectively, on the other hand. Oxford Square Management,Oxford Lane Management, LLC andOxford Gate Management, LLC are subject to a written policy with respect to the allocation of investment opportunities among the Company, Oxford Lane Capital Corp.,Oxford Bridge II, LLC and the Oxford Gate Funds. Where investments are suitable for more than one entity, the allocation policy generally provides that, depending on size and subject to current and anticipated cash availability, the absolute size of the investment as well as its relative size compared to the total assets of each entity, current and anticipated weighted average costs of capital, among other factors, an investment amount will be determined by the adviser to each entity. If the investment opportunity is sufficient for each entity to receive its investment amount, then each entity receives the investment amount; otherwise, the investment amount is reduced pro rata. OnJune 14, 2017 , theSecurities and Exchange Commission issued an order permitting the Company and certain of its affiliates to complete negotiated co-investment transactions in portfolio companies, subject to certain conditions (the "Order"). Subject to satisfaction of certain conditions to the Order, the Company and certain of its affiliates are now permitted, together with any future BDCs, registered closed-end funds and certain private funds, each of whose investment adviser is the Company's investment adviser or an investment adviser controlling, controlled by, or under common control with the Company's investment adviser, to co-invest in negotiated investment opportunities where doing so would otherwise be prohibited under the 1940 Act, providing 77 the Company's stockholders with access to a broader array of investment opportunities. Pursuant to the Order, we are permitted to co-invest in such investment opportunities with our affiliates if a "required majority" (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including, but not limited to, that (1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned, and (2) the potential co-investment transaction is consistent with the interests of our stockholders and is consistent with our then-current investment objective and strategies. In the ordinary course of business, we may enter into transactions with portfolio companies that may be considered related party transactions. In order to ensure that we do not engage in any prohibited transactions with any persons affiliated with us, we have implemented certain policies and procedures whereby our executive officers screen each of our transactions for any possible affiliations between the proposed portfolio investment, us, companies controlled by us and our employees and directors. We will not enter into any agreements unless and until we are satisfied that doing so will not raise concerns under the 1940 Act or, if such concerns exist, we have taken appropriate actions to seek board review and approval or exemptive relief for such transaction. Our Board reviews these procedures on an annual basis. We have also adopted a Code of Business Conduct and Ethics which applies to our senior officers, including our Chief Executive Officer and Chief Financial Officer, as well as all of our officers, directors and employees. Our Code of Business Conduct and Ethics requires that all employees and directors avoid any conflict, or the appearance of a conflict, between an individual's personal interests and our interests. Pursuant to our Code of Business Conduct and Ethics, each employee and director must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict. Our Audit Committee is charged with approving any waivers under our Code of Business Conduct and Ethics. As required by the NASDAQ Global Select Market corporate governance listing standards, the Audit Committee of our Board is also required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K).
Information concerning related party transactions is included in the financial statements and related notes, appearing elsewhere in this annual report on Form 10-K.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles inthe United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified investment valuation and investment income as critical accounting policies.
Investment Valuation
We fair value our investment portfolio in accordance with the provisions of
ASC 820, Fair Value Measurement and Disclosure ("ASC 820") and Rule 2a-5 under
the 1940 Act. Estimates made in the preparation of our financial statements
include the valuation of investments and the related amounts of unrealized
appreciation and depreciation of investments recorded. We believe that there is
no single definitive method for determining fair value in good faith. As a
result, determining fair value requires that judgment be applied to the specific
facts and circumstances of each portfolio investment while employing a
consistently applied valuation process for the types of investments we make.
ASC 820-10 clarified the definition of fair value and requires companies to
expand their disclosure about the use of fair value to measure assets and
liabilities in interim and annual periods subsequent to initial recognition.
ASC 820-10 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC 820-10 also establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value.
These tiers include: Level 1, defined as observable inputs such as quoted prices
in active markets; Level 2, which includes inputs such as quoted prices for
similar securities in active markets and quoted prices for identical securities
in markets that are not active; and Level 3, defined as unobservable inputs for
which little or no market data exists, therefore requiring an entity to develop
its own assumptions. We consider the attributes of current market conditions on
an on-going basis and
78
have determined that due to the general illiquidity of the market for its
investment portfolio, whereby little or no market data exists, substantially all
of our fair valued investments are measured based upon Level 3 inputs as of
Good Faith Determinations of Fair Value, Rule 2a-5 under the 1940 Act
("Rule 2a-5") was adopted by the SEC in December 2020 and establishes
requirements for determining fair value in good faith for purposes of the 1940
Act. Our Board of Directors has adopted valuation policies and procedures that
are intended to comply with Rule 2a-5.
Our Board of Directors determines the value of our investment portfolio each
quarter. In connection with that determination, members of Oxford Square
Management's portfolio management team prepare a quarterly analysis of each
portfolio investment using the most recent portfolio company financial
statements, forecasts and other relevant financial and operational information.
We also engage third-party valuation firms to provide assistance in valuing
certain of its syndicated loans and bilateral investments, including related
equity investments, although our Board of Directors ultimately determines the
appropriate valuation of each such investment. Changes in fair value, as
described above, are recorded in the statements of operations as net change in
unrealized appreciation/depreciation.
Syndicated Loans (Including Senior Secured Notes)
In accordance with ASC 820-10, our valuation procedures specifically provide for the review of indicative quotes supplied by the large agent banks that make a market for each security. However, the marketplace from which we obtain indicative bid quotes for purposes of determining the fair value of our syndicated loan investments has shown attributes of illiquidity as described by ASC-820-10. During such periods of illiquidity, when we believe that the non-binding indicative bids received from agent banks for certain syndicated investments that we own may not be determinative of their fair value or when no market indicative quote is available, we may engage third-party valuation firms to provide assistance in valuing certain syndicated investments that we own. The third-party valuation firms may use the income or market approach in arriving at a valuation. Unobservable inputs utilized could include discount rates derived from estimated credit spreads and earnings before interest, taxes, depreciation, and amortization multiples. In addition, Oxford Square Management analyzes each syndicated loan by reviewing the company's financial statements, covenant compliance and recent trading activity in the security (if known), and other business developments related to the portfolio company. All available information, including non-binding indicative bids which may not be determinative of fair value, is presented to the Valuation Committee to consider in its determination of fair value. In some instances, there may be limited trading activity in a security even though the market for the security is considered not active. In such cases the Valuation Committee will consider the number of trades, the size and timing of each trade, and other circumstances around such trades, to the extent such information is available, in its determination of fair value. The Valuation Committee will evaluate the impact of such additional information, and factor it into its consideration of the fair value that is indicated by the analysis provided by third-party valuation firms, if any.
Collateralized Loan Obligations - Debt and Equity
We have acquired a number of debt and equity positions in CLO investment vehicles and CLO warehouse investments. These investments are special purpose financing vehicles. In valuing such investments, we consider the indicative prices provided by a recognized industry pricing service as a primary source, and the implied yield of such prices, supplemented by actual trades executed in the market at or around period-end, as well as the indicative prices provided by the broker who arranges transactions in such investment vehicles. We also consider those instances in which the record date for an equity distribution payment falls on the last day of the period, and the likelihood that a prospective purchaser would require a downward adjustment to the indicative price representing substantially all of the pending distribution. Additional factors include any available information on other relevant transactions including firm bids and offers in the market and information resulting from bids-wanted-in-competition. In addition, we consider the operating metrics of the specific investment vehicle, including compliance with collateralization tests, defaulted and restructured securities, and payment defaults, if any. Oxford Square Management or the Valuation Committee may request an additional analysis by a third-party firm to assist in the valuation process of CLO investment vehicles. All information is presented to ourBoard for its determination of fair value of these investments. 79
Bilateral Investments (Including Equity)
Bilateral investments (as defined below) for which market quotations are readily available are valued by an independent pricing agent or market maker. If such market quotations are not readily available, under the valuation procedures approved by our Board upon the recommendation of the Valuation Committee, a third-party valuation firm will prepare valuations for each of our bilateral investments that, when combined with all other investments in the same portfolio company, have a value as of the previous quarter of greater than or equal to 2.0% of its total assets as of the previous quarter. In addition, in those instances where a third-party valuation is prepared for a portfolio investment which meets the parameters noted above, the frequency of those third-party valuations is based upon the grade assigned to each such security under its credit grading system as follows: Grade 1, at least annually; Grade 2, at least semi-annually; Grades 3, 4, and 5, at least quarterly. Bilateral investments which do not meet the parameters above are not required to have a third-party valuation and, in those instances, a valuation analysis will be prepared by Oxford Square Management. Oxford Square Management also retains the authority to seek, on our behalf, additional third party valuations with respect to both our bilateral portfolio securities and our syndicated loan investments. Our Board retains ultimate authority as to the third-party review cycle as well as the appropriate valuation of each investment.
The term "Bilateral investments" means debt and equity investments directly negotiated between the Company and a portfolio company, but excludes syndicated loans (i.e., corporate loans arranged by an agent on behalf of a company, portions of which are held by multiple investors in addition to OXSQ).
Refer to "Note 3. Fair Value" in the notes to our financial statements for more information on investment valuation and our portfolio of investments.
INVESTMENT INCOME:
Interest Income
Interest income is recorded on an accrual basis using the contractual rate applicable to each debt investment and includes the accretion of market discounts and/or OID and amortization of market premiums. Discounts from and premiums to par value on securities purchased are accreted/amortized into interest income over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums, if any. Generally, when interest and/or principal payments on a loan become past due, or if we otherwise do not expect the borrower to be able to service its debt and other obligations, we will place the loan on non-accrual status and will generally cease recognizing interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to restructuring such that the interest income is deemed to be collectible. We generally restore non-accrual loans to accrual status when past due principal and interest is paid and, in our judgment, is likely to remain current. As ofDecember 31, 2022 and 2021, we had three debt investments that were on non-accrual status.
Interest income also includes a PIK component on certain investments in our portfolio. Refer to the section below, "Payment-In-Kind," for a description of PIK income and its impact on interest income.
Payment-In-Kind
We have debt and preferred stock investments in our portfolio that contain contractual PIK provisions. PIK interest and preferred stock dividends are computed at their contractual rates and are accrued into income and added to the principal balances on the capitalization dates. Upon capitalization, the PIK portions of the investments are valued at their respective fair values. If we believe that a PIK is not fully expected to be realized, the PIK investment would be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest or dividends would be reversed from the related receivable through interest or dividend income, respectively. PIK investments on non-accrual status are restored to accrual status once it becomes probable that such PIK will be ultimately collectible in cash. For the years endedDecember 31, 2022 and 2021, no PIK preferred stock dividends were recognized as dividend income. For the years endedDecember 31, 2022 and 2021, no PIK interest was recognized as interest income. 80
Income from Securitization Vehicles and Equity Investments
Income from investments in the equity class securities of CLO vehicles (typically income notes or subordinated notes) is recorded using the effective yield method in accordance with the provisions of ASC 325-40, Beneficial Interests in Securitized Financial Assets, based upon estimated cash flows, amounts and timing including those CLO equity investments that have not made their inaugural distribution for the relevant period end. We monitor the expected residual payments, and effective yield is determined and updated periodically, as needed. Accordingly, investment income recognized on CLO equity securities in the GAAP statements of operations differs from both the tax-basis investment income and from the cash distributions actually received by us during the period. We also record income on our investments in certain securitization vehicles (or "CLO warehouse facilities") based on a stated rate per the underlying note purchase agreement plus accrued interest or, if there is no stated rate, then an estimated rate is calculated using a base case model projecting the timing of the ramp-up of the CLO warehouse facility. As ofDecember 31, 2022 and 2021, we had no investments in CLO warehouse facilities.
Other Income
Other income includes prepayment, amendment, and other fees earned by our loan investments, distributions from fee letters and success fees associated with portfolio investments. Distributions from fee letters are an enhancement to the return on a CLO equity investment and are based upon a percentage of the collateral manager's fees above the amortized cost, and are recorded as other income when earned. We may also earn success fees associated with our investments in certain securitization vehicles or CLO warehouse facilities, which are contingent upon a repayment of the warehouse by a permanent CLO structure; such fees are earned and recognized when the repayment is completed.
Recently Issued Accounting Standards
See "Note 15. Recent Accounting Pronouncements" to our financial statements for a description of recent accounting pronouncements, including the impact on
our financial statements. RECENT DEVELOPMENTS
The following distributions payable to stockholders are shown below:
Per Share Distribution
Date Declared Record Dates Payable Dates Amount Declared
October 20, 2022 January 17, 2023 January 31, 2023 $ 0.035
October 20, 2022 February 14, 2023 February 28, 2023 $ 0.035
October 20, 2022 March 17, 2023 March 31, 2023 $ 0.035
March 16, 2023 April 14, 2023 April 28, 2023 $ 0.035
March 16, 2023 May 17, 2023 May 31, 2023 $ 0.035
March 16, 2023 June 16, 2023 June 30, 2023 $ 0.035© Edgar Online, source
