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EX-32.2 - EXHIBIT 32.2 - Hancock Park Corporate Income, Inc.hpci2017q2ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Hancock Park Corporate Income, Inc.hpci2017q2ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Hancock Park Corporate Income, Inc.hpci2017q2ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Hancock Park Corporate Income, Inc.hpci2017q2ex31-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2017
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
COMMISSION FILE NUMBER: 814-01185
 
HANCOCK PARK CORPORATE INCOME, INC.
(Exact name of registrant as specified in its charter)  
 
Maryland
81-0850535
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
10 S. Wacker Drive, Suite 2500
Chicago, Illinois 60606
(Address of principal executive offices)
 
(847) 734-2000
(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  ☒     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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer

Accelerated filer

 
 
 
 
Non-accelerated filer
☒  (do not check if a smaller reporting company)
Smaller reporting company

 
 
 
 
Emerging growth company



 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No  ☒
 
The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of August 9, 2017 was 470,057.



HANCOCK PARK CORPORATE INCOME, INC.
 
TABLE OF CONTENTS
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2
Item 3.
Item 4.
Item 5.
Item 6.



2


Defined Terms
We have used "we," "us," "our", "our company", and "the Company" to refer to Hancock Park Corporate Income, Inc. in this report. We also have used several other terms in this report, which are explained or defined below:
1940 Act
Investment Company Act of 1940, as amended
Administration Agreement
Administration agreement between the Company and OFS Services, dated July 15, 2016
Advisers Act
The Investment Advisers Act of 1940
Annual Distribution Requirement
Distributions to our stockholders, for each taxable year, of at least 90% of our ICTI
ASC
Accounting Standards Codification, as issued by the FASB
ASC Topic 820
ASC Topic 820, "Fair Value Measurement"
ASU
Accounting Standards Updates, as issued by the FASB
BDC
Business Development Company under the 1940 Act
Board
The Company's board of directors
CLO
Collateralized Loan Obligation
Code
Internal Revenue Code of 1986, as amended
Evolv
Evolv Capital Advisors LLC, a registered investment adviser under the Advisers Act, and sub-adviser to the Company
Expense Support Agreement
Expense support and conditional reimbursement agreement dated July 15, 2016, between the Company and OFS Advisor
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
Funding I
OFS Funding I, LLC, a wholly-owned subsidiary of OFSAM and an affiliate of OFS Advisor
GAAP
Accounting principles generally accepted in the United States
ICTI
Investment company taxable income, which is generally net ordinary income plus net short-term capital gains in excess of net long-term capital losses
Investment Advisory Agreement
Investment advisory and management agreement between the Company and OFS Advisor, dated July 15, 2016
Investment Sub-Advisory Agreement
Investment sub-advisory agreement between the Company, OFS Advisor, and Evolv, dated July 15, 2016
LIBOR
London Interbank Offered Rate
Offering
Continuous offering of up to $200,000,000 of shares of the Company's common stock
OFS Advisor
OFS Capital Management, LLC, a wholly-owned subsidiary of OFSAM and registered investment advisor under the Advisers Act
OFS Capital
 OFS Capital Corporation
OFS Services
OFS Capital Services, LLC, a wholly-owned subsidiary of OFSAM and affiliate of OFS Advisor
OFSAM
Orchard First Source Asset Management, LLC, an established investment platform focused on meeting the capital needs of middle-market companies
RIC
Regulated investment company under the Code
SEC
U.S. Securities and Exchange Commission
Securities Act
U.S. Securities Act of 1933, as amended


3


Forward-Looking Statements

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

our lack of long-term and extensive experience operating a BDC or maintaining our status as a RIC under the Code;
our dependence on key personnel;
our ability to maintain or develop referral relationships;
the ability of OFS Advisor, to identify, invest in and monitor companies that meet our investment criteria;
actual and potential conflicts of interest with OFS Advisor and other affiliates of OFSAM;
constraint on investments due to access to material nonpublic information;
restrictions on our ability to enter into transactions with our affiliates;
the use of borrowed money to finance a portion of our investments;
competition for investment opportunities;
our ability to qualify and maintain our qualification as a RIC and as a BDC;
our ability to raise capital as a BDC;
the timing, form and amount of any distributions from our portfolio companies;
the impact of a protracted decline in the liquidity of credit markets on our business;
the general economy and its impact on the industries in which we invest;
uncertain valuations of our portfolio investments; and
the effect of new or modified laws or regulations governing our operations.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include, among others, those described or identified in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.

We have based the forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to consult any additional disclosures that we may make directly to you or through reports that we may file with the SEC in the future, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended.
The following should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.

4


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Hancock Park Corporate Income, Inc.
Balance Sheets
 
 
June 30,
2017
 
December 31, 2016
 
 
(unaudited)
 
 
Assets:
 
 

 
 

Non-control/non-affiliate investments at fair value (amortized cost of $1,075,211 and $98,500, respectively)
 
$
1,075,003

 
$
98,652

Cash and cash equivalents
 
1,999,893

 
974,310

Interest receivable
 
2,863

 
647

Due from investment adviser under expense limitation agreements, net (see Note 3)
 
218,339

 
167,526

Deferred offering costs
 
2,095

 
2,427

Subscriptions receivable
 
2,512,500

 
58,200

Prepaid expenses and other assets
 
11,967

 
70,559

Total assets
 
$
5,822,660

 
$
1,372,321

 
 
 
 
 
Liabilities:
 
 

 
 

Administrative fee payable
 
$
112,538

 
$
95,520

Payable for investment purchased
 

 
98,500

Accrued professional fees
 
127,613

 
123,808

Distribution payable
 
38,753

 

Accrued expenses
 
8,199

 
9,466

Total liabilities
 
287,103

 
327,294

 
 
 
 
 
Commitments and contingencies ($2,023,769 and $1,416,431, respectively; see Note 3 and 5)
 
 
 
 
 
 
 
 
 
Net assets:
 
 
 
 
Common stock, par value of $0.001 per share; 20,000,000 shares authorized as of June 30, 2017, and December 31, 2016; 230,024 and 74,084 shares issued and outstanding as of June 30, 2017, and December 31, 2016, respectively; 186,079 and 4,301 shares subscribed as of June 30, 2017, and December 31, 2016, respectively
 
416

 
78

Paid-in capital in excess of par
 
5,535,349

 
1,044,797

Unrealized (depreciation) appreciation on investments
 
(208
)
 
152

Total net assets
 
5,535,557

 
1,045,027

 
 
 
 
 
Total liabilities and net assets
 
$
5,822,660

 
$
1,372,321

 
 
 
 
 
Number of shares outstanding or subscribed
 
416,103

 
78,385

Net asset value per share
 
$
13.30

 
$
13.33

 
See Notes to Financial Statements.

5


Hancock Park Corporate Income, Inc.
Statement of Operations (unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017

2016
 
2017

2016
Investment income
 
 
 
 
 

 
 

Investment income
$
19,708


$


$
22,937


$

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Organization costs


124,596




272,802

Amortization of deferred offering costs
125,301




244,211



Contractual issuer expenses (see Notes 2 and 3)
13,938


49,424


28,244


101,521

Management fees
2,828



 
3,992

 

Administrative fees
98,561



 
166,229

 

Professional fees
98,305


43,500

 
269,733

 
43,500

General and administrative expenses
65,145


8,550

 
112,792

 
8,550

Total operating expenses
404,078


226,070

 
825,201

 
426,373

Less: Expense limitation under agreements with adviser (see Notes 2 and 3)
(360,727
)

(174,020
)
 
(793,581
)
 
(374,323
)
Net operating expenses
43,351


52,050

 
31,620

 
52,050

Net investment loss
(23,643
)

(52,050
)
 
(8,683
)
 
(52,050
)
Net change in unrealized depreciation/appreciation on non-control/non-affiliate investments
(880
)



(360
)


Net decrease in net assets resulting from operations
$
(24,523
)

$
(52,050
)

$
(9,043
)
 
$
(52,050
)
 
 
 
 
 
 
 
 
Net investment loss per common share – basic and diluted
$
(0.13
)
 
$
(5,205
)
 
$
(0.07
)
 
$
(7,436
)
Net decrease in net assets resulting from operations per common share – basic and diluted
$
(0.14
)

$
(5,205
)
 
$
(0.07
)
 
$
(7,436
)
Distributions declared per common share
$
0.26

 
$

 
$
0.52

 
$

Basic and diluted weighted average shares outstanding or subscribed
179,560


10

 
131,459

 
7


See Notes to Financial Statements.


6


Hancock Park Corporate Income, Inc.
Statement of Changes in Net Assets (unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
Decrease in net assets resulting from operations:
 
 
 

Net investment loss
$
(8,683
)
 
$
(52,050
)
Net change in unrealized appreciation/depreciation on investments
(360
)
 

Net decrease in net assets resulting from operations
(9,043
)
 
(52,050
)
 
 
 
 
Distributions to stockholders from:
 
 
 
Accumulated net investment income (see Note 6)
(60,469
)
 

Total distributions to stockholders
(60,469
)
 

 
 
 
 
Common stock transactions:
 
 
 

Common stock issued or subscribed
4,560,042

 

Net increase in net assets resulting from capital transactions
4,560,042

 

Net increase (decrease) in net assets
4,490,530

 
(52,050
)
 
 
 
 
Net assets:
 

 
 

Beginning of period
1,045,027

 
150

End of period
$
5,535,557

 
$
150

 
 

 
 

Common stock activity:
 

 
 

   Number of shares outstanding, beginning of period
74,084

 
10

   Shares issued
155,940

 

   Number of shares subscribed, end of period
186,079

 

   Number of shares outstanding or subscribed at end of period
416,103

 
10

 
See Notes to Financial Statements.


7


Hancock Park Corporate Income, Inc.
Statement of Cash Flows (unaudited)
 
 
Six Months Ended June 30,
 
 
2017
 
2016
Cash flows from operating activities
 
 
 
 
Net decrease in net assets resulting from operations
 
$
(9,043
)
 
$
(52,050
)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash
used in operating activities
 
 
 
 
Unrealized appreciation on investments
 
(360
)
 

Amortization of discounts on investments
 
836

 

Amortization of deferred offering costs
 
8,368

 

Deferral of offering costs reimbursed to adviser
 
(8,036
)
 

Purchase of portfolio investments
 
(1,188,768
)


Proceeds from principal payments on portfolio investments
 
114,393

 

Changes in operating assets and liabilities:
 
 
 
 
Interest receivable
 
(2,216
)
 

Due from investment adviser under expense limitation agreements, net
 
(50,813
)
 

Administrative fee payable
 
17,018

 

Other assets and liabilities
 
58,380

 

Net cash used in operating activities
 
(1,060,241
)

(52,050
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Proceeds from issuance of common stock
 
2,107,540

 
150

Distributions paid to stockholders
 
(21,716
)
 

Net cash provided by (used in) financing activities
 
2,085,824

 
150

 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
1,025,583

 
(51,900
)
Cash and cash equivalents at beginning of period
 
974,310

 

Cash and cash equivalents at end of period
 
$
1,999,893

 
$
150

 
 
 
 


Supplemental disclosure of cash flow information:
 
 
 
 
Organization and offering costs, and contractual issuer expenses paid by investment adviser and its affiliates (see Notes 2 and 3)
 
$
91,186

 
$
117,801

Amortization of deferred offering costs limited by investment adviser (see Notes 2 and 3)
 
235,843

 


See Notes to Financial Statements.

8

Hancock Park Corporate Income, Inc.
Schedule of Investments
June 30, 2017

Portfolio Company
Investment Type (1)
 
Industry
 
Interest Rate (2)
 
Spread Above Index (2)
 
Maturity
 
Principal
Amount
 
Amortized Cost
 
Fair Value
 
Percent of
Net Assets
Non-control/Non-affiliate Investments
 
 
 
 
 
 
 
 
 
 
 
 
BJ's Wholesale Club, Inc.

Warehouse Clubs and Supercenters


















Senior Secured Loan



8.71%

(L +7.50%)

2/3/2025

$
200,000


$
198,389


$
196,080


3.5
%





















Confie Seguros Holdings II Co.

Insurance Agencies and Brokerages


















Senior Secured Loan



11.05%

(L +9.75%)

5/8/2019

150,000


150,000


148,125


2.7






















Constellis Holdings, LLC

Other Justice, Public Order, and Safety Activities


















Senior Secured Loan



6.30%

(L +5.00%)

4/21/2024

25,000


24,756


24,871


0.4

Senior Secured Loan



10.30%

(L +9.00%)

4/21/2025

50,000


49,267


49,627


0.9











75,000


74,023


74,498


1.3

Rack Merger Sub Inc

Packaging Machinery Manufacturing


















Senior Secured Loan



8.42%

(L +7.25%)

10/3/2022

186,667


181,867


184,566


3.3






















Resource Label Group, LLC

Commercial Printing (except Screen and Books)


















Senior Secured Loan



5.80%

(L +4.50%)

5/26/2023

71,429


70,723


70,747


1.3

Senior Secured Loan



8.80%

(L +8.50%)

11/26/2023

178,571


175,920


175,952


3.2











250,000


246,643


246,699


4.5

TravelCLICK, Inc.

Computer Systems Design and Related Services


















Senior Secured Loan



8.98%

(L +7.75%)

11/8/2021

150,606


150,320


150,606


2.7



















Truck Hero, Inc.

Truck Trailer Manufacturing















Senior Secured Loan



9.41%

(L +8.25%)

4/21/2025

58,600


57,731


58,125


1.1

Senior Secured Loan



5.16%

(L +4.00%)

4/21/2024

16,400


16,238


16,304


0.3











75,000


73,969


74,429


1.4

Total Investments









$
1,087,273


$
1,075,211


$
1,075,003


19.4
%
(1)
All of the Company’s investments were qualifying assets under Section 55(a) of the 1940 Act as of the period end. Qualifying assets must represent at least 70% of the Company's assets, as defined under Section 55 of the 1940 Act, at the time of acquisition of any additional non-qualifying assets.
(2)
The investments bear interest at rates that are determined by reference to LIBOR (L), and which are reset monthly or quarterly. The Company has provided the spread over LIBOR and current interest rate in effect at June 30, 2017.

9

Hancock Park Corporate Income, Inc.
Schedule of Investments
December 31, 2016


Portfolio Company
Investment Type (1)
 
Industry
 
Interest Rate (2)
 
Spread Above Index (2)
 
Maturity
 
Principal
Amount
 
Amortized Cost
 
Fair Value
 
Percent of
Net Assets
Non-control/Non-affiliate Investment
 
 
 
 
 
 
 
 
 
 
 
 
TravelCLICK, Inc.
 
Computer Systems Design and Related Services
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Secured Loan
 
 
 
8.75%
 
(L +7.75%)
 
11/8/2021
 
$
100,000

 
$
98,500


$
98,652

 
9.4
%
(1)
The Company’s investment was a qualifying asset under Section 55(a) of the 1940 Act as of the period end. Qualifying assets must represent at least 70% of the Company's assets, as defined under Section 55 of the 1940 Act, at the time of acquisition of any additional non-qualifying assets.
(2)
The investment bears interest at a rate that determined by reference to LIBOR (L), which is reset monthly. This investment was also subject to a LIBOR interest rate floor; LIBOR was below the LIBOR interest rate floor on this investment at December 31, 2016. The Company has provided the spread over LIBOR and current interest rate in effect at December 31, 2016.


10

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 



Note 1. Organization
Hancock Park Corporate Income, Inc. is a Maryland corporation formed on December 8, 2015, as an externally managed, non-diversified, closed-end investment company. The Company has elected to be regulated as a BDC under the 1940 Act and as a RIC under Subchapter M of the Code.
The Company’s objective is to provide stockholders with current income and capital appreciation through its strategic investment focus primarily on debt investments and, to a lesser extent, equity investments primarily in middle-market companies principally in the United States. OFS Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company. OFS Advisor, an affiliate of the Company, a registered investment adviser, and a subsidiary of OFSAM, serves as investment adviser to the Company, and Evolv, a registered investment adviser, serves as sub-adviser to the Company. OFS Advisor also serves as the investment adviser to CLO funds and other assets, including OFS Capital. OFS Capital is a publicly traded BDC with an investment strategy similar to the Company's.
The Company intends to raise up to $200,000,000 through the Offering, in reliance on exemptions from the registration requirements of the Securities Act. Placement activities are conducted by the Company’s officers and OFS Advisor. In addition, the Company has entered and may enter into additional agreements with placement agents or broker-dealers to solicit investor capital commitments (“Capital Commitments”). In particular, the Company and OFS Advisor have entered into a dealer manager agreement with International Assets Advisory, LLC and certain participating broker-dealers to solicit Capital Commitments. Fees and expenses paid pursuant to these agreements will be paid in part by the Company and in part by OFS Adviser. On August 30, 2016, Funding I purchased 74,074 shares of the Company’s common stock in the Offering for gross proceeds of $1,000,000 (the "Minimum Offering Requirement"), or $13.50 per share. No selling commissions or dealer manager fees were paid by the Company in connection with this purchase.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of presentation: The Company prepares its financial statements in accordance with GAAP, including ASC Topic 946, Financial Services–Investment Companies, the 1940 Act, Articles 6 or 10 of Regulation S-X, and the requirements for reporting on Form 10-Q. In the opinion of management, the financial statements include all adjustments, consisting only of normal and recurring accruals and adjustments, necessary for fair presentation have been made. Certain amounts in the prior period financial statements have been reclassified to conform to the current year presentation. These financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
Investments: The Company applies fair value accounting in accordance with GAAP. ASC Topic 820 defines fair value, establishes a framework to measure fair value, and requires disclosures regarding fair value measurements. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is determined through the use of models and other valuation techniques, valuation inputs, and assumptions market participants would use to value the investment. Highest priority is given to prices for identical assets quoted in active markets (Level 1) and the lowest priority is given to unobservable valuation inputs (Level 3). The availability of observable inputs can vary significantly and is affected by many factors, including the type of product, whether the product is new to the market, whether the product is traded on an active exchange or in the secondary market, and the current market conditions. To the extent that the valuation is based on less observable or unobservable inputs, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for financial instruments classified as Level 3 (i.e., those instruments valued using non-observable inputs), which comprise the entirety of the Company’s investments.
Changes to the valuation policy are reviewed by management and the Company’s Board. As the Company’s investments change, markets change, new products develop, and valuation inputs become more or less observable, the Company will continue to refine its valuation methodologies.
See Note 4 for more detailed disclosures of the Company’s fair value measurements of its financial instruments.
The Company classifies its investments in accordance with the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in those companies in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of board representation, “Affiliate Investments” are defined as investments in those companies in which the Company owns between 5% and 25% of the voting securities, and “Non-Control/Non-Affiliate Investments” are those that neither qualify as Control Investments nor Affiliate Investments.
Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the

11

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Reportable segments: The Company has a single reportable segment and single operating segment structure.
Cash and cash equivalents: Cash and cash equivalents consist of cash and highly liquid investments not held for resale with original maturities of three months or less. The Company’s cash and cash equivalents are maintained with a member bank of the FDIC and at times, such balances may be in excess of the FDIC insurance limits. Included in cash and cash equivalents was $1,999,893 and $947,312 as of June 30, 2017 and December 31, 2016, respectively.
Organization costs: Organization costs include, among other things, legal fees related to the: organization of the Company, its related documents of organization, and its initial operating agreements; independent audit of the Company’s seed-stage financial statements; and expenses related to its election to be treated as a BDC. Organization costs are charged to expense as incurred. The Investment Advisory Agreement limits the Company's liability for, and recognition of, organization costs, as discussed below and in Note 3.
Offering costs: Offering costs include legal, accounting, printing and other expenses pertaining to the preparation of the Offering; the related dealer-manager agreement; and other underwriting expenses, which include permissible due diligence reimbursements to the dealer-manager and participating broker-dealers. Offering costs incurred prior the commencement of the Offering on July 18, 2016, were deferred and then amortized on a straight-line basis over twelve months from July 18, 2016. All offering costs incurred subsequent to July 18, 2016, are deferred and amortized over a twelve month period from the date incurred. Amortization of deferred offering costs for the six months ended June 30, 2017 and 2016, was $244,211 and $-0-, respectively. The Investment Advisory Agreement limits the Company's liability for offering costs, and the related amortization expense, as discussed below and in Note 3.
Deferred offering costs as of June 30, 2017, and December 31, 2016, are as follows:
 
 
June 30, 2017
 
December 31, 2016
Total deferred offering costs
 
$
69,759

 
$
256,333

Deferred offering costs limitation under Investment Advisory Agreement (see below and Note 3)
 
(67,664
)
 
(253,906
)
Deferred offering costs recognized by the Company
 
$
2,095

 
$
2,427

Expense limitation agreements and contractual issuer expenses: The Company benefits from two expense limitation agreements with OFS Advisor: (i) portions of the Investment Advisory Agreement, and (ii) Expense Support Agreement, which limits all other operating expenses.
The Investment Advisor Agreement contains provisions limiting the Company's obligation to recognize and pay (i) organization and offering costs, and (ii) other contractually-defined costs pertaining to the Company's organization and the Offering, including (a) costs associated with technology integration between the Company’s systems and those of its participating broker-dealers; (b) marketing expenses, which includes development of marketing materials and marketing presentations, training and educational meetings, and generally coordinating the marketing process for the Company; and (c) the salaries and direct expenses of OFS Advisor’s employees, employees of their affiliates and others while engaged in organization, offering, and these other contractually-defined activities (the costs included in items (a) through (c) referred to as "Contractual Issuer Expenses").
The Expense Support Agreement is intended to limit all other operating expenses not separately limited under the Investment Advisory Agreement such that no distribution by the Company is deemed to be a return of capital contributed by its stockholders. However, such distributions may still be characterized as a return of capital for U.S. federal income tax purposes. See Note 3.
The initial effect of expense limitation agreements are recognized reductions in gross expenses in the statement of operations, and elimination of associated assets and liabilities in the balance sheet in the period of limitation. Liability for the reimbursement of amounts, and the associated expense or deferred expense, are recognized as the substantive conditions for reimbursement are satisfied.
Revenue recognition:
Interest Income: Interest income is recorded on an accrual basis and reported as interest receivable until collected. Interest income is accrued daily based on the outstanding principal amount and the contractual terms of the debt investment. Certain of

12

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


the Company’s investments may contain a payment-in-kind interest income provision (“PIK interest”). The PIK interest, computed at the contractual rate specified in the applicable investment agreement, is added to the principal balance of the investment, rather than being paid in cash, and recorded as interest income, as applicable, on the statements of operations. The Company discontinues accrual of interest income, including PIK interest, when there is reasonable doubt that the interest income will be collected.
Loan origination fees, original issue discount (“OID”), market discount or premium, and loan amendment fees (collectively, “Net Loan Fees”) are recorded as an adjustment to the amortized cost of the investment, and accreted or amortized as an adjustment to interest income over the life of the respective debt investment using a method that approximates the effective interest method. When the Company receives a loan principal payment, the unamortized Net Loan Fees related to the paid principal are accelerated and recognized in interest income.
Further, the Company may acquire or receive equity, warrants or other equity-related securities (“Equity”) in connection with the Company’s acquisition of, or subsequent amendment to, debt investments. The Company determines the cost basis of Equity based on their fair value, and the fair value of debt investments and other securities or consideration received. Any resulting difference between the face amount of the debt and its recorded cost resulting from the assignment of value to the Equity is treated as OID, and accreted into interest income as described above.
Dividend Income: Dividend income on common stock, generally payable in cash, is recorded at the time dividends are declared. Dividend income on preferred equity securities is accrued as earned. Dividends on preferred equity securities may be payable in cash or in additional preferred securities, and are generally not payable unless declared or upon liquidation. Declared dividends payable in cash are reported as dividend receivables until collected. Dividends payable in additional preferred securities or contractually earned but not declared (“PIK dividends”) are recorded as an adjustment to the cost basis of the investment. The Company discontinues accrual of PIK dividends on preferred equity securities when there is reasonable doubt that the dividend income will be collected.
Net Realized and Unrealized Gain or Loss on Investments: Investment transactions are reported on a trade-date basis. Unsettled trades as of the balance sheet date are included in payable for investments purchased on the balance sheets. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of the investment. Investments are valued at fair value as determined in good faith by Company management under the supervision and review of the Board. After recording all appropriate interest, dividend, and other income, some of which is recorded as an adjustment to the cost basis of the investment as described above, the Company reports changes in the fair value of investments as net changes in unrealized appreciation/depreciation on investments in the statements of operations.
Non-accrual loans: When there is reasonable doubt that principal, cash interest, PIK interest, or dividends will be collected, loans or preferred equity investments are placed on non-accrual status and the Company will generally cease recognizing cash interest, PIK interest, Net Loan Fee amortization, or dividend income, as applicable. When an investment is placed on non-accrual status, all interest and dividends previously accrued but not collected, other than PIK interest or dividends that has been contractually added to the adjusted cost basis of the investment prior to the designation date, is reversed against current period interest and dividend income. Interest and dividend payments subsequently received on non-accrual investments may be recognized as income or applied to principal depending upon management’s judgment. Interest or dividend accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal, interest or dividends and when, in the judgment of management, the investments are estimated to be fully collectible as to all principal, interest or dividends.
Income taxes: The Company has elected to be treated, and intends to qualify annually, as a RIC under Subchapter M of the Code. To qualify as a RIC, the Company must, among other things, meet certain source of income and asset diversification requirements, and timely distribute at least 90% of its ICTI to its stockholders. The Company has made, and intends to continue to make, the requisite distributions to its stockholders, which generally relieves the Company from U.S. federal income taxes.
Depending on the level of ICTI earned in a tax year, the Company may choose to retain ICTI in an amount less than that which would trigger federal income tax liability under Subchapter M of the Code. However, the Company would be liable for a 4% excise tax on such income. Excise tax liability is recognized when the Company determines its estimated current year annual ICTI exceeds estimated current year distributions.
The Company may utilize wholly-owned holding companies taxed under Subchapter C of the Code when making equity investments in portfolio companies taxed as pass-through entities to meet its source-of-income requirements as a RIC. These “tax blocker” entities will be consolidated in the Company’s GAAP financial statements and may result in federal income tax expense with respect to income derived from those investments. Such income, net of applicable federal income tax, will not be included in the Company’s tax-basis net investment income until distributed by the holding company, which may result in temporary differences and character differences between the Company’s GAAP and tax-basis net investment income and

13

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


realized gains and losses. Federal income tax expense recognized by such holding-company subsidiaries will be included in general and administrative expenses in the statements of operations.
The Company evaluates tax positions taken in the course of preparing its tax returns to determine whether they are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold could result in greater and undistributed ICTI, income and excise tax expense, and, if involving multiple years, a re-assessment of the Company’s RIC status. GAAP requires recognition of accrued interest and penalties related to uncertain tax benefits as income tax expense. There were no uncertain income tax positions at June 30, 2017 and December 31, 2016. The current and prior tax year remain subject to examination by U.S. federal and most state tax authorities.
Common stock subscriptions: Common stock subscriptions received in cash prior to the issuance of the Company’s financial statements are reported as subscription receivable with corresponding amounts reported in common stock and paid-in capital in excess of par.
Distributions: Distributions to common stockholders are recorded on the declaration date. The timing of distributions as well as the amount to be paid out as a distribution is determined by the Board each quarter. Distributions from net investment income and net realized gains are determined in accordance with the Code. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment. Distributions paid in excess of taxable net investment income and net realized gains are considered returns of capital to stockholders.
Concentration of credit risk: Aside from its debt instruments, financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits at financial institutions. At various times during the year, the Company may exceed the federally insured limits. To mitigate this risk, the Company places cash deposits only with high credit quality institutions. Management believes the risk of loss is minimal.
New accounting standards: The following tables discuss recently issued ASUs by the FASB adopted (or yet to be adopted) by the Company during 2017:
Standard
 
Description
 
Period of Adoption
 
Effect of Adoption on the financial statements
Standards that were adopted
 
 
 
 
 
 
ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)
 
Incorporates into the FASB ASC Topic 250, SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on the financial statements of recently issued accounting standards when adopted, and specifically for ASU 2014-09, ASU 2016-02, and ASU 2016-03. If a registrant does not know or cannot reasonably estimate the impact of adoption of the above standards, the SEC staff expects the registrant to make a statement to that effect. Consistent with SAB Topic 11.M, the SEC staff also expects the registrant to provide qualitative disclosures to help users assess the significance the adoption will have on the financial statements. In addition, conforms the SEC Staff comments included in ASU 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for investments in Qualified Affordable Housing Projects. The primary effect of the amendment was to change the reference "effective yield method" to "proportional amortization method"
 
First Quarter of 2017
 
No material impact to the Company's financial statements


14

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


Standard
 
Description
 
Effect of Adoption on the the financial statements
Standards that are not yet adopted
 
 
ASU 2014-09, Revenue from Contracts with Customers 
 
Supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of the standard is to recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard defines a five step process to achieve this core principle. The standard must be adopting using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures)
 
In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09, such that the guidance is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is not permitted. The Company has completed its initial evaluation phase and has determined the impact of its pending adoption of ASU 2014-09 is not expected to have a material effect on the Company's financial statements.
ASU 2016-01, Financial Instruments – Overall
 
Modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value, and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820 - Fair Value Measurement, and as such these investments may be measured at cost
 
Annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is required to record its investments at fair value with changes in fair value recognized in net income in accordance with ASC Topic 946, Financial Services—Investment Companies. Therefore, the adoption of ASU 2016-01 is not expected to have a material effect on the Company’s financial statements
ASU 2016-15, Statement of Cash Flows
 
Addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows
 
Annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. The Company is currently evaluating the impact of this ASU will have on the Company's financial position and disclosures.
ASU 2016-19, Technical Corrections and Improvements
 
Makes minor corrections and clarifications that affect a wide variety of topics in the Accounting Standards Codification, including an amendment to ASC Topic 820, which clarifies the difference between a valuation approach and a valuation technique when applying the guidance of that Topic. The amendment also requires an entity to disclose when there has been a change in either or both a valuation approach and/or a valuation technique. The transition guidance for the ASC Topic 820 amendment must be applied prospectively because it could potentially involve the use of hindsight that includes fair value measurements
 
Annual reporting periods beginning after December 15, 2017, including interim periods within those years. Early application is permitted for any fiscal year or interim period for which the entity’s financial statements have not yet been issued. The Company is currently evaluating the impact this ASU will have on the Company’s financial position or disclosures
ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
 
Amends certain narrow aspects of ASU 2014-09, including loan guarantee fees, impairment testing of contract costs, provisions for losses on construction-type and production type contracts, advertising costs, scope exception clarifications, and various disclosures
 
The effective date and transition requirements are the same as the effective date and transition requirements for ASU 2014-09 and is not expected to have a material effect on the Company's financial statements.

15

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


Standard
 
Description
 
Effect of Adoption on the the financial statements
Standards that are not yet adopted
 
 
ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 620-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
 
Defines "insubstance nonfinancial asset", unifies guidance related to partial sales of nonfinancial assets, eliminates rules specifically addressing sales of real estate, removes exceptions to the financial asset derecognition model, and clarifies the accounting for contributios of nonfinancial assets to joint ventures
 
The effective date and transition requirements are the same as the effective date and transition requirements for ASU 2014-09 and is not expected to have a material effect on the Company's financial statements.
Note 3.  Related Party Transactions
Investment Advisory and Management Agreement: OFS Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company pursuant to an Investment Advisory Agreement, which became effective on August 30, 2016, when the Company satisfied the Minimum Offering Requirement. Under the terms of the Investment Advisory Agreement, which are in accordance with the 1940 Act and subject to the overall supervision of the Company’s Board, OFS Advisor is responsible for sourcing potential investments, conducting research and diligence on potential investments and equity sponsors, analyzing investment opportunities, structuring investments, and monitoring investments and portfolio companies on an ongoing basis. OFS Advisor is a subsidiary of OFSAM and a registered investment advisor under the Advisers Act.
OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to us and OFS Advisor is free to furnish similar services to other entities, including other BDCs affiliated with OFS Advisor, so long as its services to us are not impaired. OFS Advisor also serves as the investment adviser to CLO funds and other assets, including OFS Capital, a publicly traded BDC with an investment strategy similar to the Company.
OFS Advisor receives fees for providing services, consisting of two components: a base management fee and an incentive fee. From August 30, 2016, the effective date of the Investment Advisory Agreement, through May 19, 2017, the base management fee was calculated at an annual rate of 2.0% and based on the average value of the Company’s total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) at the end of the two most recently completed calendar quarters, adjusted for any share issuances or repurchases during the quarter. On May 19, 2017, OFS Advisor agreed to permanently reduce the base management fee from 2.0% per annum to 1.25% per annum. The sub-adviser will continue to receive the amount of management fees allocated to it pursuant to the Investment Sub-Advisory Agreement, subject to the reduced base management fee.
The base management fee is payable quarterly in arrears and was $2,828 and $3,992, for the three and six months ended June 30, 2017, respectively. The Company did not incur a base management fee during the three and six months ended June 30, 2016.
The incentive fee has two parts. The first part ("Part One") is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination and sourcing, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest or dividend feature (such as OID, debt instruments with PIK interest, equity investments with accruing or PIK dividend and zero coupon securities), accrued income that the Company has not yet received in cash.
Pre-incentive fee net investment income is expressed as a rate of return on the value of the Company’s net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter. The incentive fee with respect to pre-incentive fee net income is 100.0% of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 1.75% (which is 7.0% annualized) “hurdle rate” but is less than 2.1875% (or 8.75% annually), referred to as the “catch-up” provision, and 20.0% of the amount of pre-incentive fee net investment income, if any, that exceeds 2.1875%. The “catch-up” is

16

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


meant to provide OFS Advisor with 20.0% of the pre-incentive fee net investment income as if a hurdle rate did not apply if this pre-incentive fee net investment income exceeds 2.1875% in any calendar quarter.
Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter in which the Company incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that quarter due to realized and unrealized capital losses. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the base management fee. These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during such quarter.
The second part ("Part Two") of the incentive fee (the “Capital Gain Fee”) will be determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and will equal 20.0% of the Company’s aggregate realized capital gains, if any, on a cumulative basis through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation through the end of such year, less all previous amounts paid in respect of the Capital Gain Fee.
The Company accrues the Capital Gain Fee if, on a cumulative basis, the sum of net realized capital gains and (losses) plus net unrealized appreciation and (depreciation) is positive. If, on a cumulative basis, the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation) decreases during a period, the Company will reverse any excess Capital Gain Fee previously accrued such that the amount of Capital Gains Fee accrued is no more than 20% of the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation).
Unless terminated earlier as described below, the Investment Advisory Agreement will remain in effect for a period of two years from August 30, 2016, and will remain in effect from year-to-year thereafter if approved annually by the Company’s board of directors or by the affirmative vote of the holders of a majority of the Company’s outstanding voting securities, and, in either case, if also approved by a majority of the Company’s directors who are not “interested persons” as defined in the 1940 Act. The Investment Advisory Agreement will automatically terminate in the event of its assignment, as defined in the 1940 Act, and may be terminated by the Company or OFS Advisor without penalty upon not less than 60 days’ written notice to the other. The holders of a majority of our outstanding voting securities may also terminate the Investment Advisory Agreement without penalty upon not less than 60 days’ written notice.
Investment Sub-Advisory Agreement: Evolv serves as the Company’s sub-adviser pursuant to the Investment Sub-Advisory Agreement, which became effective on August 30, 2016, when the Minimum Offering Requirement was satisfied. Evolv assists OFS Advisor with the management of the Company’s activities and operations. On an annualized basis, Evolv earns 20% of the fees paid by the Company to OFS Advisor under the Investment Advisory Agreement with respect to each year, which, when due, are payable by OFS Advisor to Evolv quarterly in arrears. In addition, certain registered representatives of Evolv are also representatives of the dealer manager of the Offering.
Unless terminated earlier as described below, the Investment Sub-Advisory Agreement will remain in effect for a period of two years from August 30, 2016, and will remain in effect from year-to-year thereafter if approved annually by the Company’s board of directors, including a majority of the Company’s directors who are not interested persons, or by the affirmative vote of the holders of a majority of the Company’s outstanding voting securities. The Investment Sub-Advisory Agreement may be terminated at any time by Evolv upon not less than 60 days’ prior written notice to the Company and OFS Advisor, or by the Company or OFS Advisor upon not less than 60 days’ prior written notice to Evolv and upon (i) the vote of a majority of the Company's outstanding voting securities or (ii) the vote of a majority of the Company’s board of directors, including a majority of the independent directors. The Investment Sub-Advisory Agreement will automatically terminate in the event of its assignment. For the three year period following termination of the Investment Sub-Advisory Agreement, other than for cause, as such term is defined in the Investment Sub-Advisory Agreement, Evolv will be entitled to receive from OFS Advisor a percentage (up to 20%) of the management fee and incentive fees received by OFS Advisor with respect to every quarter in such three-year period.
Administration Agreement: OFS Services, a wholly-owned subsidiary of OFSAM, furnishes the Company with office facilities and equipment, necessary software licenses and subscriptions, and clerical, bookkeeping and record keeping services at such facilities pursuant to the Administration Agreement. Under the Administration Agreement, OFS Services performs, or oversees the performance of, the Company’s required administrative services, which include being responsible for the financial records that the Company is required to maintain and preparing reports to its stockholders and all other reports and materials required to be filed with the SEC or any other regulatory authority. In addition, OFS Services assists the Company in determining and publishing its net asset value, oversees the preparation and filing of its tax returns and the printing and dissemination of reports to its stockholders, and generally oversees the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. Under the Administration

17

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


Agreement, OFS Services also provides managerial assistance on the Company’s behalf to those portfolio companies that have accepted the Company’s offer to provide such assistance. Payment under the Administration Agreement is equal to an amount based upon the Company’s allocable portion of OFS Services’s overhead in performing its obligations under the Administration Agreement, including, but not limited to, rent, information technology services and the Company’s allocable portion of the cost of its officers, including its chief executive officer, chief financial officer, chief compliance officer, chief accounting officer, and their respective staffs. To the extent that OFS Services outsources any of its functions, the Company will pay the fees associated with such functions on a direct basis without profit to OFS Services. Amounts charged under the Administration Agreement exclude Contractual Issuer Expenses.
Administrative fees were $98,561 and $166,229 for the three and six months ended June 30, 2017, respectively. The Company did not incur an administrative fee for the three and six months ended June 30, 2016, respectively.
Expense Limitation Agreements: OFS Advisor limits the Company's incurred expenses under two agreements: the Investment Advisory Agreement, which contains provisions limiting organization and offering costs, and Contractual Issuer Expenses; and an Expense Support Agreement, which limits all other operating expenses. Expense limitations provided under the Investment Advisory Agreement and Expense Support Agreement for the three and six months ended June 30, 2017 and 2016, are presented below:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017

2016
 
2017

2016
Organization and offering costs, and Contractual Issuer Expenses limitations under Investment Advisory Agreement
 
$
76,844


$
174,020

 
$
203,303


$
374,323

Operating expense limitations under Expense Support Agreement
 
283,883



 
590,278



Total expense limitations under agreements with OFS Advisor
 
$
360,727

 
$
174,020

 
$
793,581

 
$
374,323

The Company is conditionally obligated to reimburse OFS Advisor for aggregate expense support provided of $2,023,770 and $1,416,431 at June 30, 2017, and December 31, 2016, respectively, as presented below:
 
 
June 30, 2017
 
December 31, 2016
Unreimbursed costs under Investment Advisory Agreement:
 
 
 
 
Organization costs
 
$
357,911

 
$
378,535

Offering costs:
 
 
 
 
Unamortized as of balance sheet date
 
67,664


253,906

Amortized as of balance sheet date
 
397,282

 
199,211

Contractual Issuer Expenses
 
203,683

 
177,827

Unreimbursed operating expense support under Expense Support Agreement
 
997,230

 
406,952

Total conditional reimbursement obligation under expense limitation agreements with OFS Advisor
 
$
2,023,770

 
$
1,416,431

At June 30, 2017, the Company was due $218,339 from OFS Advisor under the Expense Support Agreement, net of $2,828 owed for management fees and $62,714 owed under the reimbursement provisions of the Investment Advisory Agreement. The conditional reimbursement provisions of the Investment Advisory Agreement and Expense Support Agreement are discussed below.
Organization and Offering Costs, and Contractual Issuer Expense Limitations : OFS Advisor and its affiliates have incurred aggregate organizational and offering costs, and Contractual Issuer Expenses related to the Company of $1,111,260 and $1,025,379 as of June 30, 2017, and December 31, 2016, respectively. The Company is conditionally liable for these costs under the terms of the Investment Advisory Agreement. Additionally, management expects OFS Advisor and its affiliates will continue to incur offering costs on behalf of the Company throughout the Offering. OFS Advisor and its affiliates have paid an aggregate of $975,303 and $884,117 in cash for organizational and offering costs related to the Company as of June 30, 2017, and December 31, 2016, respectively. The Investment Advisory Agreement entitles OFS Advisor to receive up to 1.5% of the gross proceeds raised in the Offering until all reimbursable organization and offering costs paid by OFS Advisor and its affiliates have been recovered. Organization and offering expenses incurred by OFS Advisor or its affiliates will be eligible for reimbursement for three years from the date incurred. The Company has recognized aggregate liability for reimbursement of

18

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


organizational and offering costs to OFS Advisor of $84,720, and $900 as of June 30, 2017, and December 31, 2016, respectively. These liabilities are generally settled on a net basis with management fees and amounts due to or due from OFS Advisor under the Expense Limitation Agreement.
Unreimbursed organization and offering costs, and Contractual Issuer Expenses as of June 30, 2017, are summarized below:
Period incurred
 
Organization
Costs
 
Offering
Costs
 
Contractual Issuer Expenses
 
Unreimbursed
Total
Period from December 8 (inception) through December 31, 2015
 
$
36,092

 
$
88,098

 
$
1,071

 
$
125,261

Three months ended March 31, 2016
 
148,206

 
133,495

 
52,097

 
333,798

Three months ended June 30, 2016
 
124,596

 
94,163

 
49,424

 
268,183

Three months ended September 30, 2016
 
47,038

 
76,508

 
54,222

 
177,768

Three months ended December 31, 2016
 
1,979

 
15,045

 
18,625

 
35,649

Three months ended March 31, 2017
 

 
36,206

 
14,306

 
50,512

Three months ended June 30, 2017
 
$


$
21,431


$
13,938


$
35,369

Total unreimbursed organization and offering costs, and Contractual Issuer Expenses
 
$
357,911

 
$
464,946

 
$
203,683

 
$
1,026,540

Expense Support Agreement: The Expense Support Agreement is designed to ensure no portion of the Company’s distribution to stockholders will be paid from its Offering proceeds, and provides for expense-reduction payments from OFS Advisor to the Company in any quarterly period in which the Company’s cumulative distributions to stockholders exceeds its cumulative distributable ordinary income and net realized gains ("Cumulative Taxable Income"). Cumulative distributions to stockholders may exceed Cumulative Taxable Income to the extent of cumulative tax-basis return-of-capital distributions received by the Company from its investments without resulting in an expense limitation payment from OFS Advisor. The Expense Support Agreement provides for reimbursement of these payments by the Company to OFS Advisor, however, such liability shall only accrue (i) to the extent they do not cause the then-current annualized year-to-date and quarterly "Other Operating Expense Ratio" (defined below) to exceed such ratios for the annual and quarterly periods, respectively, for which the Company will reimburse OFS Advisor as presented in the table below, and (ii) if the then-current annualized rate of distribution per share equals or exceeds the annualized rate of distribution per share of the supported period for which the Company will reimburse OFS Advisor. The Other Operating Expense Ratio is defined as total operating expenses reported in the statement of operations excluding interest expense, management fees, incentive fees, organization cost, amortization of deferred offering costs, and Contractual Issuer Expenses as a percentage of net assets. Payments under the Expense Support Agreement will be eligible for reimbursement for three years from the date accrued.
OFS Advisor voluntarily agreed to provide expense support for operating expenses, excluding organization and operating expenses, which are separately supported under the Investment Advisory Agreement, incurred from inception through September 30, 2016, and the three months ended December 31, 2016, and to only seek reimbursement for such voluntary expense support in accordance with the Expense Support Agreement as if such expense support had been required by the Expense Support Agreement in connection with a distribution at an annualized rate of 7.0% per share.

19

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


Unreimbursed support for operating expenses provided under the Expense Support Agreement as of June 30, 2017, is summarized below:
 
 
 
 
Other Operating Expense Ratio
 
 
Supported period
 
Amount of expense limitation
 
Annualized for the quarter limitation was provided
 
Annual for year limitation was provided
 
Annualized rate of distribution per share
Three months ended September 30, 2016
 
$
237,837

 
75.2%
 
102.7%
 
7.0%(1)
Three months ended December 31, 2016
 
169,115

 
64.3%
 
102.7%
 
7.0%(1)
Three months ended March 31, 2017
 
306,395

 
82.0%
 
n/m(2)
 
7.0%
Three months ended June 30, 2017
 
283,883

 
19.0%
 
n/m(2)
 
7.0%
Total unreimbursed operating expense limitations provided under Expense Support Agreement
 
$
997,230

 
 
 
 
 
 
(1)
Agreed-upon annualized distribution rate per share for the purposes of determining reimbursement eligibility. No distribution was actually declared or paid from inception through September 30, 2016, or during the three months ended December 31, 2016.
(2)
Not meaningful. Annual Other Operating Expense Ratio upon which reimbursement is conditioned is based on the full-year results, and will not be determined until after December 31, 2017.
Note 4. Fair Value of Financial Instruments
The Company’s investments are valued at fair value as determined in good faith by Company management under the supervision, and review and approval of the Board. These fair values are determined in accordance with a documented valuation policy and a consistently applied multi-step valuation process as described below:
For each debt investment, a basic credit risk rating review process is completed. The risk rating on every credit facility is reviewed and either reaffirmed or revised by OFS Advisor’s investment committee.
Each portfolio company or investment is valued by OFS Advisor.
The preliminary valuations are documented and are then submitted to OFS Advisor’s investment committee for ratification.
Third-party valuation firm(s) provide valuation services as requested, by reviewing the investment committee’s preliminary valuations. OFS Advisor’s investment committee’s preliminary fair value conclusions on each of the Company’s assets for which sufficient market quotations are not readily available are reviewed and assessed by a third-party valuation firm at least once in every 12-month period, and more often as determined by the audit committee of the Company’s Board or required by the Company’s valuation policy. Such valuation assessment may be in the form of positive assurance, range of values or other valuation method based on the discretion of the Company’s Board.
The audit committee of the Board reviews the preliminary valuations of OFS Advisor’s investment committee and independent valuation firms and, if appropriate, recommends the approval of the valuations by the Board.
The Company’s Board discusses valuations and determines the fair value of each investment in the portfolio in good faith based on the input of OFS Advisor, the audit committee and, where appropriate, the respective independent valuation firm.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair values are determined with models or other valuation techniques, valuation inputs, and assumptions market participants would use in pricing an asset or liability. Valuation inputs are organized in a hierarchy that gives the highest priority to prices for identical assets or liabilities quoted in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of inputs in the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

20

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


Level 2: Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include: (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived principally from or corroborated by observable market data.
Level 3: Unobservable inputs for the asset or liability, and situations where there is little, if any, market activity for the asset or liability at the measurement date.
The inputs into the determination of fair value are based upon the best information under the circumstances and may require significant management judgment or estimation. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the measurement date. All of the Company’s investments, which are measured at fair value, were categorized as Level 3 based upon the lowest level of significant input to the valuations. The following sections describe the valuation techniques used by the Company to measure different financial instruments at fair value and include the levels within the fair value hierarchy in which the financial instruments are categorized.
Each quarter, the Company assesses whether market quotations, indicative prices from pricing services or bids from brokers or dealers are available, as well as the Company's ability to transact at such quotes, prices or bids. Investments for which sufficient quotes, prices or bids exist and the Company believes such quotes, prices, or bids are actionable, are generally valued consistent with such quote, price, or bid. The Company periodically corroborates the quotes, prices, and bids it sees in the market, as applicable, against the actual prices at which the Company purchases its investments and/or through other valuation techniques, such as the discounted cash flow method described below. Based on the corroborating analysis and the experience of the Company’s management in purchasing and selling these investments, the Company believes that these quotes, prices or bids can be reliable indicators of fair. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), and the non-binding nature of the quotes, prices or bids received, the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy.
In the absence of sufficient and actionable market quotations, indicative prices or bids, the primary method used to estimate the fair value of the Company's debt investments is the discounted cash flow method. However, if there is deterioration in credit quality or a debt investment is in workout status, the Company may consider other methods in determining the fair value, including the value attributable to the debt investment from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis. The discounted cash flow approach to determine fair value (or a range of fair values) involves applying an appropriate discount rate(s) to the estimated future cash flows using various relevant factors depending on investment type, including the latest arm’s length or market transactions involving the subject security, a benchmark credit spread or other indication of market yields, and company performance. The valuation based on the inputs determined to be the most reasonable and probable is used as the fair value of the investment. The determination of fair value using these methodologies may take into consideration a range of factors including, but not limited to, the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment and anticipated financing transactions after the valuation date.
Application of this valuation methodology involves a significant degree of judgment by management. Fair values of new investments or investments where an arm’s length transaction occurred in the same security are generally assumed to be equal to their cost (“Transaction Price”) for up to three months after their initial purchase.
Due to the inherent uncertainty of determining the fair value of Level 3 investments, the fair value of the investments may differ significantly from the values that would have been used had a ready market or observable inputs existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other restrictions, or otherwise are less liquid than publicly traded instruments. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, the Company might realize significantly less than the value at which such investment had previously been recorded. The Company’s investments are subject to market risk. Market risk is the potential for changes in the value due to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments are traded.
The following table provides quantitative information about the Company’s significant Level 3 fair value input to the Company’s fair value measurement as of June 30, 2017, and December 31, 2016. In addition to the technique and input noted in the tables below, according to the Company’s valuation policy, the Company may also use other valuation techniques and

21

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


methodologies when determining the Company’s fair value measurements. The table below is not intended to be exhaustive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements.
 
Fair Value at June 30, 2017 (1)
 
Valuation technique
 
Unobservable input
 
Range
(Weighted average)
Senior secured loans
$
714,494


Discounted cash flow

Discount rate

6.86%-11.76% (10.09%)
 
212,386


Market quotes

Indicative broker/ dealer quotes

99.42%-97.06% (97.24%)
(1)
Excludes a $148,123 senior secured debt investment valued at a Transaction Price.
 
Fair Value at
December 31,
2016
 
Valuation technique
 
Unobservable input
 
Range
(Weighted average)
Senior secured loan
$
98,652

 
Discounted cash flow
 
Discount rate
 
10.40%-10.40% (10.40%)
Changes in market credit spreads or the credit quality of the underlying portfolio company (both of which could impact the discount rate), among other things, could have a significant impact on debt fair value. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.
The following tables present changes in the investment measured at fair value using Level 3 inputs for the six months ended June 30, 2017:
 
Senior Secured Loans
Level 3 assets, January 1, 2017
$
98,652

 
 
Net change in unrealized appreciation/depreciation on investments
(360
)
Amortization of Net Loan Fees
836

Purchase of portfolio investments
1,090,268

Proceeds from principal payments on portfolio investments
(114,393
)
 
 
Level 3 assets, June 30, 2017
$
1,075,003

The net change in unrealized appreciation for the six months ended June 30, 2017, reported in the Company’s statements of operations attributable to the Company’s Level 3 asset held at period end was $(360).
GAAP requires disclosure of the fair value of financial instruments for which it is practical to estimate such value and the methods and significant assumptions used to estimate fair value. GAAP excludes from this requirement non-financial assets and liabilities. Accordingly, the required fair value disclosures provide only a partial estimate of the fair value of the Company. The Company believes that the carrying amounts of its other financial instruments such as cash, receivables and payables approximate the fair value of such items due to the short maturity of such instruments.
Note 5. Commitments and Contingencies
From time to time, the Company is involved in legal proceedings in the normal course of its business. Although the outcome of such litigation cannot be predicted with any certainty, management is of the opinion, based on the advice of legal counsel, that final disposition of any litigation should not have a material adverse effect on the financial position of the Company as of June 30, 2017.
Additionally, the Company is subject to periodic inspection by regulators to assess compliance with applicable regulations related to being a BDC.
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide general indemnifications. The Company’s maximum exposure under these arrangements is

22

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


unknown, as this would involve future claims that may be made against the Company that have not occurred. The Company believes the risk of any material obligation under these indemnifications to be low.
Note 6. Federal Income Tax
The Company has elected to be taxed as a RIC under Subchapter M of the Code. In order to maintain its status as a RIC, the Company is required to distribute annually to its stockholders at least 90% of its ICTI, as defined by the Code. Additionally, to avoid a 4% excise tax on undistributed earnings the Company will be required to distribute each calendar year the sum of (i) 98% of its ordinary income for such calendar year (ii) 98.2% of its net capital gains for the one-year period ending October 31 of that calendar year, and (iii) any income recognized, but not distributed, in preceding years and on which the Company paid no federal income tax. Maintenance of the Company's RIC status will also require adherence to certain source of income and asset diversification requirements.
The Company has met the required distribution, source of income and asset diversification requirements as of June 30, 2017, and intends to continue to meet these requirements. Accordingly, there is no liability for federal income taxes at the Company level. The Company’s ICTI differs from the net decrease in net assets resulting from operations primarily due to differences in income recognition on the unrealized appreciation of investments, and in expense recognition related to organization costs, amortization of deferred offering costs, Contractual Issuer Expenses, and the related expense support under the Investment Advisory Agreement (together, "Net O&O Costs").
The determination of the tax attributes of the Company’s distributions is made annually as of the end of its fiscal year based upon its ICTI and distributions for the full year. If the tax characteristics of the Company’s $21,716 distributions paid during 2017 were determined as of June 30, 2017, all distributions would be ordinary income.
The Company records reclassifications to its capital accounts related to permanent differences between the GAAP and tax treatment of Net O&O Costs. Reclassifications were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017

2016
 
2017

2016
Paid-in capital in excess of par
$
(62,395
)
 
$

 
$
(69,152
)
 
$

Undistributed net investment income
62,395

 

 
69,152

 

The tax bases of undistributed net investment income, portfolio investments, or net unrealized appreciation on the investments did not differ from their GAAP bases as of June 30, 2017, and December 31, 2016 .

23

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


Note 7. Financial Highlights
The following is a schedule of financial highlights for the three and six months ended June 30, 2017:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2017
Per share data:
 
 
 
 
Net asset value per share at beginning of period
$
13.32


 
$
13.33

Distributions (1)
(0.26
)
 
 
(0.52
)
Net investment loss
(0.13
)

 
(0.07
)
Issuance of common stock (2)
0.37


 
0.56

Net asset value per share at end of period
$
13.30


 
$
13.30

Total return based on net asset value (3)
1.8
 %

 
3.1
 %
Shares issued or subscribed at end of period
416,103

 
 
416,103

Weighted average shares issued or subscribed
179,560


 
131,459

Ratio/Supplemental Data
 
 
 
 
Average net asset value (4)
$
3,476,695


 
$
2,666,139

Net asset value at end of period
$
5,535,557


 
$
5,535,557

Net investment loss
$
(23,643
)

 
$
(8,683
)
Ratio of total operating expenses to average net assets (5)
5.0
 %

 
2.4
 %
Ratio of net investment loss to average net assets (5)
(2.7
)%

 
(0.7
)%
Portfolio turnover
17.3
 %

 
24.1
 %
(1)
The per share data for distributions is the actual amount of distributions declared per share during the period.
(2)
The issuance of common stock on a per share basis reflects the incremental net asset value change as a result of the issuance of shares of common stock in the Company’s continuous public offering and the dilutive or anti-dilutive impact from significant changes in weighted-average shares outstanding during the period.
(3)
Calculation is ending net asset value less beginning net asset value, adjusting for distributions reinvested at the Company’s most recent quarter-end net asset value prior to the respective payment date of the distributions.
(4)
Based on net asset values as the end of the indicated and preceding calendar quarter for three-month period, and net asset values as the end of the indicated and two preceding calendar quarters for six-month period.
(5)
Annualized.
Note 8. Distributions
The following table reflects the cash distributions per share that the Company declared on its common stock during the six months ended June 30, 2017. Stockholders of record as of each respective record date were entitled to receive the distribution.
Date Declared
 
Record Dates
 
Payment Date
 
Amount
Per Share
 
Cash
Distribution
Six Months Ended June 30, 2017
 
 
 
 
 
 
January 31, 2017

January 31, 2017

April 21, 2017

$
0.0875


$
6,859

February 27, 2017

February 28, 2017, March 31, 2017

April 21, 2017

0.0875


14,857

April 25, 2017

April 28, 2017, May 31, 2017, June 30, 2017

July 14, 2017

0.0875


38,753

The above distributions were funded, in part, through the reimbursement of certain operating expenses by OFS Advisor under the Expense Support Agreement. The Expense Support Agreement is designed to ensure no portion of the Company's distribution to stockholders will be paid from Offering proceeds, and will provide for expense reduction payments to the Company in any quarterly period in which the Company's cumulative distributions to stockholders exceeds the Company's cumulative ICTI and net realized gains. The Expense Support Agreement may be terminated by OFS Advisor, without payment of any penalty, with or without notice to the Company.
Note 9. Subsequent Events Not Disclosed Elsewhere
On July 3, 2017, the Company collected $2,512,500 related to subscriptions receivable as of June 30, 2017.

24

Hancock Park Corporate Income, Inc.
Notes to Financial Statements
 


On July 31, 2017, the Board declared a distribution of $0.0875 per common share payable on October 16, 2017 to stockholders of record on each of July 31, 2017, August 31, 2017 and September 29, 2017.

25


Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
    
The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a BDC under the 1940 Act. We were formed on December 8, 2015, as a corporation under the laws of Maryland. Our investment objective is to provide our stockholders with both current income and capital appreciation primarily through debt investments and, to a lesser extent, equity investments. Our investment strategy focuses primarily on investments in middle-market companies in the United States. We use the term “middle-market” to refer to companies that may exhibit one or more of the following characteristics: number of employees between 150 and 2,000; revenues between $15 million and $300 million; annual EBITDA, between $3 million and $50 million; generally, private companies owned by private equity firms or owners/operators; and enterprise value between $10 million and $500 million. For additional information about how we define the middle-market, see "Item 1. Business—Investment Criteria/Guidelines" in our Annual Report on Form 10-K for the year ended December 31, 2016.
While our investment strategy focuses primarily on middle-market companies in the United States, including senior secured loans, which includes first-lien, second-lien and unitranche loans as well as subordinated loans and, to a lesser extent, warrants and other equity securities, we also may invest up to 30% of our portfolio in opportunistic investments of non-eligible portfolio companies. Specifically, as part of this 30% basket, we may consider investments in investment funds that are operating pursuant to certain exceptions to the 1940 Act and in advisers to similar investment funds, as well as in debt of middle-market companies located outside of the United States and debt and equity of public companies that do not meet the definition of eligible portfolio companies because their market capitalization of publicly traded equity securities exceeds the levels provided for in the 1940 Act.
We intend to raise up to $200,000,000 through the Offering, in reliance on exemptions from the registration requirements of the Securities Act. Placement activities are conducted by our officers and OFS Advisor. In addition, the we have entered and may enter into additional agreements with placement agents or broker-dealers to solicit investor capital commitments (“Capital Commitments”). In particular, we and OFS Advisor have entered into a dealer manager agreement with International Assets Advisory, LLC and certain participating broker-dealers to solicit Capital Commitments. Fees and expenses paid pursuant to these agreements will be paid in part by us and in part by OFS Adviser. On August 30, 2016, Funding I, a subsidiary of OFSAM, purchased 74,074 shares of our common stock in the Offering for gross proceeds of $1,000,000 ("Minimum Offering Requirement"), or $13.50 per share. No selling commissions or dealer manager fees were paid by us in connection with this purchase. On May 19, 2017, OFS Advisor agreed to pay the dealer manager fee on subsequent sales of shares of our common stock in the Offering. Payments of dealer manager fees by OFS Advisor are not subject to reimbursement by us. Since commencing operations on August 30, 2016, we have sold a total of 395,973 shares of common stock for total gross proceeds of $5,403,000
Our investment activities are managed by OFS Advisor and supervised by our Board, a majority of whom are independent of us, OFS Advisor and its affiliates. Under the Investment Advisory Agreement we have agreed to pay OFS Advisor an annual base management fee, and an incentive fee based on our investment performance. From August 30, 2016, the effective date of the Investment Advisory Agreement, through May 19, 2017, the base management fee was calculated at an annual rate of 2.0% and based on the average value of our total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) at the end of the two most recently completed calendar quarters, adjusted for any share issuances or repurchases during the quarter. On May 19, 2017, OFS Advisor agreed to permanently reduce the base management fee from 2.0% per annum to 1.25% per annum. Our sub-adviser will continue to receive the amount of management fees allocated to it pursuant to the Investment Sub-Advisory Agreement, subject to the reduced base management fee. OFS Advisor also serves as the investment adviser to CLO funds and other assets, including OFS Capital, a publicly traded BDC with an investment strategy similar to the Company's. Evolv, a registered investment adviser, serves as our sub-adviser pursuant to the Investment Sub-Advisory Agreement.
We have also entered into an Administration Agreement with OFS Services. Under our Administration Agreement, we have agreed to reimburse OFS Services for our allocable portion (subject to the review and approval of our independent directors) of overhead and other expenses incurred by OFS Services in performing its obligations under the Administration Agreement.
As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our assets, as defined by the 1940 Act, are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities

26


exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized in the United States.
We are permitted to borrow money from time to time within the levels permitted by the 1940 Act (which generally allows us to incur leverage for up to 50% of our asset base). We may borrow money when the terms and conditions available are favorable to do so and are aligned with our investment strategy and portfolio composition. The use of borrowed funds or the proceeds of preferred stock to make investments would have its own specific benefits and risks, and all of the costs of borrowing funds or issuing preferred stock would be borne by holders of our common stock.
We have elected to be treated for federal income tax purposes, and intend to qualify annually, as a RIC under the Code. To qualify as a RIC, we must, among other things, meet certain source-of-income and assets diversification requirements. Pursuant to these elections, we generally will not have to pay corporate-level taxes on any income we distribute to our stockholders.
The 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting the BDC to do so. On October 12, 2016, we received exemptive relief from the SEC to permit us to co-invest in portfolio companies with certain other funds managed by OFS Advisor, including OFS Capital (“Affiliated Funds”) in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions (the “Order”). Pursuant to the Order, we are generally permitted to co-invest with Affiliated Funds if a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transactions, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching by us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies. As a result of the exemptive relief, there could be significant overlap in our investment portfolio and the investment portfolios of OFS Capital and/or other funds established by OFS Advisor that could avail themselves of the exemptive relief.
Related Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the following:
We entered into the Investment Advisory Agreement with OFS Advisor to manage our operating and investment activities. Under the Investment Advisory Agreement we have agreed to pay OFS Advisor an annual base management fee based on the average value of our total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) as well as an incentive fee based on our investment performance. See "Item 1–Financial Statements–Note 3".
We entered into the Administration Agreement with OFS Capital Services, an affiliate of OFS Advisor, to provide us with the office facilities and administrative services necessary to conduct our operations. See "Item 1–Financial Statements–Note 3".
OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to us and OFS Advisor is free to furnish similar services to other entities, including other BDCs affiliated with OFS Advisor, so long as its services to us are not impaired. OFS Advisor also serves as the investment adviser to CLO funds and other assets, including OFS Capital, a publicly traded BDC with an investment strategy similar to the Company.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. Critical accounting policies are those that require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact on our current and future financial condition and results of operations.
Our critical accounting policies and estimates are those relating to expense limitation agreements and fair value estimates. Management has discussed the development and selection of each critical accounting policy and estimate with the Audit Committee of the Board of Directors. For descriptions of our revenue recognition and fair value policies, see Note 2 to the financial statements included in "Item 1.–Financial Statements" of this Quarterly Report on Form 10-Q.
Expense limitation agreements. We benefit from two expense limitation agreements with OFS Advisor: portions of the Investment Advisory Agreement, which limit our liability to reimburse OFS Advisor for organization and offering expenses it incurs on our behalf, and the Expense Support Agreement. See "Item 1 – Financial Statements – Note 3."

27


We considered the relevant accounting literature applicable to expense limitation agreements—particularly ASC Topic 946 Subtopic 20 Section 25-4—and related publications by the American Institute of Certified Public Accountants, as well as publicly-available documents on industry practice and the SEC Staff’s views thereon. The application of this accounting literature requires interpretation of the reimbursement conditions in the expense limitation agreements, which requires significant judgment. An agreement whose reimbursement conditions are either non-substantive or whose occurrence is inevitable will generally fail to meet to the requirements of this literature, resulting in greater reported expense, lower reported net asset values, and an on-balance sheet liability to reimburse the agreement counterparty for any funds or support received.
We regularly evaluate the Investment Advisory Agreement’s conditions for reimbursement, and have concluded the expense-reduction recognition it has been given is appropriate because (i) the substantive conditions for recognition of liability by the Company—specifically, the sale of shares from whose proceeds the Advisor will be paid for unreimbursed costs—have not been satisfied, and (ii) the amount of any near-term or ultimate contingent liability for organization and offering costs is not subject to reasonable estimation. In reaching these conclusions we considered the terms of the Investment Advisory Agreement, our experience and the experience of our dealer manager in the distribution channel through which the shares will be sold, current regulatory and other market influences on that channel, and the inherent uncertainty in any forecast of proceeds to be raised in the continuous private placement of our shares.
Fair value estimates. As discussed more fully in "Item 1.–Financial Statements–Note 4" GAAP requires us to categorize financial assets and liabilities carried at fair value according to a three-level valuation hierarchy. The hierarchy gives the highest priority to quoted, active market prices for identical assets and liabilities (Level 1) and the lowest priority to valuation techniques that require significant management judgment because one or more of the significant inputs are unobservable in the market place (Level 3). All of our assets carried at fair value are classified as Level 3; we typically do not hold equity securities or other instruments that are actively traded on an exchange.
As described in "Item 1. – Financial Statements – Note 4", we follow a process, under the supervision and review of the Board, to determine these unobservable inputs used to calculate the fair value of our investments. The most significant unobservable inputs in the fair value measurement is the discount rate and projected cash flows contractually due from the investments.
We consider a variety of factors in our determination of the discount rate to be applied to an investment including, among other things, investment type, LIBOR swap rate, indicative yields from independent third-party sources and the yield on our investment relative to indicative yields at the time of our investment (initial and subsequent investments) in the portfolio company. We also consider developments at the portfolio company since our investment including, but not limited to, trends in the portfolio company’s earnings and leverage multiple, and input from our independent third-party valuation firms. This process typically results in a single selected discount rate for the investment.
The following table illustrates the sensitivity of our fair value measures to reasonably likely changes to the estimated discount rate inputs used in our debt investment valuations at June 30, 2017:
 
Fair Value at June 30, 2017
 
Weighted average discount rate at June 30, 2017
 
Discount rate sensitivity
 
 
-10% Weighted average
 
+10% Weighted average
Senior secured loan
$
714,494

 
10.09%
 
$
726,835

 
$
691,038

The table above presents the impact to our debt-investment fair value accounting measures by uniformly modifying our discount rate valuation input. This table does not present the estimated effect of hypothetical changes in actual, observed interest rates, which would affect the cash flows from many of the underlying investments as they are indexed to LIBOR or the Prime Rate of interest, the operating environment of many of our portfolio companies, and other factors, as well as our estimates of the discount rate valuation input. The effect of hypothetical changes in actual, observed interest rates on our fair value measures is not subject to reasonable estimation.

28


Portfolio Composition and Investment Activity
Portfolio Composition
The following table summarizes the composition of our investment portfolio as of June 30, 2017, and December 31, 2016:
 
June 30, 2017
 
December 31, 2016
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Senior secured debt investments
$
1,075,211


$
1,075,003

 
$
98,500


$
98,652

Total number of portfolio companies
7

 
7

 
1

 
1

At June 30, 2017, the weighted average yield on our debt investment portfolio was 9.25%. The weighted average yield on our debt investments is computed as (a) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of Net Loan Fees divided by (b) amortized cost of our debt investments as of the balance sheet date. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our fees and expenses. There can be no assurance that the weighted average yield will remain at its current level.
As of June 30, 2017, and December 31, 2016, all of our debt investments were floating rate loans.    Our portfolio companies were domiciled in the United States ("U.S.") at June 30, 2017, and December 31, 2016. The following table shows the portfolio composition by U.S. geographic region at amortized cost and fair value and as a percentage of total investments; the geographic composition is determined by the location of the portfolio company's corporate headquarters:
 
Amortized Cost
 
Fair Value
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
South - US
$
320,666

 
29.8
%
 
$

 
%
 
$
321,197

 
29.9
%
 
$

 
%
Northeast - U.S.
530,576

 
49.3

 
98,500

 
100.0

 
531,252

 
49.4

 
98,652

 
100.0

West - U.S.
150,000

 
14.0

 

 

 
148,125

 
13.8

 

 

Midwest - US
73,969

 
6.9

 
 
 
 
 
74,429

 
6.9

 
 
 
 
Total
$
1,075,211

 
100.0
%
 
$
98,500

 
100.0
%
 
$
1,075,003

 
100.0
%
 
$
98,652

 
100.0
%
Investment Activity
During the six months ended June 30, 2017, we purchased nine new senior secured debt investment for $1,090,268,
Our level of investment activity may vary substantially from period to period depending on various factors, including, but not limited to, the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.
We categorize debt investments into seven risk categories based on relevant information about the ability of borrowers to service their debt. For additional information regarding our risk categories, see “Item 1. Business–Portfolio Review/Risk Monitoring” in our Annual Report on Form 10-K for the year ended December 31, 2016. All of our debt investments were classified as a risk category 3 as of June 30, 2017, and December 31, 2016.
Results of Operations
Key Financial Measures
The following is a discussion of the key financial measures that management employs in reviewing the performance of our operations.
Total Investment Income. We generate revenue in the form of interest income on debt investments, capital gains, and dividend income from our equity investments. Our debt investments typically have a term of three to eight years and bear interest at fixed and floating rates. In some cases, our investments provide for deferred interest or dividend payments, PIK interest, or PIK dividends (meaning interest or dividends paid in the form of additional principal amount of the loan or equity security instead of in cash). In addition, we may generate total investment income in the form of commitment, structuring or due diligence fees, fees for providing managerial assistance and consulting fees. Loan origination fees, OID, market discount or premium, and loan amendment fees are capitalized, and accreted or amortized over the life of the loan as interest income. When we receive principal payments on a loan in an amount that exceeds its amortized cost, we will also recognize the excess principal payment as income in the period it is received.

29


Expenses. Our primary operating expenses include professional fees, the payment of fees to OFS Advisor under the Investment Advisory Agreement, our allocable portion of overhead expenses under the Administration Agreement and other operating costs described below. Additionally, we will pay interest expense on any outstanding debt under any new credit facility or other debt instrument we may enter into. We will bear all other out-of-pocket costs and expenses of our operations and transactions, whether incurred by us directly or on our behalf by a third party, including:
the cost of calculating our net asset value, including the cost of any third-party valuation services;
the cost of effecting sales and repurchases of shares of our common stock and other securities;
fees payable to third parties relating to making investments, including out-of-pocket fees and expenses associated with performing due diligence and reviews of prospective investments;
transfer agent and custodial fees;
out-of-pocket fees and expenses associated with marketing efforts;
federal and state registration fees and any stock exchange listing fees;
U.S. federal, state and local taxes;
independent directors’ fees and expenses;
brokerage commissions;
fidelity bond, directors’ and officers’ liability insurance and other insurance premiums;
direct costs, such as printing, mailing and long-distance telephone;
fees and expenses associated with independent audits and outside legal costs;
costs associated with our reporting and compliance obligations under the 1940 Act and other applicable U.S. federal and state securities laws; and
other expenses incurred by either OFS Services or us in connection with administering our business.
Net Gain (Loss) on Investments. Net gain (loss) on investments consists of the sum of: (a) realized gains and losses from the sale of debt or equity securities, or the redemption of equity securities; and (b) changes in net unrealized appreciation/depreciation on debt and equity investments. In the period in which a realized gain or loss is recognized, such gain or loss will generally be offset by the reversal of previously recognized unrealized appreciation or depreciation, and the net gain recognized in that period will generally be smaller. The unrealized appreciation or depreciation on debt securities is also reversed when those investments are redeemed or paid off prior to maturity. In such instances, the reversal on unrealized appreciation or depreciation will be reported as a net loss or gain, respectively, and may be partially offset by the acceleration of any premium or discount on the debt security in interest income and any prepayment fees on the debt security in fee income.
We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the debt securities we acquire, the default rate on such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, distributions from our portfolio companies, the degree to which we encounter competition in our markets and general economic conditions. In light of these factors, results for any period should not be relied upon as being indicative of performance in future periods. Moreover, as a BDC and a RIC, we will also be subject to certain constraints on our operations, including, but not limited to, limitations imposed by the 1940 Act and the Code.
Net increase in net assets resulting from operations can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, annual comparisons of net increase in net assets resulting from operations may not be meaningful.

30


Comparison of the three and six months ended June 30, 2017, and 2016
Investment Income
Investment income for the three and six months ended June 30, 2017 consisted of interest income on our senior secured debt investments and was $19,708 and $22,937, respectively. We purchased our first investment, a senior secured debt investment, in the fourth quarter of 2016, and therefore had no interest income during the three and six months ended June 30, 2016.
Expenses
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017

2016
Organization costs


124,596




272,802

Amortization of deferred offering costs
125,301




244,211



Contractual issuer expenses
13,938


49,424


28,244


101,521

Management fees
2,828




3,992



Professional fees
98,305


43,500


269,733


43,500

Administration fee
98,561




166,229



General and administrative expenses
65,145


8,550


112,792


8,550

Total expenses
$
404,078


$
226,070


$
825,201


$
426,373

Organization Expenses. We incurred organization expenses of $-0- and 124,596 for the three months ended June 30, 2017 and 2016, respectively, and $-0- and $272,802 for the six months ended June 30, 2017 and 2016, respectively. Organization expenses for the three and six months ended June 30, 2016, were comprised of professional fees of our attorneys and independent accountants related to the preparation of our registration statement on Form 10 filed with the SEC and our initial operating agreements, and the audit of our December 31, 2015 financial statements.
Offering Expenses. We incurred offering costs of $21,431 and $94,163 during the three months ended June 30, 2017 and 2016, respectively, and $57,637 and $227,658 during the six months ended June 30, 2017 and 2016, respectively. Offering costs incurred prior to the commencement of the Offering on July 18, 2016, were deferred and then amortized on a straight-line basis over twelve months from July 18, 2016. All offering costs incurred subsequent to July 18, 2016, are deferred and amortized over a twelve month period from the date incurred. Offering costs for the three and six months ended June 30, 2017, were for legal fees incurred related to ordinary due diligence, and non-recurring legal fees related to establishing agreements with clearing broker-dealers to permit their custody of our common stock and developing distribution platforms for our common stock. Offering costs for the three and six months ended June 30, 2016, consist of professional fees of attorneys and others related to the preparation of our private placement memorandum and our dealer-manager agreement, due diligence activities, and fees related to development of marketing plans and materials for our common stock.
Organization and offering costs for the three and six months ended June 30, 2016, include $60,000 and $120,000, respectively, for costs incurred by OFS Advisor to an affiliate of Evolv for consulting services prior to Evolv’s appointment as sub-adviser to us. On July 18, 2016, OFS Advisor and the affiliate of Evolv terminated their consulting agreement.
Amortization of offering costs was $125,301 and $244,211 for the three and six months ended June 30, 2017, respectively. There was no amortization of offering costs prior to July 18, 2016, the commencement of our continuous offering. The payment of offering costs and incurrence of amortization expense related to offering costs is subject to limitation under the Investment Management Agreement; see "—Expense Limitations", below.
Contractual Issuer Expenses. We incurred Contractual Issuer Expenses of $13,938 and $49,424 for the three months ended June 30, 2017 and 2016, respectively, and $28,244 and $101,521 for the six months ended June 30, 2017 and 2016, respectively, related to salaries and direct expenses of personnel of OFS Advisor and its affiliates directly involved in the activities enumerated above in organization expenses and offering expenses.
Administrative Fees. We incurred administrative fees of $98,561 and $166,229 for the three and six months ended June 30, 2017, primarily related to accounting and record-keeping services, and preparation and filing of required periodic reports with the SEC. We did not incur administrative fees during the three months ended March 31, 2016, because the the Administrative Agreement did not become effective until August 30, 2016.
Professional Fees. We incurred professional fees of $98,305 and $43,500 for the three months ended June 30, 2017 and 2016, respectively, and $269,733 and $43,500 for the six months ended June 30, 2017 and 2016, respectively. Professional

31


fees during 2017 primarily consist of fees from our attorneys and independent accountants related to the preparation and filing of required periodic reports with the SEC. Professional fees incurred in the three and six months ended June 30, 2016, related to our organization and offering activities as discussed above.
General and Administrative Expenses. We incurred general and administrative expenses of $65,145 and $8,550 for the three months ended June 30, 2017 and 2016, respectively, and $112,792 and $8,550 for the six months ended June 30, 2017 and 2016, respectively. General and administrative expenses during 2017 primarily consist of board fees and insurance costs.
Expense Limitations. All organization and offering expenses, and Contractual Issuer Expenses for the three and six months ended June 30, 2017, have been limited to $62,395 and $69,152, respectively, under the terms of the Investment Advisory Agreement. We reimbursed OFS Advisor $18,515 and $23,013 in organization costs and Contractual Issuer Expenses during the three and six months ended June 30, 2017, respectively, which reduced other expense limitations for that period and resulted in net recognition of expense. We also reimbursed OFS Advisor $44,200 and $45,807 in offering costs during the three and six months ended June 30, 2017, respectively, of which $36,833 and $37,771, respectively, was amortized at the time of reimbursement, and reduced the expense limitations for that period and resulted in net recognition of expense. The remaining $7,367 and $8,036 was unamortized at the time of reimbursement and is reported as deferred offering costs on the balance sheet from where it continues to amortize in accordance with its original amortization period, and is not subject to further limitation under expense limitation agreements with OFS Advisor. Organization and offering expenses and Contractual Issuer Expenses were limited to $-0- prior to July 18, 2016. The net effect of expense limitations under the Investment Advisory Agreement is presented below.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017

2016
Gross aggregate organization costs, amortization of deferred offering costs, and Contractual Issuer Expenses reported in operating expenses
 
$
139,239


$
174,020


$
272,455


$
374,323

Reimbursement of organization costs
 
(16,414
)


 
(20,624
)


Reimbursement of amortized offering costs
 
(36,833
)



(37,771
)


Amortization of reimbursed deferred offering costs
 
(7,047
)



(8,368
)


Reimbursement of Contractual Issuer Expenses
 
(2,101
)



(2,389
)


Organization costs, amortization of deferred offering costs, and Contractual Issuer Expenses reimbursed and incurred
 
(62,395
)
 

 
(69,152
)
 

Expense limitation of organization and offering costs, and Contractual Issuer Expenses provided under the Investment Advisory Agreement
 
$
76,844

 
$
174,020

 
$
203,303

 
$
374,323


32


All other gross operating expenses (operating expenses exclusive of organization and offering expenses, and Contractual Issuer Expenses, and before limitations) are subject to limitation under the Expense Support Agreement. OFS Advisor's obligation to provide such expense support is a function of declared distributions on our common stock, and the amount of support provided is determined by reference to unsupported investment company taxable income (expense) and the amount of the declared distribution; the Expense Support Agreement provides expense support such that distributions are not paid from Offering proceeds. The determination of expense limitation under the Expense Support Agreement for the three and six months ended June 30, 2017 and 2016, is presented below.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Total investment income
 
$
19,708


$


$
22,937


$

Gross operating expenses excluding organization costs, amortization of deferred offering costs, and Contractual Issuer Expenses reported in operating expenses (1):
 
 
 
 
 
 
 
 
Interest expense, base management fees, and incentive fees
 
2,828



 
3,992

 

Other operating expenses as defined in the Expense Support Agreement (2)
 
262,010

 

 
548,754

 

Unsupported investment company taxable income (loss)
 
(245,130
)
 

 
(529,809
)
 

Declared distributions
 
38,753

 

 
60,469

 

Expense limitation under Expense Support Agreement
 
$
283,883

 
$

 
$
590,278

 
$

(1)
Organization costs, amortization of deferred offering costs, Contractual Issuer Expenses, and the related expense support under the Investment Advisory Agreement are generally excluded from the determination of ICTI. See "Item 1. – Financial Statements – Note 6."
(2)
Generally defined in the Expense Support Agreement as our operating expenses determined in accordance with GAAP excluding organization and offering expenses, Contractual Issuer Expenses, interested expenses, and base management fees, and incentive fees. The annualized ratio of other operating expenses to net assets at the time of support constitutes a condition for reimbursement to OFS Advisor. See "Item 1. – Financial Statements – Note 3."
Expense limitation under both the Investment Advisory Agreement and the Expense Support Agreement is cancelable at any time.
Net change in unrealized depreciation/appreciation on non-control/non-affiliate investments
Net change in unrealized depreciation/appreciation for the three and six months ended June 30, 2017 consisted of net unrealized losses on our senior secured debt investments and was $880 and $360, respectively, primarily due to changes in certain market loan indices and company specific performance factors. We purchased our first investment, a senior secured debt investment, in the fourth quarter of 2016, and therefore had no unrealized or realized gains or losses during the three and six months ended June 30, 2016.    

Liquidity and Capital Resources
Sources and Uses of Cash and Cash Equivalents
We expect to generate cash primarily from (i) the net proceeds of the Offering, (ii) cash flows from our operations, (iii) any financing arrangements we may enter into in the future and (iv) any future offerings of our equity or debt securities. We may fund a portion of our investments through borrowings from banks and issuances of senior securities. Our primary use of cash will be for (i) investments in portfolio companies and other investments to comply with certain portfolio diversification requirements, (ii) the cost of operations (including paying OFS Advisor), (iii) debt service of any borrowings and (iv) cash distributions to the holders of our stock. These principal sources and uses of cash and liquidity are presented below:

33


 
 
Six Months Ended June 30,
 
 
2017
 
2016
Cash from net investment income
 
$
14,134

 
$
(52,050
)
Purchase of portfolio investments
 
(1,188,768
)


Proceeds from principal payments on portfolio investments
 
114,393

 

Net cash used in operating activities
 
(1,060,241
)

(52,050
)
Proceed from issuances of common stock
 
2,107,540

 
150

Cash distributions paid
 
(21,716
)
 

Net change in cash and cash equivalents
 
$
1,025,583

 
$
(51,900
)
We used $1,060,241 and $52,050 in cash from operating activities for the six months ended June 30, 2017 and 2016, respectively. The increase in cash used in operations was primarily due to the funding of investments we purchased during 2017, approximately $380,000 of cash paid for professional and general and administrative fees, and approximately $149,000 of cash paid to OFS Advisor under the Administration Agreement, offset by approximately $300,000 in cash received from OFS Advisor under the Expense Support Agreement.
We raised $2,107,540 and $150 during the six months ended June 30, 2017 and 2016, respectively. The capital contributions for the six months ended June 30, 2016, were from OFSAM for our initial capitalization.
Subsequent to June 30, 2017, we paid a distribution to holders of our common stock of $38,753.
Other Liquidity Matters
We expect to fund the growth of our investment portfolio through the private placement of our common shares and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act. We cannot assure stockholders that our plans to raise capital will be successful. In addition, we intend to distribute to our stockholders substantially all of our taxable income in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments or make additional investments in our portfolio companies. The illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
In addition, as a BDC, we generally will be required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock (of which we had none at June 30, 2017, and December 31, 2016) of at least 200%. This requirement limits the amount that we may borrow. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all.
Contractual Obligations
On July 15, 2016, we, with approval by our board of directors, entered into the Investment Advisory Agreement, the Expense Support Agreement, the Investment Sub-Advisory Agreement, and the Administration Agreement. The Investment Advisory Agreement and Investment Sub-Advisory Agreement became effective as of August 30, 2016, the date that we satisfied the Minimum Offering Requirement. See “Item 1 – Financial Statements – Note 3.”
Off-Balance Sheet Arrangements
OFS Advisor and its affiliates have incurred organizational and offering costs, and Contractual Issuer Expenses related to the Company of which $1,026,540 and $1,009,479 were unreimbursed as of June 30, 2017 and December 31, 2016, respectively. We remain conditionally liable for organization and offering costs incurred by OFS Advisor and its affiliates on our behalf. See “Item 1 – Financial Statements – Note 3.”
OFS Advisor has provided aggregate operating expense support of $997,230 and $406,952 as of June 30, 2017, and
December 31, 2016, respectively. We remain conditionally liable for operating expense support provided by OFS Advisor. See “Item 1 – Financial Statements – Note 3.”
Distributions
Our board of directors maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount not less than 90-100% of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, we may also pay an additional special dividend, or fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was earned, while maintaining the option to spill over our excess taxable income to a following year.

34


We have elected to be taxed as a RIC under Subchapter M of the Code. Generally, a RIC is entitled to deduct dividends it pays to its stockholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, and taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest and dividends or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation, and amortization expense.
Our 2017 distribution was, and our distributions may in the future, be funded through expense limitation payments by OFS Advisor under the Expense Support Agreement. The Expense Support Agreement is designed to ensure no portion of our distribution to stockholders will be paid from Offering proceeds, and provides for expense limitation payments to us in any quarterly period our cumulative distributions to stockholders exceeds the Company's cumulative ICTI and net realized gains. Any such distributions funded through expense limitation payments are not based on our investment performance, and can only be sustained if we achieve positive investment performance in future periods and/or OFS Advisor continues to make such payments. The Expense Support Agreement may be terminated by us or OFS Advisor, without payment of any penalty, upon written notice to us.


35



Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risks reported in our Annual Report on Form 10-K for the year ended December 31, 2016.
Assuming that the interim and unaudited balance sheet as of June 30, 2017, were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates:
Basis point increase(1)
 
Interest income
 
Interest expense
 
Net increase
in net investment income
50
 
$
5,914

 
$

 
$
5,914

100
 
11,426

 

 
11,426

150
 
16,938

 

 
16,938

200
 
22,450

 

 
22,450

250
 
27,961

 

 
27,961

(1)
A decline in interest rates would not have a material impact on our net investment income.

36



Item 4.  Controls and Procedures
Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2017. The term “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of June 30, 2017, the Company’s chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 


37



PART II—OTHER INFORMATION
 
Item 1.  Legal Proceedings
We, OFS Advisor and OFS Services, are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our future portfolio companies. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our future portfolio companies. Our business is also subject to extensive regulation, which may result in regulatory proceedings against us. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Item 1A. Risk Factors
Investing in our common stock may be speculative and involves a high degree of risk. In addition to the other information contained in this Quarterly Report on Form 10-Q, including our financial statements, and the related notes, schedules and exhibits, you should carefully consider the risk factors described in "Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
There have been no material changes from the risk factors previously disclosed in Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, which should be read together with the other risk factors and information disclosed elsewhere in this Quarterly Report on Form 10-Q and our other reports filed with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three month period ended June 30, 2017, we sold 138,754 shares of our common stock for gross proceeds of $1,890,500, or a weighted average price of $13.62 per share, to investors who participated in the Offering and each of whom met the criteria of an “accredited investor” as defined in Rule 501 of Regulation D under the Securities Act.
The offer and sale of the Company’s Common Stock in the Offering was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of, and Rule 506 of Regulation D under, the Securities Act. We paid $17,160 in commissions in connection with the sale of the shares. OFS Advisor paid commissions of $50,055.
Because shares of our common stock have been acquired by investors in one or more transactions "not involving a public offering," they are "restricted securities" and may be required to be held indefinitely. Our common shares may not be sold, transferred, assigned, pledged or otherwise disposed of unless (i) the transferor provides OFS Advisor with at least 10 days written notice of the transfer; (ii) the transfer is made in accordance with applicable securities laws; and (iii) the transferee agrees in writing to be bound by these restrictions and the other restrictions imposed on the common shares and to execute such other instruments or certifications as are reasonably required by us. Accordingly, an investor must be willing to bear the economic risk of investment in the common shares until we are liquidated. No sale, transfer, assignment, pledge or other disposition, whether voluntary or involuntary, of the common shares may be made except by registration of the transfer on our books.
Item 3.  Defaults Upon Senior Securities
Not applicable.
Item 4.  Mine Safety Disclosures
Not applicable.
Item 5.  Other Information
Not applicable.

38


Item 6.  Exhibits
 
Listed below are the exhibits that are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):
 
 
 
 
Incorporated by Reference
 
Exhibit
Number
 
Description
Form and SEC File No.
Filing Date with SEC
Exhibit No.
Filed with this 10-Q
11.1
 
Computation of Per Share Earnings
 
 
 
+
 
 
 
 
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended
 
 
 
*
 
 
 
 
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended
 
 
 
*
 
 
 
 
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
 
 
32.2
 
Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
+
Included in the statements of operations contained in this report
*
Filed herewith.
Furnished herewith.
 
 


39


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Dated: August 11, 2017
HANCOCK PARK CORPORATE INCOME, INC.
 
 
 
 
By:
/s/ Bilal Rashid
 
Name:
Bilal Rashid
 
Title:
Chief Executive Officer
 
 
 
 
By:
/s/ Jeffrey A. Cerny
 
Name:
Jeffrey A. Cerny
 
Title:
Chief Financial Officer



40


EXHIBIT INDEX

 
 
 
Incorporated by Reference
 
Exhibit
Number
 
Description
Form and SEC File No.
Filing Date with SEC
Exhibit No.
Filed with this 10-Q
11.1
 
Computation of Per Share Earnings
 
 
 
+
 
 
 
 
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended
 
 
 
*
 
 
 
 
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended