Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or
¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
 
Commission file number: 814-00672
 
 
 
 
OHA Investment Corporation
 
 
(Exact name of registrant as specified in its charter) 
 
 
 
 
Maryland
 
20-1371499
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
1114 Avenue of the Americas,
27th Floor
 
10036
New York, New York
 
(Zip Code)
(Address of principal executive
offices)
 
 
(212) 852-1900
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 o
Accelerated filer
 o
Non-accelerated filer
 x
Smaller reporting company
 o
Emerging growth company
 o
 
 
(Do not check if smaller reporting company)
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of May 14, 2018, there were 20,172,392 shares of the registrant’s common stock outstanding.




Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
 
OHA INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts) 
 
 
March 31, 2018
 
December 31, 2017
 
 
(unaudited)
 
 
Assets
 
 

 
 

Investments in portfolio securities at fair value
 
 

 
 

Affiliate investments (cost: $24,267 and $23,263, respectively)
 
$
18,177

 
$
18,179

Non-affiliate investments (cost: $129,681 and $132,429, respectively)
 
46,863

 
46,751

Total portfolio investments (cost: $153,948 and $155,692, respectively)
 
65,040

 
64,930

Investments in U.S. Treasury Bills at fair value (cost: $14,996 and $19,994, respectively)
 
14,996

 
19,994

Total investments
 
80,036

 
84,924

Cash and cash equivalents
 
22,235

 
19,939

Accounts receivable and other current assets
 
6

 

Interest receivable
 
457

 
632

Due from broker
 
103

 

Other prepaid assets
 
11

 
21

Deferred tax asset
 
591

 
632

Total current assets
 
23,403

 
21,224

Total assets
 
$
103,439

 
$
106,148

 
 
 
 
 
Liabilities
 
 

 
 

Current liabilities
 
 

 
 

Distributions payable
 
$
403

 
$
403

Accounts payable and accrued expenses
 
1,682

 
1,585

Due to broker
 
1,250

 

Due to affiliate (Note 4)
 
96

 
562

Management and incentive fees payable (Note 4)
 
400

 
426

Income taxes payable
 
30

 
24

Repurchase agreement
 
14,695

 
19,592

Short-term debt, net of debt issuance costs
 
35,783

 
35,785

Total current liabilities
 
54,339

 
58,377

Long-term debt, net of debt issuance costs
 

 

Total liabilities
 
54,339

 
58,377

Commitments and Contingencies  (Note 6)
 
 

 
 

Net assets
 
 

 
 

Common stock, $.001 par value, 250,000,000 shares authorized; 20,172,392 and 20,172,392 shares issued and outstanding, respectively
 
20

 
20

Paid-in capital in excess of par
 
234,553

 
234,553

Undistributed net investment loss
 
(2,611
)
 
(2,113
)
Undistributed net realized capital loss
 
(97,072
)
 
(97,043
)
Net unrealized depreciation on investments
 
(85,790
)
 
(87,646
)
Total net assets
 
49,100

 
47,771

Total liabilities and net assets
 
$
103,439

 
$
106,148

Net asset value per share
 
$
2.43

 
$
2.37

(See accompanying notes to consolidated financial statements)

3



OHA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
For the three months ended March 31,
 
2018
 
2017
Investment income:
 

 
 

Interest income:
 

 
 

Affiliate investments
$
122

 
$
103

Payment-in-kind from affiliate investments
988

 
792

Non-affiliate investments
1,118

 
1,509

Money market interest
49

 

Other income
6

 
51

Total investment income
2,283

 
2,455

Operating expenses:
 

 
 

Interest expense and bank fees
823

 
974

Management fees (Note 4)
400

 
570

Incentive fees (Note 4)
1

 

Costs related to strategic alternatives review
75

 

Professional fees
643

 
271

Other general and administrative expenses
370

 
382

Directors fees
61

 
61

Total operating expenses
2,373

 
2,258

Waived incentive fees (Note 4)
(1
)
 

Income tax provision, net
6

 
4

Net investment income (loss)
(95
)
 
193

Realized and unrealized gain (loss) on investments:
 
 
 
Net realized capital gain (loss) on investments
 

 
 

Control investments

 
1

Non-affiliate investments
13

 
94

 Benefit (Provision) for taxes on realized gain (loss)
(42
)
 

Total net realized capital gain (loss) on investments
(29
)
 
95

Net unrealized appreciation (depreciation) on investments
 

 
 

Control investments

 

Affiliate investments
(1,006
)
 
(299
)
Non-affiliate investments
2,862

 
(19,080
)
Total net unrealized appreciation (depreciation) on investments
1,856

 
(19,379
)
 
 
 
 
Net increase (decrease) in net assets resulting from operations
$
1,732

 
$
(19,091
)
 
 
 
 
Net increase (decrease) in net assets resulting from operations per common share
$
0.08

 
$
(0.95
)
 
 
 
 
Distributions declared per common share
$
0.02

 
$
0.02

Weighted average shares outstanding - basic and diluted
20,172

 
20,172


 (See accompanying notes to consolidated financial statements)

4



OHA INVESTMENT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(in thousands, except per share data)
(unaudited)
 
 
 
For the three months ended March 31,
 
 
2018
 
2017
Increase (decrease) in net assets from operations
 
 

 
 

Net investment income
 
$
(95
)
 
$
193

Net realized capital gain (loss) on investments
 
(29
)
 
95

Net unrealized appreciation (depreciation) on investments
 
1,856

 
(19,379
)
Net increase (decrease) in net assets resulting from operations
 
1,732

 
(19,091
)
Distributions to common stockholders
 
 

 
 

Distributions from net investment income
 
(403
)
 
(403
)
Net decrease in net assets from distributions
 
(403
)
 
(403
)
Net increase (decrease) in net assets
 
1,329

 
(19,494
)
Net assets, beginning of period
 
47,771

 
80,493

Net assets, end of period
 
$
49,100

 
$
60,999

Net asset value per common share at end of period
 
$
2.43

 
$
3.02

Common shares outstanding at end of period
 
20,172

 
20,172

 
(See accompanying notes to consolidated financial statements)

5



OHA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
For the three months ended March 31,
 
 
2018
 
2017
Cash flows from operating activities:
 
 

 
 

Net increase (decrease) in net assets resulting from operations
 
$
1,732

 
$
(19,091
)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by (used in) operating activities:
 
 
 
 
Payment-in-kind interest
 
(988
)
 
(1,445
)
Net amortization of premiums, discounts and fees
 
(44
)
 
(81
)
Net realized capital (gain) loss on investments
 
(13
)
 
(95
)
Net unrealized depreciation on investments
 
(1,856
)
 
19,379

Purchase of investments in portfolio securities
 
(10,858
)
 
(9,925
)
Proceeds from redemption or sale of investments in portfolio securities
 
13,649

 
8,490

Purchase of investments in U.S. Treasury Bills
 
(15,000
)
 
(40,000
)
Proceeds from redemption of investments in U.S. Treasury Bills
 
19,998

 
40,000

Amortization of debt issuance costs on Credit Facility
 
178

 
289

Effects of changes in operating assets and liabilities:
 
 
 
 
Accounts receivable and other current assets
 
(6
)
 
(6
)
Interest receivable
 
175

 
626

Prepaid assets
 
10

 
6

Payables and accrued expenses
 
77

 
(556
)
Deferred tax asset
 
41

 

Due from broker
 
(103
)
 
(3,551
)
Due to broker
 
1,250

 

Due to affiliate
 
(466
)
 
(51
)
Net cash provided by (used in) operating activities
 
7,776

 
(6,011
)
Cash flows from financing activities:
 
 

 
 

Borrowings under repurchase agreement
 
14,695

 
39,200

Debt issuance cost paid
 
(180
)
 

Repayments on repurchase agreement
 
(19,592
)
 
(39,200
)
Distributions to common stockholders
 
(403
)
 
(1,210
)
Net cash used in financing activities
 
(5,480
)
 
(1,210
)
Net change in cash and cash equivalents
 
2,296

 
(7,221
)
Cash and cash equivalents, beginning of period
 
19,939

 
16,533

Cash and cash equivalents, end of period
 
$
22,235

 
$
9,312

 
(See accompanying notes to consolidated financial statements)
 

6



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2018
(in thousands, except share amounts and percentages)
(unaudited)
Portfolio Company
 
Industry
Segment
 
Investment(1)
 
Principal
 
Cost
 
Fair Value(2)
 
Affiliate Investments - (5% to 25% owned)
OCI Holdings, LLC
 
Home Health Services
 
Subordinated Note (LIBOR+ 12.0% cash with a 1.0% floor plus 3.0% PIK)(7), 20.88%, due 8/15/2018
 
$
21,794

 
$
21,767

 
$
18,015

OCI Holdings, LLC
 
Home Health Services
 
100% of Class A Units in OHA/OCI Investments, LLC representing 20.8% diluted ownership of OCI Holdings, LLC(11)
 
 

 
2,500

 
162

Subtotal Affiliate Investments - (5% to 25% owned)
 
 

 
$
24,267

 
$
18,177

 
 
 
 
 
 
 
 
 
 
 
Non-affiliate Investments - (Less than 5% owned)
Equinox Holdings, Inc.
 
Leisure Goods, Activities, Movies
 
Second Lien Term Loan
(LIBOR+7.0% with a 1.0% floor), 8.88%, due 9/6/2024
(3)
 
7,000

 
6,953

 
7,193

PAE Holding Corporation
 
Aerospace and Defense
 
Second Lien Term Loan
(LIBOR+9.50% with a 1.0% floor), 11.49%, due 10/20/2023
(3)
 
6,888

 
6,734

 
6,940

Berlin Packaging
 
Packaging
 
Second Lien Term Loan (LIBOR +6.75% with a 1.0% floor), 8.42%, due 10/1/2022(3)
 
6,705

 
6,457

 
6,780

CVS Holdings I, LP (MyEyeDr)
 
Retail
 
Second Lien Term Loan
(LIBOR+6.75% with a 1.0% floor), 8.54%, due 2/6/2025
(3)
 
5,000

 
4,975

 
5,006

Avantor Performance Materials, Inc.
 
Chemicals
 
Senior Unsecured Notes
9.0% due 10/1/2025
(3)
 
5,000

 
5,000

 
4,925

WASH Multifamily Acquisition, Inc.
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR + 7.0% with a 1.0% floor), 8.88%, due 5/14/2023(3)
 
3,404

 
3,386

 
3,387

DexKo Global, Inc.
 
Automotive
 
Second Lien Term Loan (LIBOR+8.25% with a 1.0% floor), 10.55%, due 7/24/2025(3)
 
3,000

 
2,978

 
3,045

TIBCO Software, Inc.
 
Software
 
Senior Unsecured Notes, 11.38%, due 12/1/2021(3)
 
2,100

 
1,974

 
2,286

MW Industries (Helix Acquisition)
 
Industrials
 
Second Lien Term Loan (LIBOR+8.0%), 10.30%, due 9/27/2025(3)
 
1,400

 
1,387

 
1,426

Hayward Industries, Inc.
 
Consumer Goods
 
Second Lien Term Loan (LIBOR+8.25%), 10.13%, due 8/4/2025(3)
 
1,302

 
1,280

 
1,299

Allied Universal Holdco, LLC
 
Business Services
 
Second Lien Term Loan
(LIBOR+8.5% with a 1.0% floor), 10.27%, due 7/28/2023
(3)
 
1,250

 
1,250

 
1,244

Safe Fleet Holdings, LLC
 
Industrials
 
Second Lien Term Loan
(LIBOR+6.75% with a 1.0% floor), 8.53%, due 2/1/2026
(3)
 
700

 
697

 
712

 (See accompanying notes to consolidated financial statements)

7



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2018
(in thousands, except share amounts and percentages)
(unaudited — continued)
Portfolio Company
 
Industry Segment
 
Investment(1)
 
Principal
 
Cost
 
Fair Value(2)
 
 
 
 
 
 
 

 
 

 
 

Non-affiliate Investments - (Less than 5% owned) - Continued
Coinamatic Canada, Inc.(5)
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR + 7.0% with a 1.0% floor), 8.88%, due 5/14/2023(3)(5)
 
596

 
593

 
593

ClearChoice (CC Dental Implants Intermediate)
 
Healthcare
 
First Lien Revolver (Last Out) (Funded: LIBOR+6.5% with a 1.0% floor), 8.48%, due 1/2/2023(12)(13)
 
563

 
547

 
547

ClearChoice (CC Dental Implants Intermediate)
 
Healthcare
 
First Lien Term Loan (Last Out) (LIBOR+6.5% with a 1.0% floor), 8.66% due 1/2/2023)(13)
 
500

 
495

 
495

MedRisk, LLC
 
Healthcare
 
Second Lien Term Loan
(LIBOR+6.75%), 8.63%, due 12/28/2025)
(3)
 
500

 
498

 
500

EaglePicher Technologies, LLC
 
Aerospace and Defense
 
Second Lien Term Loan
(LIBOR+7.25%), 8.96% due 3/28/2026
(3)
 
300

 
298

 
303

Gramercy Park CLO Ltd.(5)
 
Financial Services
 
Subordinated Notes, Residual Interest, 13.46% based on cost, due 7/17/2023
 
9,000

 
19

 
182

Castex Energy 2005, LP
 
Oil & Natural Gas
Production and Development
 
Redeemable Preferred LP Units (current pay 8.0% cash or 10.0% PIK)(6)(8)
 
62,529

 
56,315

 

ATP Oil & Gas Corporation/Bennu Oil & Gas, LLC
 
Oil & Natural Gas Production and Development
 
Limited Term Royalty Interest (notional rate of 13.2%)(9)
 
 
 
27,845

 

Globe BG, LLC
 
Coal Production
 
Contingent earn-out related to July 2011 sale of royalty interests in Alden Resources, LLC(10)
 
 
 

 

Subtotal Non-affiliate Investments - (Less than 5% owned)
 
 

 
$
129,681

 
$
46,863

Subtotal Portfolio Investments (81.3% of total investments)
 
 

 
$
153,948

 
$
65,040

 
 
 
 
 
 
 
 
 
 
 
GOVERNMENT SECURITIES
U.S. Treasury Bills(4)
 
 
 
 
 
$
15,000

 
$
14,996

 
$
14,996

Subtotal Government Securities (18.7% of total investments)
 
 

 
$
14,996

 
$
14,996

 
 
 
 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
 
$
168,944

 
$
80,036


 (See accompanying notes to consolidated financial statements)

8



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2018
(in thousands, except share amounts and percentages)
(unaudited — continued)

NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS
 
(1) 
We pledged all of our portfolio investments, except our investments in U.S. Treasury Bills, as collateral for obligations under our Credit Facility. See Note 3 to Consolidated Financial Statements. Percentages represent interest rates in effect as of March 31, 2018, and due dates represent the contractual maturity dates. Common stock, units and earn-outs are non-income producing securities, unless otherwise stated.
(2) 
The Audit Committee recommends fair values of each asset to our Board of Directors, which in good faith determines the final fair value for each investment. Fair value is determined using unobservable inputs (Level 3 hierarchy), unless otherwise stated. See Note 7 to the Consolidated Financial Statements.
(3) 
Fair value is determined using prices with observable market inputs (Level 2 hierarchy). See Note 7 to the Consolidated Financial Statements.
(4) 
Fair value is determined using prices for identical securities in active markets (Level 1 hierarchy). See Note 7 to the Consolidated Financial Statements.
(5) 
We have determined that this investment is not a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, or the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. The status of these assets under the 1940 Act is subject to change. We monitor the status of these assets on an ongoing basis.
(6) 
Investment on non-accrual status and therefore non-income producing.
(7) 
During the fourth quarter of 2016, we executed a series of amendments to our note purchase and security agreement with OCI Holdings, LLC, or OCI, to allow the company to PIK its LIBOR+12% cash interest for November and December 2016. Also, default interest of $0.1 million and current unpaid interest of $0.4 million was added to the principal balance in the fourth quarter 2016. OCI remains in financial covenant default and while in default, we are earning an additional 2% cash interest and 2% PIK interest. In 2017, we have executed a number of amendments to our note purchase and security agreement with OCI that allows the company to continue to PIK its LIBOR +12% cash interest through December 31, 2017.
(8) 
By the terms of our original investment, upon redemption, we were due the outstanding face amount of $50 million, any unpaid and accrued dividends, plus an option to elect to receive either: a) a cash payment resulting in a total 12% return or make-whole (inclusive of the 8% cash distributions even if not paid), or b) our pro rata share of 2% of the outstanding regular limited partner interests in Castex Energy 2005, LP, or Castex (0.67% net to us). Amounts shown for principal and cost include PIK dividends that have been added to the principal balance.
During the first quarter of 2017, we placed our investment in Castex on non-accrual status based on our March 31, 2017 valuation, which reflected a determination that future payments received from this investment would no longer be sufficient to cover all of the contractual principal and dividend amounts on this investment. On October 16, 2017, Castex announced that it (together with certain affiliates) has filed bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. According to the filing, Castex and its affiliates in bankruptcy entered into a restructuring support agreement ("RSA") with pre-petition lenders holding approximately 86% in principal amount of claims under the pre-petition credit facility. On February 26, 2018, we agreed to a settlement and agreed to withdraw our confirmation objections to the Debtors' Joint Plan of Reorganization under Chapter 11 of the Bankruptcy code in exchange for the potential to receive some amount of cash and warrants in the reorganized company. This agreement was approved on February 27, 2018. At this time we are unable to determine the value of a recovery, if any, resulting from the settlement which will be dependent upon the ultimate pool of unsecured claims. Therefore, until we are in a position to determine the value and likelihood of a recovery, we continue to estimate $0 fair market value of our investment in Castex at March 31, 2018 for financial statement purposes.

(9) 
Effective July 1, 2015, ATP was placed on non-accrual status based on estimated future production payments and income is recognized to the extent cash received. For more information on ATP, refer to the discussion of the ATP litigation in Note 7 to the Consolidated Financial Statements.

9



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2018
(in thousands, except share amounts and percentages)
(unaudited — continued)

NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS - Continued

(10) 
Contingent payment of up to $6.8 million is dependent upon Alden Resources, LLC’s achievement of certain sales volume and operating efficiency levels during the three-year period ended July 2014. The reporting and review mechanism to conclude the ultimate value of the earn-out has not yet been completed. Globe BG, LLC has informally advised us that the company’s relative cost of production has not improved since July 2011.
(11) 
Non-income producing equity security.
(12) 
Represents a revolving line of credit of which $1.0 million of the $1.6 million total commitment is unfunded at March 31, 2018. The revolving line of credit includes a 0.75% unused fee applied to the unfunded amount.
(13) 
Investment is entitled to skim interest which will result in a higher interest rate spread by approximately 28 basis points.

 (See accompanying notes to consolidated financial statements)


10



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(in thousands, except share amounts and percentages)

Portfolio Company
 
Industry
Segment
 
Investment(1)
 
Principal
 
Cost
 
Fair Value(2)
 
Affiliate Investments - (5% to 25% owned)
OCI Holdings, LLC
 
Home Health Services
 
Subordinated Note (LIBOR+ 12.0% cash with a 1.0% floor plus 3.0% PIK)(7), 20.56%, due 8/15/2018
 
$
20,806

 
$
20,763

 
$
18,015

OCI Holdings, LLC
 
Home Health Services
 
100% of Class A Units in OHA/OCI Investments, LLC representing 20.8% diluted ownership of OCI Holdings, LLC(11)
 
 

 
2,500

 
164

Subtotal Affiliate Investments - (5% to 25% owned)
 
 

 
$
23,263

 
$
18,179

 
 
 
 
 
 
 
 
 
 
 
Non-affiliate Investments - (Less than 5% owned)
Talos Production, LLC
 
Oil & Natural Gas
Production and Development
 
Senior Unsecured Notes
9.75%, due 2/15/2018
(3)
 
$
11,536

 
$
11,534

 
$
8,652

Equinox Holdings, Inc.
 
Leisure Goods, Activities, Movies
 
Second Lien Term Loan
(LIBOR+7.0% with a 1.0% floor), 8.57%, due 9/6/2024
(3)
 
7,000

 
6,951

 
7,245

PAE Holding Corporation
 
Aerospace and Defense
 
Second Lien Term Loan
(LIBOR+9.50% with a 1.0% floor), 11.12%, due 10/20/2023
(3)
 
6,888

 
6,729

 
6,931

Berlin Packaging
 
Packaging
 
Second Lien Term Loan (LIBOR +6.75% with a 1.0% floor), 8.12%, due 10/1/2022(3)
 
6,705

 
6,447

 
6,780

Avantor Performance Materials, Inc.
 
Chemicals
 
Senior Unsecured Notes,
9.0%, due 10/1/2025
(3)
 
5,000

 
5,000

 
4,925

WASH Multifamily Acquisition, Inc.
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR + 7.0% with a 1.0% floor), 8.57%, due 5/14/2023(3)
 
3,404

 
3,385

 
3,387

DexKo Global, Inc.
 
Automotive
 
Second Lien Term Loan (LIBOR+8.25% with a 1.0% floor), 9.94%, due 7/24/2025(3)
 
3,000

 
2,977

 
3,038

TIBCO Software, Inc.
 
Software
 
Senior Unsecured Notes, 11.38%, due 12/1/2021(3)
 
2,100

 
1,968

 
2,286

MW Industries (Helix Acquisition)
 
Industrials
 
Second Lien Term Loan (LIBOR+8.0%), 9.69%, due 9/27/2025(3)
 
1,400

 
1,386

 
1,409

Hayward Industries, Inc.
 
Consumer Goods
 
Second Lien Term Loan (LIBOR+8.25%), 9.82%, due 8/04/2025(3)
 
1,302

 
1,280

 
1,296


(See accompanying notes to consolidated financial statements)

11



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(in thousands, except share amounts and percentages)
(continued)
Portfolio Company
 
Industry Segment
 
Investment(1)
 
Principal
 
Cost
 
Fair Value(2)
 
 
 
 
 
 
 

 
 

 
 

Non-affiliate Investments - (Less than 5% owned) - Continued
Coinamatic Canada, Inc.
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR + 7.0% with a 1.0% floor), 8.57%, due 5/14/2023(3)
 
$
596

 
$
593

 
$
593

Gramercy Park CLO Ltd. (5)
 
Financial Services
 
Subordinated Notes, Residual Interest, 13.46% based on cost, due 7/17/2023
 
9,000

 
19

 
209

Castex Energy 2005, LP
 
Oil & Natural Gas
Production and Development
 
Redeemable Preferred LP Units (current pay 8.0% cash or 10.0% PIK(6)(8)
 
62,529

 
56,315

 

ATP Oil & Gas Corporation/Bennu Oil & Gas, LLC
 
Oil & Natural Gas
Production and Development
 
Limited Term Royalty Interest
(notional rate of 13.2%)
(9)
 

 
27,845

 

Globe BG, LLC
 
Coal Production
 
Contingent earn-out related to July 2011 sale of royalty interests in Alden Resources, LLC (10)
 

 

 

Subtotal Non-affiliate Investments - (Less than 5% owned)
 
 

 
$
132,429

 
$
46,751

Subtotal Portfolio Investments (76.5% of total investments)
 
 

 
$
155,692

 
$
64,930

 
 
 
 
 
 
 

 
 

 
 

GOVERNMENT SECURITIES
U.S. Treasury Bills(4)
 
 
 
 
 
$
20,000

 
$
19,994

 
$
19,994

Subtotal Government Securities (23.5% of total investments)
 
 

 
$
19,994

 
$
19,994

 
 
 
 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
 
$
175,686

 
$
84,924


 (See accompanying notes to consolidated financial statements)



12



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(in thousands, except share amounts and percentages)
(continued)


NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS

(1) 
We pledged all of our portfolio investments, except our investments in U.S. Treasury Bills, as collateral for obligations under our Credit Facility. See Note 3 to Consolidated Financial Statements. Percentages represent interest rates in effect as of December 31, 2017, and due dates represent the contractual maturity dates. Common stock, units and earn-outs are non-income producing securities, unless otherwise stated.
(2) 
The Audit Committee recommends fair values of each asset to our Board of Directors, which in good faith determines the final fair value for each investment. Fair value is determined using unobservable inputs (Level 3 hierarchy), unless otherwise stated. See Note 7 to the Consolidated Financial Statements.
(3) 
Fair value is determined using prices with observable market inputs (Level 2 hierarchy). See Note 7 to the Consolidated Financial Statements.
(4) 
Fair value is determined using prices for identical securities in active markets (Level 1 hierarchy). See Note 7 to the Consolidated Financial Statements.
(5) 
We have determined that this investment is not a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, or the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. The status of these assets under the 1940 Act is subject to change. We monitor the status of these assets on an ongoing basis.
(6) 
Investment on non-accrual status and therefore non-income producing.
(7) 
During the fourth quarter of 2016, we executed a series of amendments to our note purchase and security agreement with OCI Holdings, LLC, or OCI, to allow the company to PIK its LIBOR+12% cash interest for November and December 2016. Also, default interest of $0.1 million and current unpaid interest of $0.4 million was added to the principal balance in the fourth quarter 2016. OCI remains in financial covenant default and while in default, we are earning an additional 2% cash interest and 2% PIK interest. In 2017, we have executed a number of amendments to our note purchase and security agreement with OCI that allows the company to continue to PIK its LIBOR +12% cash interest through December 31, 2017.
(8) 
By the terms of our original investment, upon redemption, we were due the outstanding face amount of $50 million, any
unpaid and accrued dividends, plus an option to elect to receive either: a) a cash payment resulting in a total 12% return or
make-whole (inclusive of the 8% cash distributions even if not paid), or b) our pro rata share of 2% of the outstanding regular limited partner interests in Castex Energy 2005, LP, or Castex (0.67% net to us). Amounts shown for principal and cost include PIK dividends that have been added to the principal balance. Please refer to footnote 8 in the December 31, 2016 Consolidated Schedule of Investments for additional information our about our investment in Castex and the put process.

During the first quarter of 2017, we placed our investment in Castex on non-accrual status based on our March 31, 2017
valuation, which reflected a determination that future payments received from this investment would no longer be sufficient to cover all of the contractual principal and dividend amounts on this investment. On October 16, 2017, Castex announced that it (together with certain affiliates) has filed bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. According to the filing, Castex and its affiliates in bankruptcy entered into a restructuring support agreement ("RSA") with pre-petition lenders holding approximately 86% in principal amount of claims under the pre-petition credit facility. On February 26, 2018, we agreed to a settlement and agreed to withdraw our confirmation objections to the Debtors' Joint Plan of Reorganization under Chapter 11 of the Bankruptcy code in exchange for the potential to receive some amount of cash and warrants in the reorganized company. This agreement was approved on February 27, 2018. At this time we are unable to determine the value of a recovery, if any, resulting from the settlement which will be dependent upon the ultimate pool of unsecured claims. Therefore, until we are in a position to determine the value and likelihood of a recovery, we are estimating $0 fair market value of our investment in Castex at December 31, 2017 for financial statement purposes.
(9) 
Effective July 1, 2015, ATP was placed on non-accrual status based on estimated future production payments and income is recognized to the extent cash received. For more information on ATP, refer to the discussion of the ATP litigation in Note 7 to the Consolidated Financial Statements.

13



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(in thousands, except share amounts and percentages)
(continued)

NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS - Continued

(10) 
Contingent payment of up to $6.8 million is dependent upon Alden Resources, LLC’s achievement of certain sales volume and operating efficiency levels during the three-year period ended July 2014. The reporting and review mechanism to conclude the ultimate value of the earn-out has not yet been completed. Globe BG, LLC has informally advised us that the company’s relative cost of production has not improved since July 2011.
(11) 
Non-income producing equity security.


(See accompanying notes to consolidated financial statements)



14



OHA INVESTMENT CORPORATION
CONSOLIDATED FINANCIAL HIGHLIGHTS
(unaudited)
 
For the three months ended March 31,
Per Share Data(1)
2018
 
2017
Net asset value, beginning of period
$
2.37

 
$
3.99

Net investment income, net of tax
(0.01
)
 
0.01

Net realized and unrealized loss on investments(2)
0.09

 
(0.96
)
Net decrease in net assets resulting from operations
0.08

 
(0.95
)
Distributions to common stockholders
 
 
 

Distributions from net investment income
(0.02
)
 
(0.02
)
Net decrease in net assets from distributions
(0.02
)
 
(0.02
)
Net asset value, end of period
2.43

 
3.02

 
 
 
 
Market value, beginning of period
$
1.15

 
$
1.72

Market value, end of period
$
1.40

 
$
1.54

Market value return(3)(4)
23.8
 %
 
(9.5
)%
 
 
 
 
Ratios and Supplemental Data
 

 
 

($ and shares in thousands)
 

 
 

Net assets, end of period
$
49,100

 
$
60,999

Average net assets
$
48,516

 
$
76,630

Common shares outstanding, end of period
20,172

 
20,172

Total operating expenses and taxes/average net assets, before waived incentive fees (5)
19.9
 %
 
12.0
 %
Total operating expenses and taxes/average net assets, net of waived incentive fees (5)
19.9
 %
 
12.0
 %
Net investment income(loss)/average net assets, before waived incentive fees(5)
(0.8
)%
 
1.0
 %
Net investment income (loss)/average net assets, net of waived incentive fees(5)
(0.8
)%
 
1.0
 %
Portfolio turnover rate
16.7
 %
 
7.8
 %
 
 
 
 
Expense Ratios (as a percentage of average net assets)(5)
 

 
 

Interest expense and bank fees
6.9
 %
 
5.2
 %
Management fees
3.3
 %
 
3.0
 %
Incentive fees
 %
 
 %
Incentive fees, net of waived incentive fees
 %
 
 %
Costs related to strategic alternatives review
0.6
 %
 
 %
Other operating expenses, including provision for income taxes
9.1
 %
 
3.8
 %
Total operating expenses, including provision for income taxes, before waived incentive fees
19.9
 %
 
12.0
 %
Total operating expenses, including provision for income taxes, net of waived incentive fees
19.9
 %
 
12.0
 %
 
(1) 
Per share data is based on weighted average number of common shares outstanding for the period.
(2) 
May include a balancing amount necessary to reconcile the change in net asset value per share with other per share information presented due to rounding.
(3) 
Total return is based on the change in market price per share during the respective periods. Total return calculations take into account distributions, if any, reinvested in accordance with the Company's dividend reinvestment plan and do not reflect brokerage commissions.
(4) 
Not annualized.
(5) 
Annualized.
(See accompanying notes to consolidated financial statements)

15



OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

Note 1: Organization
These consolidated financial statements present the financial position, results of operations and cash flows of OHA Investment Corporation and its consolidated subsidiaries (collectively “we,” “us,” “our” and “OHAI”). We are a specialty finance company that was organized in July 2004 as a Maryland corporation. Our investment objective is to generate both current income and capital appreciation primarily through debt investments, some of which include equity components. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company, or a BDC, under the 1940 Act. For federal income tax purposes we operate so as to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. We have several direct and indirect subsidiaries that are single-member limited liability companies and wholly-owned limited partnerships established to hold certain portfolio investments or provide services to us in accordance with specific rules prescribed for a company operating as a RIC. We consolidate the financial results of our wholly-owned subsidiaries for financial reporting purposes, and we do not consolidate the financial results of our portfolio companies.
On September 30, 2014, our stockholders approved the appointment of Oak Hill Advisors, L.P., or OHA, as our investment advisor, replacing NGP Investment Advisor, LP, which had been our investment advisor since our inception. In connection with this change in investment advisor, we changed our name from NGP Capital Resources Company to OHA Investment Corporation. OHA is a registered investment adviser under the Investment Advisers Act of 1940, or the Advisers Act. OHA acts as our investment advisor and administrator pursuant to an investment advisory agreement and an administration agreement, respectively, each dated as of September 30, 2014, which we refer to as the Investment Advisory Agreement and the Administration Agreement, respectively. See Note 4.

Note 2: Basis of Presentation
These interim unaudited consolidated financial statements include the accounts of OHAI and its consolidated subsidiaries. The effects of all intercompany transactions between OHAI and its subsidiaries have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current period presentation.
We prepare the interim consolidated financial statements in accordance with accounting principles generally accepted in United States of America ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The Company is an investment company following the accounting and reporting guidance in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 946, Financial Services - Investment Company ("ASC 946"). Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X and ASC 946, the Company is precluded from consolidating portfolio company investments, including those in which it has a controlling interest, unless the portfolio company is another investment company. An exception to the general principle occurs if the Company holds a controlling interest in an operating company that provides all or substantially all of its services directly to the Company or to its portfolio companies. None of the portfolio investments made by the Company qualify for this exception. Therefore, the Company's investment portfolio is carried on the Consolidated Balance Sheets at fair value.
We omit certain information and footnote disclosures normally included in audited financial statements prepared in accordance with GAAP pursuant to such rules and regulations. We believe we include all adjustments which are of a normal recurring nature, so that these financial statements fairly present our financial position, results of operations and cash flows. Interim results are not necessarily indicative of results for a full year or any other interim period. You should read these unaudited consolidated financial statements in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Preparing interim consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes thereto, including the estimated fair values of our investment portfolio discussed in Note 7. Although we believe our estimates and assumptions are reasonable, actual results could differ materially from these estimates.
Going Concern
Our consolidated financial statements have been prepared assuming OHAI will continue as a going concern. Under that assumption, we expect that assets will be realized and liabilities will be satisfied in the normal course of business.

16


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2018
(unaudited)

As of May 14, 2018, the total outstanding principal amount of our debt obligations under our Credit Facility (as defined below) is $36.0 million. This amount, along with accrued interest, will be due and payable upon expiration of our Credit Facility which is scheduled to expire on September 9, 2018. If we do not have a new credit facility in place prior to that date, or if we are unable to extend our existing Credit Facility, we will consider a number of actions in order to increase our liquidity to levels sufficient to meet our debt obligations under the existing Credit Facility and any other anticipated cash needs through May 14, 2019. These actions include: refinancing our debt obligations with other lenders, disposing of certain portfolio investments, and reducing other controllable cash outflows.
We believe we will be able to take such actions in a manner that would enable us to meet our debt obligations and other cash needs through May 14, 2019. However, failure to successfully execute our liquidity plans or otherwise address our liquidity needs may have a material adverse effect on our business and financial position, and may materially affect our ability to continue as a going concern.
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand deposits and investments in money market funds. The Company considers cash and cash equivalents to include money market funds and may invest in money market funds as part of its cash management activities. As of March 31, 2018, the Company held $1.5 million in cash and cash equivalents and $20.7 million in money market funds.
Distributions
We record distributions to stockholders on the ex-dividend date. We currently intend that our distributions each year will be sufficient to maintain our status as a RIC for federal income tax purposes and to eliminate federal excise tax liability. We currently intend to make distributions to stockholders on a quarterly basis so that substantially all of our net taxable income is distributed on an annual basis. We also intend to make distributions of net realized capital gains, if any, at least annually. However, we may in the future decide to retain such capital gains for investment and designate such retained amounts as deemed distributions. Each quarter, we estimate our annual taxable earnings. The Board of Directors considers this estimate and determines the distribution amount, if any. We generally declare our distributions each quarter and pay them shortly thereafter. The following table summarizes our recent distribution history:
Declaration Date
 
Per Share
Amount
 
Record Date
 
Payment Date
March 14, 2017
 
$
0.02

 
March 31, 2017
 
April 7, 2017
June 16, 2017
 
0.02

 
June 30, 2017
 
July 10, 2017
September 18, 2017
 
0.02

 
September 30, 2017
 
October 9, 2017
December 12, 2017
 
0.02

 
December 31, 2017
 
January 9, 2018
March 14, 2018
 
0.02

 
March 31, 2018
 
April 9, 2018

Note 3: Credit Facilities and Borrowings
We are party to a Credit Agreement (the "Credit Facility"), dated September 9, 2016, with MidCap Financial Trust, as administrative agent, which replaced our prior Third Amended and Restated Revolving Credit Agreement, as amended, with SunTrust Bank, as administrative agent (the "Investment Facility"). As of December 31, 2016, the size of the Credit Facility was $56.5 million with a maturity date of March 9, 2018, with an option to extend for a six-month period, subject to certain conditions. The initial proceeds of $40.5 million from the Credit Facility were used to pay off the $38.5 million outstanding balance on the Investment Facility, pay transaction expenses and provide balance sheet cash. The remaining $16.0 million consisted of a delayed draw term loan, which was committed for one year, and was available to us to grow our investment portfolio and operate our business.
On February 2, 2018, we exercised the option to extend the Credit Facility through September 9, 2018.
As of March 31, 2018 and December 31, 2017, the total amount outstanding under the Credit Facility was $36.0 million with $0.0 million available to draw. The total amount outstanding on the Credit Facility is shown net of unamortized debt issuance costs of $0.2 million and $0.2 million on our Consolidated Balance Sheet as of March 31, 2018 and December 31, 2017, respectively. Substantially all of our assets, except our investments in U.S. Treasury Bills, are pledged as collateral for the obligations under the Credit Facility. The Credit Facility bears an interest rate of Adjusted LIBOR plus 5.35% for Eurodollar Loans, subject to a 1% LIBOR floor, and Base

17


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2018
(unaudited)

Rate plus 4.35% for Base Rate Loans. As of March 31, 2018, the interest rate on our outstanding principal balance of $36.0 million was 7.01%.
On November 10, 2017, we entered into an amendment to the Credit Facility whereby we agreed to make a voluntary principal prepayment in the amount of $4.5 million, reducing the total principal amount outstanding to $36.0 million, and the lenders agreed not to test certain covenants at certain determination dates.
The Credit Facility contains affirmative and reporting covenants and certain financial ratio and restrictive covenants. We have complied with these covenants from the date of the Credit Agreement through March 31, 2018, and had no existing defaults or events of default under the Credit Facility. The financial covenants, with terms as defined in the Credit Agreement, are:
maintain a Debt to Tangible Net Worth Ratio of not more than 0.80:1.00 as determined on the last day of each calendar month,
maintain at all times a minimum liquidity in the form of Cash or Cash Equivalents of at least $1.0 million,
maintain a Debt to Fair Market Value Ratio of not more than 0.50:1.00 at any time, and
maintain the Fair Market Value of Liquid Portfolio Investments as a percentage of outstanding aggregate principal balance to not be less than 80% through March 9, 2017, 90% through September 9, 2017 and 100% through September 9, 2018.

At the end of each quarter, we may take proactive steps to preserve investment flexibility for the next quarter by investing in cash equivalents, which includes purchasing U.S. Treasury Bills, by utilizing repurchase agreements on a temporary basis. On March 28, 2018, we purchased $15.0 million of U.S. Treasury Bills and contemporaneously entered into a $14.7 million repurchase arrangement with a global financial institution to finance such purchase. Under the repurchase arrangement, we transferred $15.0 million of U.S. Treasury Bills and $0.3 million of cash as collateral under the repurchase agreement. We repaid the $14.7 million borrowed under the repurchase agreement, and was returned the $0.3 million cash collateral, net of a $6 thousand financing fee, upon maturity of the U.S. Treasury Bills on April 5, 2018. We account for the transfer of the U.S. Treasury Bills under the repurchase agreement as a secured borrowing in accordance with GAAP. As a result, the U.S. Treasury Bills are recorded on our books as investments in U.S. Treasury Bills, and the amount outstanding under the repurchase agreement is recorded as short-term debt at March 31, 2018.
On December 26, 2017, we purchased $20.0 million of U.S. Treasury Bills and contemporaneously entered into a $19.6 million repurchase arrangement with a global financial institution to finance such purchase. Under the repurchase arrangement, we transferred $20.0 million of U.S. Treasury Bills and $0.4 million of cash as collateral under the repurchase agreement. We repaid the $19.6 million borrowed under the repurchase agreement, and was returned the $0.4 million cash collateral, net of a $8 thousand financing fee, upon maturity of the U.S. Treasury Bills on January 4, 2018. We account for the transfer of the U.S. Treasury Bills under the repurchase agreement as a secured borrowing in accordance with GAAP. As a result, the U.S. Treasury Bills are recorded on our books as investments in U.S. Treasury Bills, and the amount outstanding under the repurchase agreement is recorded as short-term debt at December 31, 2017.

Note 4: Investment Management
Investment Advisory Agreement
On September 30, 2014, we entered into the Investment Advisory Agreement with OHA, an investment adviser registered under the Investment Advisers Act of 1940, or Advisers Act, pursuant to which OHA replaced NGP Investment Advisor, LP as our investment advisor. The Investment Advisory Agreement was most recently approved by our Board of Directors, a majority of whom are not “interested” persons (as defined in the 1940 Act) of us, on August 3, 2017. Pursuant to the Investment Advisory Agreement, OHA implements our business strategy on a day-to-day basis and performs certain services for us subject to the supervision of our Board of Directors. Under the Investment Advisory Agreement, we pay OHA a fee consisting of two components — a base management fee and an incentive fee.
Base Management Fee: The base management fee is paid quarterly in arrears and is calculated by multiplying the average value of our total assets (excluding cash, cash equivalents and U.S. Treasury Bills that are purchased with borrowed funds solely for the purpose of satisfying quarter-end diversification requirements related to our election to be taxed as a RIC under the Code), as of the end of the two immediately prior fiscal quarters, by a rate of 1.75% per annum, with a 0.25% reduction in this 1.75% annual rate for the first year following September 30, 2014. Three months ended March 31, 2018 and 2017, we incurred $0.4 million and $0.6 million, respectively, in base management fees.
Incentive Fee: The incentive fee consists of two parts. The first part, the investment income incentive fee, is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the fiscal quarter for which the fee is being calculated. Pre-incentive fee net investment income means interest income, dividend income, royalty payments, net profits interest

18


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2018
(unaudited)

payments, and any other income (including any other fees, such as commitment, origination, syndication, structuring, diligence, monitoring and consulting fees or other fees that we receive from portfolio companies) accrued during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement, and any interest expense and distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. Accordingly, we may pay an incentive fee based partly on accrued investment income, the collection of which is uncertain or deferred. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses, or unrealized capital appreciation or 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 liabilities at the end of the immediately preceding fiscal quarter) is compared to a “hurdle rate” of 1.75% per quarter (7% annualized). OHA receives no incentive fee for any fiscal quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate. OHA receives an incentive fee equal to 100% of our pre-incentive fee net investment income for any fiscal quarter in which our pre-incentive fee net investment income exceeds the hurdle rate but is less than 2.1875% (8.75% annualized) of net assets (also referred to as the “catch up” provision) plus 20% of our pre-incentive fee net investment income for such fiscal quarter greater than 2.1875% (8.75% annualized) of net assets. For the three months ended March 31, 2018, and for the three months ended March 31, 2017, we did not incur any investment income incentive fees.
The second part of the incentive fee, the capital gains incentive fee, is determined and payable in arrears as of the end of each fiscal year (or, upon termination of the Investment Advisory Agreement, as of the termination date). The capital gains incentive fee is equal to 20% of our cumulative aggregate realized capital gains from September 30, 2014 through the end of that fiscal year, computed net of our cumulative aggregate realized capital losses and cumulative aggregate unrealized depreciation on investments for the same time period. The aggregate amount of any previously paid capital gains incentive fees to OHA is subtracted from the capital gains incentive fee calculated. If such amount is negative, then there is no capital gains fee for such year. For the purposes of the capital gains fee, any gains and losses associated with our investment portfolio as of September 30, 2014 shall be excluded from the capital gains fee calculation. For the three months ended March 31, 2018, we estimated $1,000 in capital gain fees which is subject to the Incentive fee waiver agreement. We did not accrue any capital gains incentive fees for the three months ended March 31, 2017.
On November 10, 2017, we entered into an Incentive Fee Waiver Agreement with OHA whereby OHA agreed to waive any incentive fees earned relating to fiscal years 2017 and 2018. Under the Incentive Fee Waiver Agreement, any capitalized gains fees that would have been earned and accrued during 2017 and 2018, which under our Investment Advisory Agreement would not have been paid until 2018 and 2019, respectively, will be waived. For the three months ended March 31, 2018, OHA waived $1,000 of capital gains incentive fee that would have been accrued as of March 31, 2018.
The Investment Advisory Agreement may be terminated at any time, without the payment of any penalty, by a vote of our Board of Directors or a vote of the holders of at least a majority of our outstanding voting securities (within the meaning of the 1940 Act) on 60 days’ written notice to OHA, and would automatically terminate in the event of its “assignment” (within the meaning of the 1940 Act). OHA may terminate the Investment Advisory Agreement without penalty by providing us at least 60 days’ written notice. Pursuant to the Investment Advisory Agreement, OHA pays the compensation expense of its investment professionals, who provide management and investment advisory services to us. We bear all other costs and expenses of our operations and transactions.
Administration Agreement
Under the Administration Agreement, OHA furnishes us with certain administrative services, personnel and facilities. The Administration Agreement was most recently approved by our Board of Directors on August 3, 2017. Payments under the Administration Agreement are equal to our allocable portion of OHA’s overhead in performing its obligations under the Administration Agreement, including all administrative services necessary for our operation and the conduct of our business. The Administration Agreement may be terminated at any time, without penalty, by a vote of our Board of Directors or by OHA upon 60 days’ written notice to the other party.
We owed $0.1 million and $0.6 million to OHA under the Administration Agreement as of March 31, 2018 and December 31, 2017, respectively, for expenses incurred on our behalf for the final month of the respective quarterly period. We include these amounts in due to affiliate on our Consolidated Balance Sheets.

Note 5: Federal Income Taxes
We operate so as to qualify, for tax purposes, as a RIC under Subchapter M of Chapter 1 of the Code. As a RIC, we are generally not subject to corporate-level U.S. federal income taxes on the portion of our investment company taxable income and net capital gain

19


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2018
(unaudited)

(i.e., realized net long-term capital gains in excess of realized net short-term capital losses) that we distribute to our stockholders. To qualify as a RIC, we are required, among other things, to distribute to our stockholders each year at least 90% of investment company taxable income, as defined by the Code, and to meet certain asset-diversification requirements.
The Taxable Subsidiaries have elected to be taxed as corporations for federal income tax purposes. The Taxable Subsidiaries hold certain of our portfolio investments and are consolidated for financial reporting purposes, but not for income tax reporting purposes. These Taxable Subsidiaries permit us to hold equity investments in portfolio companies that are “pass through” entities for tax purposes, in order to comply with the “source-of-income” requirements that must be satisfied to maintain our qualification as a RIC. The Taxable Subsidiaries may generate net income tax expense or benefit, which is reflected on our Consolidated Statements of Operations.
On December 22, 2017, the U.S. government enacted significant tax legislation commonly referred to as the Tax Act and Job Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, (1) reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent, (2) repealing the Corporate Alternative Minimum Tax (AMT), (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (4) creating a new limitation on deductible interest expense, (5) changing rules related to the use and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017 and; (6) the requirement to pay a one-time transition tax on all undistributed earnings of foreign subsidiaries.
Recently, the SEC staff also issued Staff Accounting Bulletin 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimated in the financial statements. If we cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with our initial analysis of the impact of the Tax Act, we have recorded a net tax expense of approximately $12.2 million in the period ending December 31, 2017 which consists of a reduction of deferred tax assets previously valued at 34%. This tax expense and reduction in deferred tax assets was fully offset by a simultaneous reduction in our valuation allowance. The reduction in the statutory U.S. federal rate is expected to positively impact our future U.S. after tax earnings.
At December 31, 2017, due to the Tax Act, we determined that we were eligible for a refund of our AMT credit carryforward. Accordingly, the valuation allowance related to this AMT credit carryforward has been released in the amount of $632,000, or $0.03 per share. The valuation allowance related to other net deferred tax assets remains. The initial determination of the AMT credit refund was not adjusted for sequestration. Based on guidance the IRS published on March 28, 2018, the AMT tax refund is subject to sequestration (approximately 6.6%). Therefore, the associated deferred tax asset has been reduced at March 31, 2018, for $42,000 for the sequestration. The provisional amount of $0.7 million at December 31, 2017 was based on our understanding of the impact of the Tax Act, which changed in the three months ended March 31, 2018 and may still change as as notices and regulations regarding the Tax Act are issued. We need more time and further guidance to more accurately account for the tax law changes under ASC 740. While we feel confident we have accounted for the other material changes in the tax law correctly, any future notices or regulations further clarifying the law could alter our analysis.
Our estimate of the impact of the Tax Act is based upon our analysis and interpretations of currently available information. Uncertainties remain regarding the impact of the Tax Act due to future regulatory and rule-making processes, prospects of additional corrective or supplemental legislation, and potential trade or other litigation. These uncertainties, along with our completion of the calculations and potential changes in our initial assumptions as new information becomes available, could cause the actual charge to ultimately differ materially from the provisional amount recorded in 2017 related to the enactment of the Tax Act.
Tax years 2014 through 2017 with respect to the Company and our Taxable Subsidiaries are open to future IRS examination. Our Taxable Subsidiaries have federal net operating loss carryforwards of $37.5 million that expire in various years through 2037. Federal and state laws impose limitations on the utilization of capital losses and NOLs in the event of an "ownership" change for tax purposes, as defined by Sections 382 and 383 of the Internal Revenue Code. An ownership change at either the RIC entity or Taxable Subsidiary level, if one were to occur, would limit our ability to use pre-ownership change NOLs to offset post-ownership change taxable income. An ownership change would also limit our ability to use pre-ownership change capital losses to offset post-ownership change capital gains.

Note 6: Commitments and Contingencies

20


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2018
(unaudited)

As of March 31, 2018, we had investments in 19 active portfolio companies totaling $153.9 million. Of these 19 active portfolio companies, the Company had already funded investments in the amount of $152.7 million and there were outstanding unfunded commitments of $1.0 million related to our investment in the ClearChoice revolving credit facility and $1.3 million due to broker on unsettled trades. As of December 31, 2017, we had investments in 14 active portfolio companies totaling $155.7 million. Of these 14 active portfolio companies, the Company had already funded investments in the amount of $155.7 million and there were no remaining outstanding unfunded commitments.
We have continuing obligations under the Investment Advisory Agreement and the Administration Agreement with OHA. See Note 4. The agreements provide that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its duties and obligations, OHA and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with OHA will be entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of services under the agreements or otherwise as our investment advisor or administrator. The agreements also provide that OHA and its affiliates will not be liable to us or any stockholder for any error of judgment, mistake of law, any loss or damage with respect to any of our investments or any action taken or omitted to be taken by OHA in connection with the performance of any of its duties or obligations under the agreements or otherwise as investment advisor or administrator to us, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services. In the normal course of business, we enter into a variety of undertakings containing a variety of representations that may expose us to some risk of loss. We do not expect significant losses, if any, from such undertakings.
Legal Proceedings
From time to time, we are involved in various legal proceedings arising in the normal course of business. While we cannot predict the outcome of these proceedings with certainty, we do not believe that an adverse result in any pending legal proceeding, other than those described below, individually or in the aggregate, would be material to our business, financial condition or cash flows.
ATP Litigation. On August 17, 2012, ATP Oil & Gas Corporation, or ATP, filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. Prior to the bankruptcy filing, we purchased limited term overriding royalty interests, or ORRIs, in certain offshore oil and gas producing properties operated by ATP (generally, the Gomez and Telemark properties). On August 23, 2012, on a motion filed by ATP, the bankruptcy judge presiding over ATP’s case signed an order (Bankr. Dkt. No. 191) requiring ATP to pay amounts received after August 17, 2012 to those parties it believes are entitled to receive them, including the ORRI holders, provided that the ORRI holders execute a disgorgement agreement providing for the repayment of any amounts that the bankruptcy court later finds to have been inappropriately paid. We executed the disgorgement agreement and began receiving monthly distributions in September 2012 from ATP of our share of production proceeds received by ATP after August 17, 2012.
Phase 1. On October 17, 2012, we filed a lawsuit against ATP styled: OHA Investment Corporation v. ATP Oil & Gas Corporation, Adv. Proc. No. 12-03443, in the U.S. Bankruptcy Court for the Southern District of Texas, seeking a declaration that the ORRIs are our property and not property of ATP and that the conveyance and purchase and sale documents are not executory contracts that may be rejected in order to remove or recharacterize our interests in the properties (the “Adversary Proceeding”). Also, certain service companies claiming statutory liens or privileges intervened for the purpose of establishing that their alleged statutory liens and privileges are superior to our rights in the ORRIs and asserting related claims for disgorgement of royalties paid to us by ATP. The issues in the Adversary Proceeding were bifurcated such that the issues of (i) whether the conveyances and transactions between us and ATP constituted outright transfers of ownership and (ii) whether the conveyances are executory contracts or leases that ATP may reject, would be tried first as “Phase 1” of the proceeding. And, any additional claims, including the service company statutory lien claims and related issues, would be decided later in “Phase 2.” Phase 1 of the litigation proceeded into the discovery stage and dispositive motion practice.
On October 17, 2013, the bankruptcy court entered its Final Sale Order approving the sale of the Telemark properties (Bankr. Dkt. No. 2706) to Bennu Oil & Gas, LLC, or Bennu, a newly formed company owned by the DIP Lenders. (The Gomez properties were abandoned by ATP.)
After the bankruptcy case was converted to a case under Chapter 7 of the Bankruptcy Code, we settled Phase 1 of the litigation with the Trustee, Bennu and Credit Suisse AG, as agent to the DIP Lenders (Adv. Dkt. No. 270, 271). On February 4, 2016, an Agreed Final Judgment [Adv. Dkt. No. 276] was entered determining that, among other things, the ORRIs are a real property interest and a “production payment” within the meaning of Sections 101(42A) and 541(b) of the United States Bankruptcy Code. Likewise, our claims against ATP were dismissed without prejudice. The Agreed Judgment resolved Phase 1 of the Adversary Proceeding. It did not address any disputes between us and Bennu or its successors with respect to the proper calculation of the investment balance under the

21


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2018
(unaudited)

terms of the ORRIs, including our legal fees, default interest, or the claims asserted by the statutory lien claimants. Additional detail on Phase 1 and the ATP bankruptcy is set forth in our Form 10Q for the quarter ending March 31, 2016.
Phase 2. On February 3, 2016, we filed our Amended Motion to Dismiss the Complaints in Intervention Filed by the Statutory Lien Claimants, which was subsequently amended [Adv. Dkt. No. 284]. The Amended Motion to Dismiss asserted, among other things, that under the terms of the applicable Louisiana Oil Well Lien Statute, the alleged statutory liens of the lien claimants either cannot attach to overriding royalties, or alternatively, that OHA purchased the ORRIs free and clear of the statutory liens because the lien claimants did not provide notice of the liens as required under the statute. Pursuant to the Memorandum Opinion and the Order, the Court determined that under the Louisiana statute, if we purchased our ORRIs without notice of the lien claimants’ liens, in a bona fide transaction, we would take the ORRIs free and clear of the lien claimants’ rights.
On May 27, 2016, the Intervenors filed their amended complaints, which made new allegations with respect to the issue of notice. Accordingly, on June 9, 2016, we filed our Motion to Dismiss the amended complaints [Adv. Dkt. No. 310] asserting that the allegations regarding notice are insufficient to state a claim under the statute.
On August 19, 2016, the Bankruptcy Court entered its order [Adv. Dkt. No. 325] and its related Report and Recommendation [Adv. Dkt. No. 326] dismissing, with prejudice, the Intervenors’ amended complaints. The Bankruptcy Court’s order and the related Report and Recommendation recommended, to the District Court, that Phase II of the lawsuit be fully resolved in our favor. The Report and Recommendation was docketed in the United States District Court for the Southern District of Texas, Case No. 4:16-CV-02556. On September 2, 2016, certain of the Intervenors filed their Objection to Judge Isgur’s Report and Recommendation [Dist. Dkt. No. 3] arguing that the Bankruptcy Court’s conclusions were erroneous, and that the Intervenors were not required to give notice to OHA in order for their alleged liens to attach. On March 9, 2017, the District Court entered a Memorandum Opinion and Order [Dist. Dkt. No. 17] (the “District Court’s Order”) adopting the Bankruptcy Court’s Report and Recommendation and dismissing the Intervenors’ claims with prejudice.
On April 3, 2017, the Intervenors filed their notice to appeal the District Court’s Order to the United States Court of Appeals for the Fifth Circuit. On April 11, 2017, we filed a notice of (protective) cross appeal in order to preserve our alternative bases for dismissal which were denied by the Bankruptcy Court and District Court. Oral argument was held on February 7, 2018. On April 17, 2018, in Case No. 17-20224, the United States Court of Appeals for the Fifth Circuit affirmed the District Court's opinion dismissing the claims of the Intervenors. On April 30, 2018, the Intervenors filed a Petition for Rehearing En Banc requesting that their appeal be reheard by all of the Fifth Circuit judges, including the panel of three judges that issued the Court’s decision, and that the Court reverse the decision. The Company believes that no valid basis exists for further appellate review. Absent further appellate review, including a grant of the Petition for Rehearing, the Fifth Circuit’s existing decision will conclude the Adversary Proceeding on a final basis.
Status of Investment. As of March 31, 2018, our unrecovered investment was $36.9 million, and we had received aggregate royalty payments of $37.8 million since the date of ATP’s bankruptcy filing. As of March 31, 2018, we had incurred legal and consulting fees totaling $6.4 million in connection with the enforcement of our rights under the ORRIs. On various occasions, we have provided notice that such legal expenses will be added to our unrecovered investment balance to the extent they are not reimbursed. To date, we have not received any payments on account of legal expenses aside from our receipt of regular monthly production payments. As a result, we add our legal expenses to the unrecovered investment balance in accordance with our transaction documents. As of March 31, 2018, $5.4 million of the $6.4 million in legal and consulting fees have been added to, and are thus included in the unrecovered investment balance under the terms of our transaction documents. No legal expenses have been added to our unrecovered investment balance during the three months and three months ended March 31, 2018. We note that the fair value of our investment in ATP ORRI remains at $0 as of March 31, 2018 due to the cessation of monthly production payments beginning in December 2016.
Through March 31, 2018, we received post-petition royalty payments from the Gomez properties and the Telemark properties in the amount of $8.3 million and $0.0 million, respectively. It is estimated that the statutory lien claims asserted by the intervenors in the Adversary Proceeding against our ORRIs are in the principal amount of approximately $35.2 million. At this time, we estimate that there are potential statutory lien claims (including the claims of the intervenors in the Adversary Proceeding, without regard to the validity of such claims) in the principal amount of approximately $54.2 million. To the extent the Fifth Circuit's Order is reversed on appeal, we have or will assert that we have viable defenses with respect to all of the claims of the statutory lien claimants or any other claim which seeks to avoid or disgorge any pre-petition or post-petition royalty payment which we received in respect of the Telemark or Gomez properties. In the event that the Fifth Circuit's Order is reversed on appeal, and to the extent we do not prevail on our defenses to the statutory lien claims or any other claim seeking to avoid or disgorge pre-petition or post-petition royalty payments, we contend that, pursuant to the terms of our transaction documents, we are entitled to include any amounts disgorged on account of any such claims into the unrecovered investment balance of our ORRIs. Moreover, to the extent we do not prevail on our defenses to any

22


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2018
(unaudited)

action brought by the holder of a statutory lien claim, we contend that we would be permitted to seek contribution from other ORRI and net profits interest holders with respect to any disgorged amounts.
The remaining oil and gas reserves associated with the Telemark properties may be insufficient to provide for a full recovery on our investment and in the event the Fifth Circuit's Order is reversed and it is determined that we are not entitled to include amounts disgorged on account of statutory lien claims or other claims, if any, into the unrecovered investment balance of our ORRIs, any disgorged amounts will result in a failure to achieve our anticipated return and/or a loss on our investment.
Please see our discussion of this history of the Bennu Oil and the Gas bankruptcy in the Notes to to the December 31, 2017 consolidated Financial Statements. The Company believes that Statoil is seeking to bring the referenced properties and wells back on line.

Note 7: Fair Value
Our investments consisted of the following as of March 31, 2018 and December 31, 2017:
 
 
March 31, 2018
 
December 31, 2017
(Dollar amounts in thousands)
 
Cost
 
% of total
 
Fair Value
 
% of total
 
Cost
 
% of total
 
Fair Value
 
% of total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Portfolio investments
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

First lien secured debt
 
$
495

 
0.3
%
 
$
495

 
0.6
%
 
$

 
%
 
$

 
%
Revolving loan facility
 
547

 
0.3
%
 
547

 
0.7
%
 

 
%
 

 
%
Second lien debt
 
37,486

 
22.2
%
 
38,428

 
48.0
%
 
29,748

 
16.9
%
 
30,679

 
36.2
%
Subordinated debt
 
28,741

 
17.0
%
 
25,226

 
31.5
%
 
39,265

 
22.4
%
 
33,878

 
39.9
%
Limited term royalties
 
27,845

 
16.5
%
 

 
%
 
27,845

 
15.8
%
 

 
%
Redeemable preferred units
 
56,315

 
33.3
%
 

 
%
 
56,315

 
32.1
%
 

 
%
CLO residual interests
 
19

 
%
 
182

 
0.3
%
 
19

 
%
 
209

 
0.2
%
Equity securities
 
2,500

 
1.5
%
 
162

 
0.2
%
 
2,500

 
1.4
%
 
164

 
0.2
%
Total portfolio investments
 
153,948

 
91.1
%
 
65,040

 
81.3
%
 
155,692

 
88.6
%
 
64,930

 
76.5
%
Government securities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury Bills
 
14,996

 
8.9
%
 
14,996

 
18.7
%
 
19,994

 
11.4
%
 
19,994

 
23.5
%
Total investments
 
$
168,944

 
100.0
%
 
$
80,036

 
100.0
%
 
$
175,686

 
100.0
%
 
$
84,924

 
100.0
%
 
We account for all of the assets in our investment portfolio at fair value, following the provisions of the FASB ASC Fair Value Measurements, or ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
On a quarterly basis, the investment team of our investment advisor prepares fair value recommendations for all of the assets in our portfolio in accordance with ASC 820 and presents them to the Audit Committee of our Board of Directors. The Audit Committee recommends fair values of each asset for which market quotations are not readily available to our Board of Directors, which in good faith determines the final fair value for each investment.
Investment Team Valuation. The investment professionals of our investment advisor prepare fair value recommendations for each investment.
Investment Team Valuation Documentation. The investment team documents and discusses its preliminary fair value recommendations with the investment committee and senior management of our investment advisor.
Third Party Valuation Activity. We may, at our discretion, retain an independent valuation firm to review any or all of the valuation analyses and fair value recommendations provided by the investment team of our investment advisor. Our general practice is that we have an independent valuation firm review all Level 3 investments (those whose value is determined using significant unobservable inputs) with recommended fair values in excess of $10 million on a quarterly basis, and review all

23


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2018
(unaudited)

Level 3 investments with recommended fair values greater than zero at least annually to provide positive assurance on our valuations.
Presentation to Audit Committee. Our investment advisor and senior management present the valuation analyses and fair value recommendations to the Audit Committee of our Board of Directors.
Board of Directors and Audit Committee. The Board of Directors and the Audit Committee review and discuss the valuation analyses and fair value recommendations provided by the investment team of our investment advisor and the independent valuation firm, if applicable.
Final Valuation Determination. Our Board of Directors discusses the fair values recommended by the Audit Committee and determines the fair value of each investment in our portfolio for which market quotations are not readily available, in good faith, based on the input of the investment team of our investment advisor, our Audit Committee and the independent valuation firm, if applicable.
ASC 820 defines fair value as the price that a seller would receive for an asset or pay to transfer a liability in an orderly transaction between independent, knowledgeable and willing market participants at the measurement date. The fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes the use of observable market inputs over unobservable entity-specific inputs. In accordance with ASC 820, we categorize our investments based on the inputs to our valuation methodologies as follows:
Level 1 — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.
Level 2  — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.
Level 3 — Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding what market participants would use to price the asset or liability based on the best available information.
Fair value accounting classifies financial assets and liabilities in their entirety based on the lowest level of input that is significant to the estimated fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment that may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels. We did not have any liabilities measured at fair value at March 31, 2018 or December 31, 2017. Amounts outstanding under our Credit Facility are carried at amortized cost in the Consolidated Balance Sheets. As of March 31, 2018, the estimated fair value of our Credit Facility approximated its carrying value of $35.8 million. As of December 31, 2017, the fair value of our Credit Facility approximated its carry value of $35.8 million. The estimated fair value of the Credit Facility is determined by discounting projected remaining payments using market interest rates for borrowings of the Company.
We occasionally have investments in our portfolio that contain payment-in-kind, or PIK, interest or dividend provisions. We compute PIK interest income or PIK dividend income at the contractual rate specified in each investment agreement, and we add that amount to the principal balance of the investment. For investments with PIK interest or PIK dividends, we calculate our income accruals on the principal balance plus any PIK amounts. If the portfolio company’s projected cash flows, further supported by estimated total enterprise value, are not sufficient to cover the contractual principal and interest or dividend amounts, as applicable, we do not accrue PIK interest income or PIK dividend income on the investment. To maintain our RIC status, we must pay out this non-cash income to stockholders in the form of distributions, even though we have not yet collected the cash. We recorded net PIK interest income of $1.0 million and $0.8 million in the three months ended March 31, 2018 and 2017, respectively. We did not record PIK dividend income from our investment in Castex Energy 2005, LP. for the three months ended March 31, 2018, and 2017, respectively. During the first quarter of 2017, we placed our investment in Castex on non-accrual status based on our March 31, 2017 valuation, which reflected a determination that future payments received from this investment will no longer be sufficient to cover all of the contractual principal and dividend amounts on this investment.

24


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2018
(unaudited)

The following tables set forth the fair value of our investments by level within the fair value hierarchy as of March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
Portfolio investments
 
 

 
 

 
 

 
 

Affiliate investments
 
 
 
 
 
 
 
 
Subordinated debt
 
$
18,015

 
$

 
$

 
$
18,015

Equity securities
 
162

 

 

 
162

Total affiliate investments
 
18,177

 

 

 
18,177

Non-affiliate investments
 
 
 
 
 
 
 
 
First lien secured debt
 
495

 

 

 
495

Second lien debt
 
38,428

 

 
38,428

 

Subordinated debt
 
7,211

 

 
7,211

 

Limited term royalties
 

 

 

 

Redeemable preferred units
 

 

 

 

CLO residual interests
 
182

 

 

 
182

Revolving Loan Facility
 
547

 

 

 
547

Total non-affiliate investments
 
46,863

 

 
45,639

 
1,224

Total portfolio investments
 
65,040

 

 
45,639

 
19,401

Government securities
 
 
 
 
 
 
 
 
U.S. Treasury Bills
 
14,996

 
14,996

 

 

Total investments
 
$
80,036

 
$
14,996

 
$
45,639

 
$
19,401

 
December 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
Portfolio investments
 
 

 
 

 
 

 
 

Affiliate investments
 
 

 
 

 
 

 
 

Subordinated debt
 
$
18,015

 
$

 
$

 
$
18,015

Equity securities
 
164

 

 

 
164

Total affiliate investments
 
18,179

 

 

 
18,179

Non-affiliate investments
 
 

 
 

 
 

 
 

First lien secured debt
 

 

 

 

Second lien debt
 
30,679

 

 
30,679

 

Subordinated debt
 
15,863

 

 
15,863

 

Limited term royalties
 

 

 

 

Redeemable preferred units
 

 

 

 

CLO residual interests
 
209

 

 

 
209

Total non-affiliate investments
 
46,751

 

 
46,542

 
209

Total portfolio investments
 
64,930

 

 
46,542

 
18,388

Government securities
 
 

 
 

 
 

 
 

U.S. Treasury Bills
 
19,994

 
19,994

 

 

Total investments
 
$
84,924

 
$
19,994

 
$
46,542

 
$
18,388



25


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2018
(unaudited)

The following tables present roll-forwards of the changes in fair value for all investments for which we determine fair value using unobservable (Level 3) factors for the periods indicated (in thousands):
 
 
First
Lien Secured
Debt and
Limited Term
Royalties
 
Revolving Loan Facility
 
Second
Lien Debt
 
Subordinated
Debt and
Redeemable
Preferred Units
 
Equity
Securities
 
CLO Residual Interests
 
Total
Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2018
Fair value at December 31, 2017
 
$

 
$

 
$

 
$
18,015

 
$
164

 
$
209

 
$
18,388

Total gains, (losses) and amortization:
 
 
 
 
 
 
 
 
 
 
 
 
Net realized losses
 

 

 

 

 

 

 

Net unrealized gains (losses)
 

 

 

 
(1,004
)
 
(2
)
 
(27
)
 
(1,033
)
Net amortization of premiums, discounts and fees
 
(5
)
 
(16
)
 

 
16

 

 

 
(5
)
New investments, repayments and settlements, net:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New investments
 
500

 
563

 

 

 

 

 
1,063

PIK
 

 

 

 
988

 

 

 
988

Repayments and settlements
 

 

 

 

 

 

 

Fair value at March 31, 2018
 
$
495

 
$
547

 
$

 
$
18,015

 
$
162

 
$
182

 
$
19,401

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net change in unrealized gains (losses) from investments still held as of reporting date:
March 31, 2018
 
$

 
$

 
$

 
$
(1,004
)
 
$
(2
)
 
$
(27
)
 
$
(1,033
)
March 31, 2017
 

 

 
(5
)
 
(21,299
)
 
(244
)
 
149

 
(21,399
)

26


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2018
(unaudited)

 
 
 
Second
Lien Debt
 
Subordinated
Debt and
Redeemable
Preferred Units
 
Equity
Securities
 
CLO Equity
 
Total
Investments
 
 
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2017
Fair value at December 31, 2016
 
$
9,137

 
$
49,340

 
$
686

 
$
1,773

 
$
60,936

Total gains, (losses) and amortization:
 
 

 
 

 
 

 
 
 

Net realized gains (losses)
 

 

 

 

 

Net unrealized gains (losses)
 
(5
)
 
(21,299
)
 
(244
)
 
149

 
(21,399
)
Net amortization of premiums, discounts and fees
 
5

 
15

 

 

 
20

New investments, repayments and settlements, net:
 

 

 

 

 

New investments
 

 

 

 

 

PIK
 

 
1,445

 

 

 
1,445

Repayments and settlements
 

 

 

 
(457
)
 
(457
)
Fair value at March 31, 2017
 
$
9,137

 
$
29,501

 
$
442

 
$
1,465

 
$
40,545

 
 
 
 
 
 
 
 
 
 
 
During the three and three months ended March 31, 2018 and 2017, none of our investments in portfolio companies changed among the categories of Control Investments, Affiliate Investments and Non-Affiliate Investments, and there were no transfers among Levels 3, 2 or 1.
We present net unrealized gains (losses) on our consolidated statements of operations as “Net unrealized appreciation (depreciation) on investments.”

27


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2018
(unaudited)

The following table summarizes the significant unobservable inputs in the fair value measurements of our Level 3 investments by category of investment and valuation technique as of March 31, 2018 (dollars in thousands):
 
Type of Investment
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range of Inputs
 
Weighted Average
 
 
 
 
 
 
 
 
 
 
 
Non-Energy Investments:
 
 
 
 
 
 
 
 
 
 
First lien debt
 
$
495

 
Private transaction comparables
 
EBITDA multiples
 
10.6x - 13.3x
 
10.4x
 
 
 
 
 
 
 
 
 
 
 
Subordinated debt
 
18,015

 
Market comparables
 
EBITDA multiples
 
7.3x - 15.2x
 
13.0x
 
 
 
 
 
 
 
 
 
 
 
CLO residual interest
 
182

 
Net asset value with discount rate
 
Discount rate
 
15.0%
 
15.0%
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
162

 
Market comparables
 
EBITDA multiples
 
6.0x - 7.0x
 
6.5x
 
 
 
 
 
 
 
 
 
 
 
Revolving Loan Facility
 
547

 
Market comparables
 
Precedent transaction
 
N/A
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
 
19,401

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy Investments:
 
 
 
 
 
 
 
 
 
 
Redeemable preferred units
 

 
Estimated recovery analysis
 
Residual value(1)
 

 

 
 
 
 

 

 

 

 
 

 
 
 

 

 

 
 
 
 
 
 
 
 
 
 
 
Total Level 3 investments
 
$
19,401

 
 
 
 
 
 
 
 
____________________________________
(1) On October 16, 2017, Castex announced that it (together with certain affiliates) had filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. According to the filing, Castex and its affiliates in bankruptcy have entered into a restructuring support agreement ("RSA") with pre-petition lenders holding approximately 86% in principal amount of claims under the pre-petition credit facility. The RSA outlines a plan of reorganization for Castex and its affiliates in bankruptcy. As currently proposed, the RSA does not provide for any recovery to the holder of the preferred limited partnership units of Castex, including those preferred limited partnership unit holders who have exercised their put rights. OHAI is not a party to the RSA and is exploring all available options in and out of bankruptcy for recovery on its investment in Castex. At this time we are unable to determine the value of a recovery, if any, resulting from the settlement which will be dependent upon the ultimate pool of unsecured claims. Therefore, until we are in a position to determine the value and likelihood of a recovery, we continue to estimate $0 fair market value of our investment in Castex at March 31, 2018 for financial statement purposes.
As noted above, the income and market approaches were used in the determination of fair value of certain Level 3 assets as of March 31, 2018. The significant unobservable inputs used in the income approach are the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying investment, which include future principal and interest payments. An increase in the discount rate or market yield would result in a decrease in the fair value. The significant unobservable inputs used in the market approach are based on market comparable transactions and market multiples of publicly traded comparable companies. Increases or decreases in market multiples would result in an increase or decrease, respectively in the fair value.



28


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2018
(unaudited)

Note 8: Common Stock
On October 31, 2011, our Board of Directors approved a stock repurchase plan, pursuant to which we may, from time to time, repurchase up to $10.0 million of our common stock in the open market at prices not to exceed the net asset value of our shares. During 2012 and 2013, we repurchased an aggregate of 1,129,014 shares of our common stock in the open market at an average price of $6.71 per share, totaling $7.6 million, in accordance with the stock repurchase plan. These repurchases were made at approximate discounts to our most recently published net asset value of 30%, 26% and 28% in May and November 2012 and May 2013, respectively.
In March 2015, our Board of Directors authorized the Company to repurchase up to the remaining $2.4 million available to be repurchased under this plan. As of July 14, 2015, we completed the stock repurchases under the stock repurchase plan. During 2015, we repurchased a total of 444,030 shares for $2.4 million at a weighted average price of $5.46 per share, a 27% discount to net asset value at December 31, 2014. Repurchases initiated after March 31, 2015 were made pursuant to a plan executed in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Our current Credit Facility does not allow us to repurchase common stock.
Note 9: Subsequent Events
On May 7, 2018, the Board declared a quarterly distribution of $0.02 per share payable on July 9, 2018 to holders of record as of June 30, 2018.


29



Item 2. Management’s Discussion and Analysis of Financ