OHA Investment Corporation
OHA Investment Corp (Form: 10-Q, Received: 08/06/2015 06:13:03)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
ý       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
or
¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
 
Commission file number: 814-00672
 
 
 
 
 
OHA Investment Corporation
 
 
(Exact name of registrant as specified in its charter) 
 
 
 
 
Maryland
 
20-1371499
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
1114 Avenue of the Americas,
27 th  Floor
 
10036
New York, New York
 
(Zip Code)
(Address of principal executive
offices)
 
 
(212) 852-1900
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
 
As of August 4, 2015, there were 20,172,392 shares of the registrant’s common stock outstanding.




Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
 

1


OHA INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
 
 
June 30, 2015
 
December 31, 2014
 
 
(unaudited)
 
 
Assets
 
 

 
 

Investments in portfolio securities at fair value
 
 

 
 

Control investments (cost: $28,608 and $28,661, respectively)
 
$
3,000

 
$
6,275

Affiliate investments (cost: $18,249 and $17,986, respectively)
 
18,780

 
17,430

Non-affiliate investments (cost: $182,043 and $153,100, respectively)
 
176,266

 
152,458

Total portfolio investments (cost: $228,900 and $199,747, respectively)
 
198,046

 
176,163

Investments in U.S. Treasury Bills at fair value (cost: $30,600 and $30,600, respectively)
 
30,600

 
30,600

Total investments
 
228,646

 
206,763

Cash and cash equivalents
 
19,598

 
31,455

Accounts receivable and other current assets
 
666

 
316

Interest receivable
 
2,097

 
2,090

Deferred loan costs and other prepaid assets
 
987

 
1,551

Total current assets
 
23,348

 
35,412

Total assets
 
$
251,994

 
$
242,175

 
 
 
 
 
Liabilities
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable and accrued expenses
 
$
1,760

 
$
1,908

Management and incentive fees payable
 
854

 
695

Distributions payable
 
2,430

 
3,299

Income taxes payable
 
51

 
109

Short-term debt
 
102,000

 
30,000

Total current liabilities
 
107,095

 
36,011

Long-term debt
 

 
52,000

Total liabilities
 
107,095

 
88,011

Commitments and contingencies  (Note 6)
 
 

 
 

Net assets
 
 

 
 

Common stock, $.001 par value, 250,000,000 shares authorized;
20,246,606 and 20,616,422 shares issued and outstanding, respectively
 
20

 
21

Paid-in capital in excess of par
 
242,473

 
244,473

Undistributed net investment loss
 
(4,793
)
 
(4,565
)
Undistributed net realized capital loss
 
(65,066
)
 
(65,298
)
Net unrealized depreciation on investments
 
(27,735
)
 
(20,467
)
Total net assets
 
144,899

 
154,164

Total liabilities and net assets
 
$
251,994

 
$
242,175

Net asset value per share
 
$
7.16

 
$
7.48

 
(See accompanying notes to consolidated financial statements)

2



OHA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Investment income:
 
 

 
 

 
 

 
 

Interest income:
 
 

 
 

 
 

 
 

Control investments
 
$

 
$
446

 
$

 
$
1,024

Affiliate investments
 
614

 
552

 
1,216

 
1,070

Non-affiliate investments
 
4,091

 
3,427

 
7,266

 
7,096

Dividend income:
 
 

 
 

 
 

 
 

Non-affiliate investments
 
999

 
999

 
1,987

 
1,982

Royalty income, net of amortization:
 
 

 
 

 
 

 
 

Control investments
 
6

 
20

 
19

 
41

Non-affiliate investments
 

 
30

 

 
55

Other income
 
204

 
39

 
242

 
103

Total investment income
 
5,914

 
5,513

 
10,730

 
11,371

Operating expenses:
 
 

 
 

 
 

 
 

Interest expense and bank fees
 
894

 
551

 
1,546

 
1,164

Management and incentive fees
 
854

 
1,306

 
1,532

 
2,652

Costs related to strategic alternatives review
 

 
207

 

 
665

Professional fees, net of legal fees of $200, $504, $487 and
$888, respectively, related to ATP bankruptcy (See Note 6)
 
776

 
489

 
1,307

 
1,232

Other general and administrative expenses
 
862

 
1,468

 
1,626

 
2,233

Total operating expenses
 
3,386

 
4,021

 
6,011

 
7,946

Income tax provision, net
 
30

 
20

 
52

 
39

Net investment income
 
2,498

 
1,472

 
4,667

 
3,386

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

 
 

 
 

 
 

Control investments
 
253

 

 
232

 
(325
)
Affiliate investments
 

 

 

 
95

Non-affiliate investments
 

 
534

 

 
(8,848
)
Total net realized capital gain (loss) on investments
 
253

 
534

 
232

 
(9,078
)
Net unrealized appreciation (depreciation) on investments
 
 

 
 

 
 

 
 

Control investments
 
(1,998
)
 
(3,388
)
 
(3,222
)
 
(6,816
)
Affiliate investments
 
720

 
804

 
1,088

 
(1,084
)
Non-affiliate investments
 
(1,957
)
 
546

 
(5,134
)
 
7,181

Total net unrealized appreciation (depreciation) on investments
 
(3,235
)
 
(2,038
)
 
(7,268
)
 
(719
)
 
 
 
 
 
 
 
 
 
Net decrease in net assets resulting from operations
 
$
(484
)
 
$
(32
)
 
$
(2,369
)
 
$
(6,411
)
 
 
 
 
 
 
 
 
 
Net decrease in net assets resulting from operations per common share
 
$
(0.02
)
 
$

 
$
(0.12
)
 
$
(0.31
)
 
 
 
 
 
 
 
 
 
Distributions declared per common share
 
$
0.12

 
$
0.16

 
$
0.24

 
$
0.32

Weighted average shares outstanding - basic and diluted
 
20,332

 
20,499

 
20,471

 
20,499

 
(See accompanying notes to consolidated financial statements)

3



OHA INVESTMENT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(in thousands, except per share data)
(unaudited)
 
 
 
For the six months ended June 30,
 
 
2015
 
2014
Increase (decrease) in net assets from operations
 
 

 
 

Net investment income
 
$
4,667

 
$
3,386

Net realized capital gain (loss) on investments
 
232

 
(9,078
)
Net unrealized depreciation on investments
 
(7,268
)
 
(719
)
Net decrease in net assets resulting from operations
 
(2,369
)
 
(6,411
)
Distributions to common stockholders
 
 

 
 

Distributions from net investment income
 
(4,895
)
 
(4,658
)
Return of capital
 

 
(1,902
)
Net decrease in net assets from distributions
 
(4,895
)
 
(6,560
)
Capital transactions
 
 

 
 

Acquisition of common stock under repurchase plan
 
(2,001
)
 

Net decrease in net assets from capital transactions
 
(2,001
)
 

Net decrease in net assets
 
(9,265
)
 
(12,971
)
Net assets, beginning of period
 
154,164

 
188,552

Net assets, end of period
 
$
144,899

 
$
175,581

Net asset value per common share at end of period
 
$
7.16

 
$
8.57

Common shares outstanding at end of period
 
20,247

 
20,499

 
(See accompanying notes to consolidated financial statements)

4



OHA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
 
For the six months ended June 30,
 
 
2015
 
2014
Cash flows from operating activities:
 
 

 
 

Net decrease in net assets resulting from operations
 
$
(2,369
)
 
$
(6,411
)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash attributable to operating activities:
 
 

 
 

Payment-in-kind interest
 
(947
)
 
(513
)
Net amortization of premiums, discounts and fees
 
(317
)
 
(286
)
Net realized capital (gain) loss on investments
 
(232
)
 
9,078

Net unrealized depreciation (appreciation) on investments
 
7,268

 
719

Amortization of deferred loan costs
 
569

 
487

Purchase of investments in portfolio securities
 
(39,979
)
 
(1,479
)
Proceeds from redemption of investments in portfolio securities
 
12,324

 
20,189

Purchase of investments in U.S. Treasury Bills
 
(61,201
)
 
(92,001
)
Proceeds from redemption of investments in U.S. Treasury Bills
 
61,201

 
92,001

Effects of changes in operating assets and liabilities:
 
 

 
 

Accounts receivable and other current assets
 
(350
)
 
(422
)
Interest receivable
 
(7
)
 
518

Prepaid assets
 
(5
)
 
965

Payables and accrued expenses
 
(47
)
 
677

Net cash attributable to operating activities
 
(24,092
)
 
23,522

Cash flows from financing activities:
 
 

 
 

Borrowings under revolving credit facilities
 
146,000

 
154,000

Repayments on revolving credit facilities
 
(126,000
)
 
(165,000
)
Acquisition of common stock under repurchase plan
 
(2,001
)
 

Distributions to stockholders
 
(5,764
)
 
(6,560
)
Net cash attributable to financing activities
 
12,235

 
(17,560
)
Net change in cash and cash equivalents
 
(11,857
)
 
5,962

Cash and cash equivalents, beginning of period
 
31,455

 
29,298

Cash and cash equivalents, end of period
 
$
19,598

 
$
35,260

 
(See accompanying notes to consolidated financial statements)
 

5



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
June 30, 2015
(in thousands, except share amounts and percentages)
(unaudited)
Portfolio Company
 
Industry
Segment
 
Investment (1)
 
Principal
 
Cost
 
Fair Value (2)
 
Control Investments - (More than 25% owned)
Contour Highwall Holdings, LLC
 
Coal Mining
 
Senior Secured Term Loan (12%, due 10/14/2015) (6)(14)
 
$
10,757

 
$
10,778

 
$
3,000

Contour Highwall Holdings, LLC
 
Coal Mining
 
 Unsecured Promissory Note (6%, due 4/11/2016) (6)
 
800

 
800

 

Contour Highwall Holdings, LLC
 
Coal Mining
 
800 Membership Units representing 80% of the common equity (10)
 
 

 

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
Tranche A - Senior Secured Term Loan (greater of 8% or LIBOR+4.0%, due
4/28/2015) (6)(16)
 
4,657

 
4,621

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
Tranche B - Senior Secured Term Loan (greater of 15% PIK or LIBOR+11.0%, due 10/28/2015) (6)
 
4,409

 
4,409

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
80,000 Preferred Units representing 100% of the outstanding equity
 
 

 
8,000

 

Subtotal Control Investments - (More than 25% owned)
 
 

 
$
28,608

 
$
3,000

 
 
 
 
 
 
 
 
 
 
 
Affiliate Investments - (5% to 25% owned)
OCI Holdings, LLC
 
Home Health Services
 
Subordinated Note (LIBOR+ 11.0% cash with a 1% floor plus 3% PIK, due
8/15/2018) (13)
 
$
15,938

 
$
15,749

 
$
15,938

OCI Holdings, LLC
 
Home Health Services
 
OHA/OCI Investments, LLC Class A Units representing 20.8% diluted ownership of OCI Holdings, LLC
 
 

 
2,500

 
2,842

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

 
$
18,249

 
$
18,780

 
 
 
 
 
 
 
 
 
 
 
Non-affiliate Investments - (Less than 5% owned)
Castex Energy 2005, LP
 
Oil & Natural Gas
Production and Development
 
Redeemable Preferred LP Units (current pay 8% cash, due 7/1/2016) (9)
 
$
50,000

 
$
50,014

 
$
56,067

ATP Oil & Gas Corporation/Bennu Oil & Gas, LLC
 
Oil & Natural Gas
Production and Development
 
Limited Term Royalty Interest (notional rate of 13.2%) (15)
 
 

 
27,166

 
19,310

Foundation Building Materials, LLC
 
Building Materials
 
Second Lien Term Loan (LIBOR+11.0% with a 1% floor, due 4/30/2019)
 
18,700

 
18,524

 
18,513

Talos Production, LLC
 
Oil & Natural Gas
Production and Development
 
Senior Unsecured Notes (9.75%, due 2/15/2018) (3)
 
12,000

 
11,958

 
10,440

 
(See accompanying notes to consolidated financial statements)

6



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
June 30, 2015
(In thousands, except share amounts and percentages)
(Unaudited — Continued)
Portfolio Company
 
Industry Segment
 
Investment (1)
 
Principal
 
Cost
 
Fair Value (2)
 
 
 
 
 
 
 

 
 

 
 

Non-affiliate Investments - (Less than 5% owned) - Continued
Shoreline Energy, LLC
 
Oil & Natural Gas Production and Development
 
Second Lien Term Loan (greater of LIBOR+9.25% with a 1.25% floor, or prime+8.25%, due 3/30/2019) (17)
 
$
13,028

 
$
12,715

 
$
10,027

Royal Holdings, Inc.
 
Chemicals
 
Second Lien Term Loan (LIBOR+7.5% with a 1% floor, due June 19, 2023) (3)
 
10,000

 
9,925

 
10,025

WP Mustang (Electronic Funds Services, LLC)
 
Financial Services
 
Second Lien Term Loan (LIBOR+7.5% with a 1% floor, due 5/29/2022) (3)
 
10,000

 
9,834

 
9,891

Appriss Holdings, Inc.
 
Information Services
 
Second Lien Term Loan (LIBOR+8.25% with a 1% floor, due 5/21/2021)
 
10,000

 
9,860

 
9,850

KOVA International, Inc.
 
Medical Supplies Manufacturing and Distribution
 
Senior Subordinated Notes (12.75%, due 8/15/2018)
 
9,000

 
8,882

 
8,100

Gramercy Park CLO Ltd. (5)
 
Financial Services
 
Subordinated Notes, Residual Interest (11.95%, based on cost, due 7/17/2023) (3)
 
9,000

 
6,694

 
7,639

Stardust Financial Holdings (Hanson)
 
Building Materials
 
Second Lien Term Loan (LIBOR+9.5% with a 1% floor, due 3/13/2023) (3)
 
7,500

 
7,097

 
7,388

Huff Energy Holdings, Inc.
 
Oil & Natural Gas Production and Development
 
Senior Secured Term Loan (greater of 12.5% or LIBOR+8.5%, due 11/20/2015)
 
4,870

 
4,851

 
4,870

Huff Energy Holdings, Inc.
 
Oil & Natural Gas Production and Development
 
3% Overriding Royalty Interest (11)
 
 

 
42

 
48

Huff Energy Holdings, Inc.
 
Oil & Natural Gas Production and Development
 
Warrants (12)
 
 

 
42

 
48

WASH Multifamily Acquisition, Inc.
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR+7.0% with a 1% floor, due May 14, 2023) (3)
 
3,404

 
3,379

 
3,446

Coinamatic Canada, Inc. (5)
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR+7.0% with a 1% floor, due May 14, 2023) (3)
 
596

 
592

 
604

Globe BG, LLC
 
Coal Production
 
Contingent earn-out related to July 2011 sale of royalty interests in Alden Resources, LLC (8)
 
 

 

 

Myriant Corporation
 
Alternative Fuels & Specialty Chemicals
 
131,741 shares of common stock, representing 0.56% of the outstanding common shares
 
 

 
419

 

Myriant Corporation
 
Alternative Fuels & Specialty Chemicals
 
Warrants (7)
 
 

 
49

 

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

 
$
182,043

 
$
176,266

Subtotal Portfolio Investments (86.6% of total investments)
 
 

 
$
228,900

 
$
198,046

 (See accompanying notes to consolidated financial statements)

7



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
June 30, 2015
(In thousands, except share amounts and percentages)
(Unaudited — Continued)
Portfolio Company
 
Industry Segment
 
Investment (1)
 
Principal
 
Cost
 
Fair Value (2)
 
 
 
 
 
 
 

 
 

 
 

GOVERNMENT SECURITIES
U.S. Treasury Bills (4)
 
 
 
 
 
$
30,600

 
$
30,600

 
$
30,600

Subtotal Government Securities (13.4% of total investments)
 
 

 
$
30,600

 
$
30,600

 
 
 
 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
 
$
259,500

 
$
228,646

 
NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS
 
(1)  
We pledged all of our portfolio investments, except our investments in U.S. Treasury Bills, as collateral for obligations under our Investment Facility. We pledged our investments in U.S. Treasury Bills as collateral for obligations under our Treasury Facility. See Note 3 of Notes to Consolidated Financial Statements. Percentages represent interest rates in effect as of June 30, 2015 and due dates represent the contractual maturity dates. Warrants, common stock, units and earn-outs are non-income producing securities, unless otherwise stated.
(2)  
The Audit Committee recommends fair values of each asset to our Board of Directors, which in good faith determines the final fair value for each investment. Fair value is determined using unobservable inputs (Level 3 hierarchy), unless otherwise stated. See Note 7 of Notes to Consolidated Financial Statements.
(3)  
Fair value is determined using prices with observable market inputs (Level 2 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.
(4)  
Fair value is determined using prices for identical securities in active markets (Level 1 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.
(5)  
We have determined that this investment is not a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, or 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. The status of these assets under the 1940 Act is subject to change. We monitor the status of these assets on an ongoing basis.
(6)  
Investment on non-accrual status.
(7)  
Myriant Corporation warrants expire on August 15, 2015 and provide us the right to purchase 32,680 shares of Myriant Corporation common stock at a purchase price of $10.00 per share.
(8)  
Contingent payment of up to $6.8 million is dependent upon Alden Resources, LLC’s achievement of certain sales volume and operating efficiency levels during the three-year period ended July 2014. The reporting and review mechanism to conclude the ultimate value of the earn-out has not yet been completed. Globe BG, LLC has informally advised us that the company’s relative cost of production has not improved since July 2011.
(9)  
Upon redemption, we will receive the outstanding face amount plus an option to elect to receive either: a) a cash payment resulting in a total 12% internal rate of return, or IRR, (inclusive of the 8% cash distributions) or b) our pro rata share of 2% of the outstanding regular limited partner interests in Castex Energy 2005, LP (0.67% net to us).
(10)  
The fair value of our Contour Highwall Holdings, LLC, or Contour, membership units also includes the value attributable to our ownership of 8,000 shares of common stock of Bundy Auger Mining, Inc., an affiliate of Contour.
(11)  
Huff Energy Holdings, Inc., or HEH, overriding royalty interests are effective upon the earlier of repayment in full of the term loan or the maturity date of the term loan. HEH has the right to purchase the overriding royalty interests on, or before, the maturity date of the term loan for an aggregate of $50,000, provided that the term loan is repaid by the maturity date.
(12)  
HEH warrants expire seven years after repayment of the term loan and entitle us to purchase 30% of the outstanding equity at $0.01 per share. HEH has the right to purchase these warrants on, or before, the maturity date of the term loan for $50,000, provided that the term loan is repaid by the maturity date.

(See accompanying notes to consolidated financial statements)



8



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
June 30, 2015
(In thousands, except share amounts and percentages)
(Unaudited — Continued)

NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS - continued
(13)  
Effective July 9, 2014, we executed a third amendment to our credit agreement with OCI Holdings, LLC, or OCI, to amend certain covenant limits in exchange for increases in OCI’s interest to the greater of 12% or LIBOR+11% cash, plus 3% payment-in-kind, or PIK.
(14)  
Contour has not made its September 2014 through June 2015 interest payments on the senior secured term loan.
(15)  
For more information, refer to the discussion of the ATP litigation in Note 6 to the Consolidated Financial Statements.
(16)  
Spirit Resources, LLC, or Spirit, has not made its November 2014 through June 2015 interest payments on the Tranche A Senior Secured Term Loan. Spirit sold substantially all its assets in June 2015, and the proceeds were applied to the outstanding principal balance.
(17)  
Effective June 24, 2014, we executed a third amendment to our credit agreement with Shoreline Energy, LLC, or Shoreline, to amend certain covenant limits in exchange for increases in Shoreline's interest to greater of LIBOR+9.25% with a 1.25% floor or prime+8.25% with a 1.25% floor, effective after March 31, 2015. The third amendment also included the addition of 0.50% payment-in-kind, or PIK, interest effective after June 30, 2015.

(See accompanying notes to consolidated financial statements)

9



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2014
(In thousands, except share amounts and percentages)
(Unaudited)
Portfolio Company
 
Industry
Segment
 
Investment (1)
 
Principal
 
Cost
 
Fair Value (2)
 
Control Investments - (More than 25% owned)
Contour Highwall Holdings, LLC
 
Coal Mining
 
Senior Secured Term Loan (12%, due 10/14/2015) (6)(14)
 
$
10,757

 
$
10,778

 
$
4,500

Contour Highwall Holdings, LLC
 
Coal Mining
 
800 Membership Units representing 80% of the common equity (10)
 
 

 

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
Tranche A - Senior Secured Term Loan (greater of 8% or LIBOR+4.0%, due
4/28/2015) (6)(16)
 
5,500

 
5,464

 
1,450

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
Tranche B - Senior Secured Term Loan (greater of 15% PIK or LIBOR+11.0%, due 10/28/2015) (6)
 
4,409

 
4,409

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
80,000 Preferred Units representing 100% of the outstanding equity
 
 

 
8,000

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
3% Overriding Royalty Interest
 
 

 
10

 
325

Subtotal Control Investments - (More than 25% owned)
 
 

 
$
28,661

 
$
6,275

 
 
 
 
 
 
 
 
 
 
 
Affiliate Investments - (5% to 25% owned)
OCI Holdings, LLC
 
Home Health Services
 
Subordinated Note (LIBOR+ 11.0% cash with a 1% floor plus 3% PIK, due
8/15/2018) (13)
 
$
15,700

 
$
15,486

 
$
15,700

OCI Holdings, LLC
 
Home Health Services
 
OHA/OCI Investments, LLC Class A Units representing 20.8% diluted ownership
of OCI Holdings, LLC
 
 

 
2,500

 
1,730

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

 
$
17,986

 
$
17,430

 
 
 
 
 
 
 
 
 
 
 
Non-affiliate Investments - (Less than 5% owned)
Castex Energy 2005, LP
 
Oil & Natural Gas
Production and Development
 
Redeemable Preferred LP Units (current pay 8% cash, due 7/1/2016) (9)
 
$
50,000

 
$
50,021

 
$
54,906

ATP Oil & Gas Corporation/Bennu Oil & Gas, LLC
 
Oil & Natural Gas
Production and Development
 
Limited Term Royalty Interest
(Notional rate of 13.2%) (15)
 
 

 
26,767

 
23,700

Shoreline Energy, LLC
 
Oil & Natural Gas
Production and Development
 
Second Lien Term Loan
(greater of LIBOR+9.0% with a 1.25% floor, or prime+8.0%, due 3/30/2019)
 
13,417

 
13,071

 
11,985

Talos Production, LLC
 
Oil & Natural Gas
Production and Development
 
Senior Unsecured Notes
(9.75%, due 2/15/2018) (3)
 
12,000

 
11,951

 
10,920

Citadel Plastics Holdings, Inc.
 
Chemicals
 
Second Lien Term Loan (LIBOR+8.0% with a 1% floor, due 11/5/2021) (3)
 
10,000

 
9,901

 
9,900

(See accompanying notes to consolidated financial statements)

10



CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2014
(In Thousands, Except Share Amounts and Percentages)
(Continued)
Portfolio Company
 
Industry Segment
 
Investment (1)
 
Principal
 
Cost
 
Fair Value (2)
 
 
 
 
 
 
 

 
 

 
 

Non-affiliate Investments - (Less than 5% owned) - Continued
Appriss Holdings, Inc.
 
Information Services
 
Second Lien Term Loan
(LIBOR+8.25% with a 1% floor, due 5/21/2021)
 
$
10,000

 
$
9,852

 
$
9,850

WP Mustang (Electronic Funds Services, LLC)
 
Financial Services
 
Second Lien Term Loan (LIBOR+7.5% with a 1% floor, due 5/29/2022) (3)
 
10,000

 
9,826

 
9,675

KOVA International, Inc.
 
Medical Supplies
Manufacturing and Distribution
 
Senior Subordinated Notes
(12.75%, due 8/15/2018)
 
9,000

 
8,867

 
9,000

Gramercy Park CLO Ltd. (5)
 
Financial Services
 
Subordinated Notes, Residual Interest (11.95%, based on cost, due 7/17/2023) (3)

 
9,000

 
7,014

 
7,110

Huff Energy Holdings, Inc.
 
Oil & Natural Gas
Production and Development
 
Senior Secured Term Loan
(greater of 12.5% or LIBOR+8.5%, due 11/20/2015)
 
5,320

 
5,278

 
5,320

Huff Energy Holdings, Inc.
 
Oil & Natural Gas
Production and Development
 
3% Overriding Royalty Interest (11)
 
 

 
42

 
46

Huff Energy Holdings, Inc.
 
Oil & Natural Gas
Production and Development
 
Warrants (12)
 
 

 
42

 
46

Globe BG, LLC
 
Coal Production
 
Contingent earn-out related to July 2011 sale of royalty interests in Alden Resources, LLC (8)
 
 

 

 

Myriant Corporation
 
Alternative Fuels &
Specialty Chemicals
 
131,741 shares of common stock, representing
0.56% of the outstanding common shares
 
 

 
419

 

Myriant Corporation
 
Alternative Fuels &
Specialty Chemicals
 
Warrants (7)
 
 

 
49

 

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

 
$
153,100

 
$
152,458

Subtotal Portfolio Investments (85.2% of total investments)
 
 

 
$
199,747

 
$
176,163

 
 
 
 
 
 
 

 
 

 
 

GOVERNMENT SECURITIES
U.S. Treasury Bills (4)
 
 
 
 
 
$
30,600

 
$
30,600

 
$
30,600

Subtotal Government Securities (14.8% of total investments)
 
 

 
$
30,600

 
$
30,600

 
 
 
 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
 
$
230,347

 
$
206,763

 

(See accompanying notes to consolidated financial statements)
 


11



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2014
(Continued)
 
NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS
 
(1)  
We pledged all of our portfolio investments, except our investments in U.S. Treasury Bills, as collateral for obligations under our Investment Facility. We pledged our investments in U.S. Treasury Bills as collateral for obligations under our Treasury Facility. See Note 3 of Notes to Consolidated Financial Statements. Percentages represent interest rates in effect as of December 31, 2014 and due dates represent the contractual maturity dates. Warrants, common stock, units and earn-outs are non-income producing securities, unless otherwise stated.
(2)  
The Audit Committee recommends fair values of each asset to our Board of Directors, which in good faith determines the final fair value for each investment. Fair value is determined using unobservable inputs (Level 3 hierarchy), unless otherwise stated. See Note 7 of Notes to Consolidated Financial Statements.
(3)  
Fair value is determined using prices with observable market inputs (Level 2 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.
(4)  
Fair value is determined using prices for identical securities in active markets (Level 1 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.
(5)  
We have determined that this investment is not a “qualifying asset” under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. The status of these assets under the 1940 Act is subject to change. We monitor the status of these assets on an ongoing basis.
(6)  
Non-accrual status.
(7)  
Myriant Corporation warrants expire on August 15, 2015 and provide us the right to purchase 32,680 shares of Myriant Corporation common stock at a purchase price of $10.00 per share.
(8)  
Contingent payment of up to $6.8 million is dependent upon Alden Resources, LLC’s achievement of certain sales volume and operating efficiency levels during the three-year period ended July 2014. The reporting and review mechanism to conclude the ultimate value of the earn-out has not yet been completed. Globe BG, LLC has informally advised us that the company’s relative cost of production has not improved since July 2011.
(9)  
Upon redemption, we will receive the outstanding face amount plus an option to elect to receive either: a) a cash payment resulting in a total 12% IRR (inclusive of the 8% cash distributions) or b) our pro rata share of 2% of the outstanding regular limited partner interests in Castex Energy 2005, LP (0.67% net to us).
(10)  
The fair value of our Contour Highwall Holdings, LLC, or Contour, membership units also includes the value attributable to our ownership of 8,000 shares of common stock of Bundy Auger Mining, Inc., an affiliate of Contour.
(11)  
Huff Energy Holdings, Inc., or HEH, overriding royalty interests are effective upon the earlier of repayment in full of the term loan or the maturity date of the term loan. HEH has the right to purchase the overriding royalty interests on, or before, the maturity date of the term loan for an aggregate of $50,000, provided that the term loan is repaid by the maturity date.
(12)  
HEH warrants expire seven years after repayment of the Term Loan and entitle us to purchase 30% of the outstanding equity at $0.01 per share. HEH has the right to purchase these warrants on, or before, the maturity date of the Term Loan for $50,000, provided that the Term Loan is repaid by the maturity date.
(13)  
Effective July 9, 2014, we executed a third amendment to our credit agreement with OCI Holdings, LLC, or OCI, to amend certain covenant limits in exchange for increases in OCI’s interest to the greater of 12% or LIBOR+11% cash, plus 3% payment-in-kind, or PIK.
(14)  
Contour has not made its September 2014 through December 2014 interest payments on the Senior Secured Term Loan.
(15)  
For more information, refer to the discussion of the ATP litigation in Note 6 to the Consolidated Financial Statements.
(16)  
Spirit Resources, LLC, or Spirit, has not made its November 2014 through December 2014 interest payments on the Tranche A Senior Secured Term Loan.

(See accompanying notes to consolidated financial statements)
 

12



OHA INVESTMENT CORPORATION
CONSOLIDATED FINANCIAL HIGHLIGHTS
(unaudited)
 
For the six months ended June 30,
Per Share Data (1)
2015
 
2014
 
 
 
 
Net asset value, beginning of period
$
7.48

 
$
9.20

Net investment income
0.23

 
0.17

Net realized and unrealized loss on investments (2)
(0.35
)
 
(0.48
)
Net decrease in net assets resulting from operations
(0.12
)
 
(0.31
)
Distributions to common stockholders
 

 
 

Distributions from net investment income
(0.24
)
 
(0.23
)
Return of capital

 
(0.09
)
Net decrease in net assets from distributions
(0.24
)
 
(0.32
)
Effect of shares repurchased, gross
$
0.04

 
$

Net asset value, end of period
$
7.16

 
$
8.57

 
 
 
 
Market value, beginning of period
$
4.69

 
$
7.47

Market value, end of period
$
5.69

 
$
6.23

Market value return (3)
26.6
 %
 
(12.5
)%
Net asset value return (3)
(0.1
)%
 
(2.3
)%
 
 
 
 
Ratios and Supplemental Data
 

 
 

($ and shares in thousands)
 

 
 

Net assets, end of period
$
144,899

 
$
175,581

Average net assets
$
151,439

 
$
183,323

Common shares outstanding, end of period
20,247

 
20,499

Total operating expenses/average net assets (4)(5)
8.0
 %
 
8.7
 %
Net investment income/average net assets (4)
6.2
 %
 
3.7
 %
Portfolio turnover rate
6.4
 %
 
0.7
 %
Net decrease in net assets resulting from operations/average net assets (4)
(3.2
)%
 
(7.1
)%
 
 
 
 
Expense Ratios (as a percentage of average net assets) (4)
 

 
 

Interest expense and bank fees
2.1
 %
 
1.3
 %
Management and incentive fees
2.0
 %
 
2.9
 %
Costs related to strategic alternatives review
 %
 
0.7
 %
Other operating expenses (5)
3.9
 %
 
3.8
 %
Total operating expenses (5)
8.0
 %
 
8.7
 %
 
(1)  
Per share data is based on weighted average number of common shares outstanding for the period.
(2)  
May include a balancing amount necessary to reconcile the change in net asset value per share with other per share information presented. This amount may not agree with the aggregate gains and losses for the period because the difference in the net asset value at the beginning and end of the period may not equal the per share changes of the line items disclosed.
(3)  
Return calculations assume reinvestment of distributions and are not annualized.
(4)  
Annualized.
(5)  
Net of legal fee reimbursements of $0.5 million and $0.9 million for the six months ended June 30, 2015 and 2014 , respectively. Excluding these legal fee reimbursements, other operating expenses and total operating expenses ratios would have been 4.6% and 5.5% and 8.7% and 9.7%, respectively, for the six months ended June 30, 2015 and 2014 . See Note 6 of Notes to Consolidated Financial Statements.
(See accompanying notes to consolidated financial statements)

13



OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(unaudited)

Note 1: Organization and Recent Developments
 
These consolidated financial statements present the financial position, results of operations and cash flows of OHA Investment Corporation and its consolidated subsidiaries. The terms “we,” “us,” “our” and “OHAI” refer to OHA Investment Corporation and its consolidated subsidiaries. We are a specialty finance company that was organized in July 2004 as a Maryland corporation. Our investment objective is to generate both current income and capital appreciation primarily through debt investments with certain equity components. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company, or a BDC, under the Investment Company Act of 1940, or the 1940 Act. For federal income tax purposes we operate so as to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. We have several direct and indirect subsidiaries that are single-member limited liability companies and wholly-owned limited partnerships established to hold certain portfolio investments or provide services to us in accordance with specific rules prescribed for a company operating as a RIC. We consolidate the financial results of our wholly-owned subsidiaries for financial reporting purposes, and we do not consolidate the financial results of our portfolio companies.
 
On September 30, 2014, our stockholders approved the appointment of Oak Hill Advisors, L.P., or OHA, as our new investment advisor, replacing NGP Investment Advisor, LP, which had been our investment advisor since our inception. In connection with this change in investment advisor, we changed our name from NGP Capital Resources Company to OHA Investment Corporation. OHA is a registered investment adviser under the 1940 Act. OHA acts as our investment advisor and administrator pursuant to an investment advisory agreement and an administration agreement, respectively, each dated as of September 30, 2014, which we refer to as the Investment Advisory Agreement and the Administration Agreement, respectively See Note 4.
 
Note 2: Basis of Presentation
 
These interim unaudited consolidated financial statements include the accounts of OHAI and its consolidated subsidiaries. We eliminate all significant intercompany accounts and transactions upon consolidation. Certain prior period amounts have been reclassified to conform to current period presentation.
 
We prepare the interim consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. We omit certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, pursuant to such rules and regulations. We believe we include all adjustments, which are of a normal recurring nature, so that these financial statements fairly present our financial position, results of operations and cash flows. Interim results are not necessarily indicative of results for a full year. You should read these unaudited consolidated financial statements in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014 .
 
Preparing interim consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes thereto, including the estimated fair values of our investment portfolio discussed in Note 7. Although we believe our estimates and assumptions are reasonable, actual results could differ materially from these estimates.
 
Distributions
 
We record distributions to stockholders on the ex-dividend date. We currently intend that our distributions each year will be sufficient to maintain our status as a RIC for federal income tax purposes and to eliminate federal excise tax liability. We currently intend to make distributions to stockholders on a quarterly basis so that substantially all of our net taxable income is distributed on an annual basis. We also intend to make distributions of net realized capital gains, if any, at least annually. However, we may in the future decide to retain such capital gains for investment and designate such retained amounts as deemed distributions. Each quarter, we estimate our annual taxable earnings. The Board of Directors considers this estimate and determines the distribution amount, if any. We generally declare our distributions each quarter and pay them shortly thereafter. The following table summarizes our recent distribution history:

14


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2015
(unaudited)

Declaration Date
 
Per Share
Amount
 
Record Date
 
Payment Date
March 18, 2014
 
$
0.16

 
March 31, 2014
 
April 7, 2014
June 10, 2014
 
0.16

 
June 30, 2014
 
July 7, 2014
September 11, 2014
 
0.16

 
September 30, 2014
 
October 7, 2014
December 17, 2014
 
0.16

 
December 31, 2014
 
January 9, 2015
March 3, 2015
 
0.12

 
March 31, 2015
 
April 8, 2015
June 10, 2015
 
0.12

 
June 30, 2015
 
July 9, 2015
 
Note 3: Credit Facilities and Borrowings
 
We are party to a $72.0 million Third Amended and Restated Revolving Credit Agreement, or the Investment Facility, dated May 23, 2013, as amended. The total amount outstanding under the Investment Facility was $72.0 million and $55.5 million as of June 30, 2015 and December 31, 2014 , respectively. Substantially all of our assets, except our investments in U.S. Treasury Bills, are pledged as collateral for the obligations under the Investment Facility. On September 29, 2014, we amended the Investment Facility to permit the appointment of OHA as our investment advisor. The Investment Facility matures on May 23, 2016 and bears interest, at our option, at either (i) LIBOR plus 325 to 475 basis points, or (ii) the base rate plus 225 to 375 basis points, both based on our amounts outstanding. As of June 30, 2015 , the average interest rate on our outstanding balance of $72.0 million was 4.4% , and there was no additional amount available for borrowing under the Investment Facility. We repaid $15 million of the balance outstanding under the Investment Facility in early July 2015.
 
We are party to a $30.0 million Treasury Secured Revolving Credit Agreement, or the Treasury Facility, dated March 31, 2011, as amended, with SunTrust Bank as administrative agent, that can only be used to purchase U.S. Treasury Bills. Proceeds from the Treasury Facility facilitate the growth of our investment portfolio and provide flexibility in the sizing of our portfolio investments. The Treasury Facility has been amended from time to time, generally to extend the expiration date and, in some cases, to revise the size of the facility. On September 24, 2014, we entered into a fifth amendment to the Treasury Facility which extended the expiration date to September 24, 2015, reduced the size of the Treasury Facility to $30.0 million, and permitted the appointment of OHA as our investment advisor. Borrowings under the Treasury Facility bear interest, at our option, at either (i) LIBOR plus 150 basis points or (ii) the base rate plus 50 basis points. We have the right at any time to prepay the amounts outstanding under the Treasury Facility, in whole or in part, without premium or penalty. As of June 30, 2015 , we had $30.0 million outstanding and no additional amount available for borrowing under the Treasury Facility, and the interest rate on our outstanding balance was 1.7% . We repaid the entire balance outstanding under the Treasury Facility in July 2015 with proceeds from the sale of U.S. Treasury Bills.
 
Both the Investment Facility and the Treasury Facility contain affirmative and reporting covenants and certain financial ratio and restrictive covenants. We have complied with these covenants throughout 2015 and 2014 and had no existing defaults or events of default under either facility. The most restrictive covenants, with terms as defined in the credit agreements, are (these restrictive covenants apply to both the Investment Facility and the Treasury Facility, unless otherwise noted):
 
maintaining a ratio of net asset value to consolidated total indebtedness (excluding net hedging liabilities) of not less than 2.25:1.0,
maintaining a ratio of net asset value to consolidated total indebtedness (including net hedging liabilities) of not less than 2.0:1.0,
maintaining a ratio of EBITDA (excluding revenue from cash collateral) to interest expense (excluding interest on loans under the Treasury Facility) of not less than 3.0:1.0, and
maintaining a ratio of collateral to the aggregate principal amount of loans under the Treasury Facility of not less than 1.02:1.0.

Note 4: Investment Management
 
Investment Advisory Agreement
 

15


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2015
(unaudited)

On September 30, 2014, we entered into the Investment Advisory Agreement with OHA, an investment adviser registered under the Investment Advisers Act of 1940, or Advisers Act, pursuant to which OHA replaced NGP Investment Advisor, LP as our investment advisor. The initial term of the Investment Advisory Agreement is until September 30, 2016, and subsequently for successive one-year renewals, provided such continuation is annually approved by our Board of Directors, a majority of whom are not “interested” persons (as defined in the 1940 Act) of us. Pursuant to the Investment Advisory Agreement, OHA implements our business strategy on a day-to-day basis and performs certain services for us, subject to the supervision of our Board of Directors. Under the Investment Advisory Agreement, we pay OHA a fee consisting of two components — a base management fee and an incentive fee.
 
Base Management Fee: The base management fee is paid quarterly in arrears, and is calculated by multiplying the average value of our total assets (excluding cash, cash equivalents and U.S. Treasury Bills that are purchased with borrowed funds solely for the purpose of satisfying quarter-end diversification requirements related to our election to be taxed as a RIC under the Code), as of the end of the two immediately prior fiscal quarters, by a rate of 1.75% per annum, with a 0.25% reduction in this 1.75% annual rate for the first year following September 30, 2014.
 
Incentive Fee: The incentive fee consists of two parts. The first part, the investment income incentive fee, is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the fiscal quarter for which the fee is being calculated. Pre-incentive fee net investment income means interest income, dividend income, royalty payments, net profits interest payments, and any other income (including any other fees, such as commitment, origination, syndication, structuring, diligence, monitoring and consulting fees or other fees that we receive from portfolio companies) accrued during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement, and any interest expense and distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. Accordingly, we may pay an incentive fee based partly on accrued investment income, the collection of which is uncertain or deferred. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses, or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less liabilities at the end of the immediately preceding fiscal quarter) is compared to a “hurdle rate” of 1.75% per quarter (7% annualized). OHA receives no incentive fee for any fiscal quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate. OHA receives an incentive fee equal to 100% of our pre-incentive fee net investment income for any fiscal quarter in which our pre-incentive fee net investment income exceeds the hurdle rate but is less than 2.1875% (8.75% annualized) of net assets (also referred to as the “catch up” provision) plus 20% of our pre-incentive fee net investment income for such fiscal quarter greater than 2.1875% (8.75% annualized) of net assets. For the three month and six month periods ended June 30, 2015 we incurred investment income incentive fees totaling $139,000.
 
The second part of the incentive fee, the capital gains fee, is determined and payable in arrears as of the end of each fiscal year (or, upon termination of the Investment Advisory Agreement, as of the termination date). The capital gains fee is equal to 20% of our cumulative aggregate realized capital gains from September 30, 2014 through the end of that fiscal year, computed net of our cumulative aggregate realized capital losses and cumulative aggregate unrealized depreciation on investments for the same time period. The aggregate amount of any previously paid capital gains incentive fees to OHA is subtracted from the capital gains incentive fee calculated. If such amount is negative, then there is no capital gains fee for such year. For the purposes of the capital gains fee, any gains and losses associated with our investment portfolio as of September 30, 2014 shall be excluded from the capital gains fee calculation. We have not incurred any capital gains fees since the Investment Advisory Agreement went into effect on September 30, 2014.
 
The Investment Advisory Agreement may be terminated at any time, without the payment of any penalty, by a vote of our Board of Directors or a vote of the holders of at least a majority of our outstanding voting securities (within the meaning of the 1940 Act) on 60 days’ written notice to OHA, and would automatically terminate in the event of its “assignment” (within the meaning of the 1940 Act). OHA may terminate the Investment Advisory Agreement without penalty by providing us more than 60 days’ written notice. Pursuant to the Investment Advisory Agreement, OHA pays the compensation expense of its investment professionals, who provide management and investment advisory services to us. We bear all other costs and expenses of our operations and transactions.
 
Previous Investment Advisory Agreement

16


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2015
(unaudited)

 
Prior to the September 30, 2014 appointment of OHA as our investment advisor, we had a similar investment advisory agreement with our previous investment advisor, NGP Investment Advisor, LP. The fee structure under our previous investment advisory agreement consisted of two components — a base management fee and an incentive fee.
 
Base Management Fee : Under the previous investment advisory agreement, we calculated the quarterly base management fee as 0.45% (1.8% annualized) of the average of our total assets (inclusive of all cash and cash equivalents without any exclusions) as of the end of the two most recent fiscal quarters, payable quarterly in arrears.
 
Incentive Fee : The incentive fee under the previous investment advisory agreement consisted of two parts. We calculated the first part of the incentive fee, the investment income incentive fee, as 20% of the excess, if any, of our net investment income for the quarter that exceeded a quarterly hurdle rate equal to 2% (8% annualized) of our net assets, with no “catch up” provision. We calculated and paid this investment income incentive fee quarterly in arrears. For the purpose of this fee calculation, net investment income was defined similarly to that under the Investment Advisory Agreement. We did not incur any investment income incentive fees in 2014 under the previous investment advisory agreement.
 
We calculated the second part of the incentive fee, the capital gains fee, as (1) 20% of (a) our net realized capital gains (realized capital gains less realized capital losses) on a cumulative basis from the closing date of our initial public offering to the end of the applicable fiscal year, less (b) any unrealized capital depreciation at the end of such fiscal year, less (2) the aggregate amount of all capital gains fees paid to NGP Investment Advisor, LP in prior fiscal years. We determined and paid the capital gains fee in arrears as of the end of each fiscal year. We did not incur any capital gains fees under the previous investment advisory agreement since 2007.
 
Administration Agreement
 
On September 30, 2014, we entered into the Administration Agreement with OHA pursuant to which OHA replaced NGP Administration, LLC as our administrator and furnishes us with certain administrative services, personnel and facilities. The Administration Agreement has an initial term ending on September 30, 2016. Payments under the Administration Agreement are equal to our allocable portion of OHA’s overhead in performing its obligations under the Administration Agreement, including all administrative services necessary for our operation and the conduct of our business. The aggregate amount of certain costs and expenses payable by us under the Investment Advisory Agreement and the Administration Agreement for the period from October 1, 2014 to September 30, 2015 shall not exceed $2.5 million, or Cap; provided that interest expense and bank fees, management and incentive fees, legal and professional fees, insurance expenses, taxes and costs related to the change in investment advisor are not subject to the Cap. The Administration Agreement may be terminated at any time, without penalty, by a vote of our Board of Directors or by OHA upon 60 days’ written notice to the other party.
 
Prior to the September 30, 2014 appointment of OHA as our administrator, we had a similar administration agreement with our previous administrator, NGP Administration, LLC, with similar provisions as the Administration Agreement, except that under the previous administration agreement, (i) there was no Cap on expenses payable by us, and (ii) a portion of compensation costs of investment professionals and certain other costs were allocated to us that are not allocable to us under the Administration Agreement.
 
We owed $0.1 million and $0.2 million to OHA under the Administration Agreement as of June 30, 2015 and December 31, 2014 , respectively, for expenses incurred on our behalf for the final month of the respective quarterly period. We include these amounts in accounts payable and accrued expenses on our consolidated balance sheets.
 
Note 5: Federal Income Taxes
 
We operate so as to qualify, for tax purposes, as a RIC under Subchapter M of Chapter 1 of the Code. As a RIC, we are generally not subject to corporate-level U.S. federal income taxes on the portion of our investment company taxable income and net capital gain (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) that we distribute to our stockholders. To qualify as a RIC, we are required, among other things, to distribute to our stockholders each year at least 90% of investment company taxable income, as defined by the Code, and to meet certain asset-diversification requirements.
 

17


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2015
(unaudited)

Certain of our wholly-owned subsidiaries, or Taxable Subsidiaries, have elected to be taxed as corporations for federal income tax purposes. The Taxable Subsidiaries hold certain of our portfolio investments and are consolidated for financial reporting purposes, but not for income tax reporting purposes. These Taxable Subsidiaries permit us to hold equity investments in portfolio companies that are “pass through” entities for tax purposes, in order to comply with the “source-of-income” requirements that must be satisfied to maintain our qualification as a RIC. The Taxable Subsidiaries may generate net income tax expense or benefit, which is reflected on our consolidated statements of operations.
 
Note 6: Commitments and Contingencies
 
We have continuing obligations under the Investment Advisory Agreement and the Administration Agreement with OHA. See Note 4. The agreements provide that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its duties and obligations, OHA and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with OHA will be entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of services under the agreements or otherwise as our investment advisor or administrator. The agreements also provide that OHA and its affiliates will not be liable to us or any stockholder for any error of judgment, mistake of law, any loss or damage with respect to any of our investments or any action taken or omitted to be taken by OHA in connection with the performance of any of its duties or obligations under the agreements or otherwise as investment advisor or administrator to us, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services. In the normal course of business, we enter into a variety of undertakings containing a variety of representations that may expose us to some risk of loss. We do not expect significant losses, if any, from such undertakings.
 
Legal Proceedings
 
From time to time, we are involved in various legal proceedings arising in the normal course of business. While we cannot predict the outcome of these proceedings with certainty, we do not believe that an adverse result in any pending legal proceeding, other than those described below, individually or in the aggregate, would be material to our business, financial condition or cash flows.
 
ATP Litigation . On August 17, 2012, ATP Oil & Gas Corporation, or ATP, filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. Prior to the bankruptcy filing, we purchased limited term overriding royalty interests, or ORRIs, in certain offshore oil and gas producing properties operated by ATP (generally, the Gomez and Telemark properties). On August 23, 2012, on a motion filed by ATP, the bankruptcy judge presiding over ATP’s case signed an order (Bankr. Dkt. No. 191) requiring ATP to pay amounts received after August 17, 2012 to those parties it believes are entitled to receive them, including the ORRI holders, provided that the owners of the ORRIs execute a disgorgement agreement providing for the repayment of any amounts that the bankruptcy court later finds to have been inappropriately paid. We executed the disgorgement agreement and began receiving monthly distributions in September 2012 from ATP of our share of production proceeds received by ATP after August 17, 2012. As of June 30, 2015 , our unrecovered investment was $27.2 million, and we had received aggregate production payments of $34.9 million subject to the disgorgement agreement; both of these amounts are the subject of disputes in the litigation described herein.
 
As of June 30, 2015 , we had incurred legal and consulting fees totaling $5.3 million in connection with the enforcement of our rights under the ORRIs. On various occasions, we have provided notice that such legal expenses will be added to our unrecovered investment balance to the extent they are not reimbursed. To date, we have not received any payments on account of legal expenses aside from our receipt of regular monthly production payments. We add our legal expenses to the unrecovered investment balance in accordance with our transaction documents. As of June 30, 2015 , $4.7 million of the $5.3 million in legal and consulting fees have been added to, and are thus included in, the unrecovered investment balance under the terms of our transaction documents. The remaining amounts of legal and consulting fees, totaling $0.6 million and $0.1 million as of June 30, 2015 and December 31, 2014 , respectively, are included in accounts receivable and other current assets on our consolidated balance sheets and are, thus, not included in the unrecovered investment balance as of such dates.
 
On October 17, 2012, we filed a lawsuit against ATP styled: OHA Investment Corporation v. ATP Oil & Gas Corporation , Adv. Proc. No. 12-03443, in the U.S. Bankruptcy Court for the Southern District of Texas, seeking a declaration that the ORRIs are our property and not property of ATP and that the conveyance and purchase and sale documents are not

18


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2015
(unaudited)

executory contracts that may be rejected in order to remove or recharacterize our interests in the properties (the “Adversary Proceeding”). ATP filed an answer and counterclaim in which it (a) denies that the ORRIs are valid and enforceable, (b) seeks a declaration that (i) the ORRIs are a financing agreement and not a true sale and (ii) the ORRIs are executory contracts that are subject to rejection under 11 U.S.C. Sec. 365, and (c) seeks disgorgement from us of amounts paid to us since August 17, 2012, the date of filing of ATP’s Chapter 11 proceeding. The United States, on behalf of the Department of the Interior, intervened in the lawsuit, arguing that the underlying leases are unexpired leases of real property or executory contracts (and not real property conveyances) and are subject to rejection by ATP. Certain service companies claiming statutory liens or privileges have intervened in the lawsuit for the purposes of establishing that their alleged statutory liens and privileges are superior to our rights and asserting related claims for disgorgement of proceeds paid to us by ATP. The Bank of New York Mellon Trust Company, N.A., the secondary lien holder, has also intervened in the lawsuit, arguing (i) the ORRIs are a financing agreement and not a true sale, (ii) our claims are barred, waived, released and/or otherwise foreclosed by the express terms of the conveyance of the ORRIs, and (iii) either we have not met a condition precedent or we failed to perform or substantially perform our contractual obligations. The issues in the lawsuit have been bifurcated such that the issues of (i) whether the conveyances and transactions between us and ATP constituted outright transfers of ownership and (ii) whether the conveyances are executory contracts or leases that ATP may reject, will be tried first as “Phase 1” of the legal proceedings. Any additional claims, including the service company statutory lien claims and related issues, will be decided later if necessary in “Phase 2.” This lawsuit is currently pending, and the initial trial date was abated along with certain other deadlines pending consideration of various motions. In that context, a Motion for Summary Judgment that we filed was denied, and we subsequently filed a motion to appeal the denial on an interlocutory basis. After our motion to appeal was denied by the United States District Court, we filed a Motion for Reconsideration of the summary judgment denial with the bankruptcy court on June 17, 2014. A new scheduling order has not been entered. We intend to vigorously defend our position that the ORRIs constitute real property interests and are fully valid and enforceable pursuant to their terms, and we intend to vigorously defend our position that the service companies’ statutory liens and privileges do not attach to our ORRIs and/or are not superior to our rights.

On June 13, 2013, the bankruptcy court entered an order (Bankr. Dkt. No. 1999) approving ATP’s request (set forth in Bankr. Dkt. No. 1902) to reject and/or abandon and relinquish its interests in the Gomez properties and related agreements, or the Abandonment Order. Consequently, we no longer receive payments attributable to the Gomez properties.
 
On May 7, 2013, ATP conducted an auction of its assets, and ATP selected a credit bid from Credit Suisse AG, as administrative and collateral agent to those lenders who are parties to that certain Senior Secured Super Priority Priming Debtor in Possession Credit Agreement dated August 29, 2012, or the DIP Lenders, based on a reduction in the amount of ATP’s outstanding indebtedness to Credit Suisse AG, or the Credit Bid, as the highest and best bid. The Credit Bid did not include an offer to purchase the Gomez properties, but it included an offer to purchase the Telemark properties. On October 17, 2013, the bankruptcy court entered its Final Sale Order approving the sale (Bankr. Dkt. No. 2706). Under the Final Sale Order, Bennu Oil & Gas, LLC, or Bennu, a newly formed company owned by the DIP Lenders, was authorized to purchase certain ATP assets, including the Telemark properties, as well as claims asserted by ATP in our pending lawsuit relating to the Telemark properties. Our ORRI continues to burden the Telemark properties subject to a resolution of the issues in our pending lawsuit against ATP. The sale to Bennu closed on November 1, 2013. On May 20, 2014, Bennu substituted into our lawsuit for ATP with respect to any claims that relate to assets purchased from ATP.
 
On June 26, 2014, the bankruptcy court entered an order converting ATP’s bankruptcy case to a case under Chapter 7 of the U.S. Bankruptcy Code. Rodney D. Tow was appointed as Chapter 7 Trustee of ATP’s bankruptcy estate.
 
On July 10, 2014, we filed, in our Adversary Proceeding, a Motion for Leave to amend our complaint to, among other things, add claims and defenses based on facts that occurred after the filing of our complaint, as well as claims and defenses specifically applicable to Bennu. On September 3, 2014, Bennu filed a Motion to Dismiss claims between Bennu and us, as well as an objection to our Motion for Leave. In connection with the Motion to Dismiss, Bennu stated that it does not desire to pursue affirmative claims against us for recharacterization or disgorgement, and it disclaimed any intention to sue us regarding the characterization of the ORRIs. The Motion to Dismiss does not seek to determine any claims, including our claims, any claims of the bankruptcy estate or the claims of the numerous intervenors involved in the litigation, nor does it preclude Bennu or a succeeding party from refiling such claims in the future.
 
On October 1, 2014, we filed an objection to the Motion to Dismiss, asserting that Bennu is the owner of all recharacterization claims against us and requesting that the judge enter a declaratory judgment (rather than an order of dismissal) holding that the ORRIs do, in fact, constitute real property interests that are not subject to recharacterization as a loan

19


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2015
(unaudited)

or otherwise, and are fully valid and enforceable pursuant to their terms. In related briefings, the Trustee asserted that Bennu does not own recharacterization claims relating to the Gomez properties, and objected to entry of a judgment in our favor due to alleged prejudice that would result against the estate’s alleged claims. On November 13, 2014, Bennu filed a Motion to Determine Ownership of Claims, or the Ownership Motion, asserting that it is the sole owner of claims seeking to recharacterize the nature and validity of the ORRIs. On January 28, 2015, the bankruptcy court entered an order on the Ownership Motion (Adv. Dkt. No. 236), which determined, among other things, that Bennu has the exclusive right to seek to recharacterize the ORRIs as something other than a vested ownership in hydrocarbons to be produced. It also determined that (i) the Trustee has the exclusive right to seek to avoid payments made to OHA under sections 544, 547 and 548 of the Bankruptcy Code and (ii) the Trustee may only pursue claims under section 549 that were not purchased by Bennu. On February 24, 2015, the Trustee filed an Amended Counterclaim against us seeking to avoid and recover alleged preferential transfers in the amount of $3.4 million. The Amended Counterclaim also seeks to avoid post-petition royalty payments made to us from the Gomez Properties in the amount of $9.6 million and from the Telemark Properties in the amount of $13.4 million. On April 1, 2015, we filed our Motion to Dismiss the Trustee’s Amended Counterclaim (Adv. Dkt. No. 249) arguing that the Amended Counterclaim should be dismissed, because Bennu purchased the recharacterization claims and the exclusive right to seek to recharacterize our ORRIs as anything other than a vested ownership interest. Also on April 1, 2015, Bennu filed a Motion to Enforce the Final Sale Order (Adv. Dkt. No. 248), arguing that the Trustee has no right to assert any section 549 claims against us.
  
On April 30, 2015, we and Bennu filed an Expedited Joint Motion to Enter Agreed Judgment (Adv. Dkt. No. 251), seeking entry of an Agreed Judgment determining that, among other things, the ORRIs are a real property interest and a “production payment” within the meaning of Sections 101(42A) and 541(b) of the United States Bankruptcy Code, and that the ORRIs are not and never were property of ATP’s bankruptcy estate. In connection with the Joint Motion, we entered into a Settlement and Release Agreement with Bennu pursuant to which, in exchange for Bennu agreeing to execute and seek entry of the Agreed Judgment, we agreed to withdraw and/or release Bennu from certain claims contemplated in our July 2014 Motion for Leave mentioned above, primarily relating to our claim for breach of certain contractual Acts of Subordination which were executed in connection with the conveyance of the ORRIs. Our release of Bennu is contingent upon the bankruptcy court’s entry of the Agreed Judgment, or another acceptable form of agreed judgment that is final and not subject to appeal.

The Trustee filed an Objection to the Joint Motion to Enter Agreed Judgment (Adv. Dkt. No. 253), and on May 21, 2015, the Court conducted a hearing on our Motion to Dismiss the Trustee’s Amended Counterclaim, Bennu’s Motion to Enforce the Final Sale Order, and the Expedited Joint Motion to Enter Agreed Judgment. At the hearing, the Court announced its decision to dismiss the claim asserted by the Trustee to avoid post-petition royalty payments made to us from the Telemark Properties. With respect to the remaining claims asserted in the Trustee’s Amended Counterclaim, the Court took our Motion to Dismiss and Bennu’s Motion to Enforce the Final Sale Order under advisement, and the Court’s ruling is currently pending. The Court requested further briefing from the Parties, which was submitted on June 5, 2015 (Adv. Dkt. Nos. 263, 264) and June 11, 2015 (Adv. Dkt. No. 265). With respect to the Expedited Joint Motion to Enter Agreed Judgment, the Court indicated that it could not enter the Agreed Judgment in the Adversary Proceeding as long as the Trustee remains a party with pending claims. As a result, the Court abated the Expedited Joint Motion to Enter Agreed Judgment, pending further submission by us and Bennu.
 
During the 90-day preference period preceding the filing of ATP’s bankruptcy, we received royalty payments totaling approximately $3.6 million. Through June 30, 2015 , we received post-petition royalty payments from the Gomez properties and the Telemark properties in the amount of $8.3 million and $26.6 million, respectively. It is estimated that the statutory lien claims asserted by intervenors in the Adversary Proceeding against our ORRIs are in the principal amount of approximately $35.2 million. At this time, we estimate that there are potential statutory lien claims (including claims of the intervenors in the Adversary Proceeding, without regard to the validity of such claims) in the principal amount of approximately $54.2 million. We have or will assert that we have viable defenses with respect to all of the claims of the statutory lien claimants or any other claim which seeks to avoid or disgorge any prepetition or post-petition royalty payment which we received in respect of the Telemark or Gomez properties. In the event we do not prevail on our defenses to the statutory lien claims or any other claim seeking to avoid or disgorge pre-petition or post-petition royalty payments, we contend that, pursuant to the terms of our transaction documents, we are entitled to include any amounts disgorged on account of any such claims into the unrecovered investment balance of our ORRIs. Moreover, to the extent we do not prevail on our defenses to any action brought by the holder of a statutory lien claim, we contend that we would be permitted to seek contribution from other ORRI and net profits interest holders with respect to any disgorged amounts.
 

20


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2015
(unaudited)

However, in the event our defenses to the claims of the statutory lien claimants are unsuccessful or we otherwise become liable for disgorgement of any pre-petition or post-petition royalty payments which we have received from either the Gomez or Telemark properties, the remaining oil and gas reserves associated with the Telemark properties may be insufficient to provide for a full recovery on our investment. In the event that it is determined that we are not entitled to include amounts disgorged on account of statutory lien claims or other claims, if any, into the unrecovered investment balance of our ORRIs, any disgorged amounts will result in a failure to achieve our anticipated return and/or a loss on our investment.
 
While we intend to vigorously defend our legal positions in the Adversary Proceeding, there can be no assurance that we will ultimately prevail in any or all of these matters.
 
Note 7: Fair Value
 
Our investments consisted of the following as of June 30, 2015 and December 31, 2014 :
 
 
 
June 30, 2015
 
December 31, 2014
(Dollar amounts in thousands)
 
Cost
 
% of total
 
Fair Value
 
% of total
 
Cost
 
% of total
 
Fair Value
 
% of total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Portfolio investments
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

First lien secured debt
 
$
24,659

 
9.5
%
 
$
7,870

 
3.5
%
 
$
25,929

 
11.3
%
 
$
11,270

 
5.4
%
Second lien debt
 
71,926

 
27.7
%
 
69,744

 
30.5
%
 
42,650

 
18.5
%
 
41,410

 
20.0
%
Subordinated debt
 
37,389

 
14.4
%
 
34,478

 
15.1
%
 
36,304

 
15.8
%
 
35,620

 
17.2
%
Limited term royalties
 
27,166

 
10.5
%
 
19,310

 
8.5
%
 
26,767

 
11.6
%
 
23,700

 
11.5
%
Royalty interests
 
42

 
%
 
48

 
%
 
52

 
%
 
371

 
0.2
%
Redeemable preferred units
 
50,014

 
19.3
%
 
56,067

 
24.5
%
 
50,021

 
21.7
%
 
54,906

 
26.6
%
CLO residual interests
 
6,694

 
2.6
%
 
7,639

 
3.3
%
 
7,014

 
3.0
%
 
7,110

 
3.5
%
Equity securities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Membership and partnership units
 
10,500

 
4.0
%
 
2,842

 
1.2
%
 
10,500

 
4.6
%
 
1,730

 
0.8
%
Common stock
 
419

 
0.2
%
 

 
%
 
419

 
0.2
%
 

 
%
Warrants
 
91

 
%
 
48

 
%
 
91

 
%
 
46

 
%
Total equity securities
 
11,010

 
4.2
%
 
2,890

 
1.2
%
 
11,010

 
4.8
%
 
1,776

 
0.8
%
Total portfolio investments
 
228,900

 
88.2
%
 
198,046

 
86.6
%
 
199,747

 
86.7
%
 
176,163

 
85.2
%
Government securities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury Bills
 
30,600

 
11.8
%
 
30,600

 
13.4
%
 
30,600

 
13.3
%
 
30,600

 
14.8
%
Total investments
 
$
259,500

 
100.0
%
 
$
228,646

 
100.0
%
 
$
230,347

 
100.0
%
 
$
206,763

 
100.0
%
 
We account for all of the assets in our investment portfolio at fair value, following the provisions of the Financial Accounting Standards Board Accounting Standards Codification Fair Value Measurements and Disclosures , or ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
 
On a quarterly basis, the investment team of our investment advisor prepares fair value recommendations for all of the assets in our portfolio utilizing the income approach and market approach in accordance with ASC 820 and presents them to the Audit Committee of our Board of Directors. The Audit Committee recommends fair values of each asset to our Board of Directors, which in good faith determines the final fair value for each investment. We record investments in securities for which market quotations are readily available at such market quotations in our financial statements as of the valuation date. For investments in securities for which market quotations are not readily available, or which have various degrees of trading restrictions, the investment team of our investment advisor prepares valuation analyses as generally described below.
 

21


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2015
(unaudited)

Investment Team Valuation. The investment professionals of our investment advisor prepare fair value recommendations for each investment.

Investment Team Valuation Documentation. The investment team documents and discusses its preliminary fair value recommendations with the investment committee and senior management of our investment advisor.

Third Party Valuation Activity. We may, at our discretion, retain an independent valuation firm to review any or all of the valuation analyses and fair value recommendations provided by the investment team of our investment advisor. Since December 31, 2014, our general practice is that we have an independent valuation firm review all Level 3 investments (those whose value is determined using significant unobservable inputs) with recommended fair values in excess of $10 million on a quarterly basis, and review all Level 3 investments with recommended fair values greater than zero at least annually.

Presentation to Audit Committee . Our investment advisor and senior management present the valuation analyses and fair value recommendations to the Audit Committee of our Board of Directors. Prior to September 30, 2014, such presentation was made to the Valuation Committee of our Board of Directors.

Board of Directors and Audit Committee. The Board of Directors and the Audit Committee (or the Valuation Committee prior to September 30, 2014) review and discuss the valuation analyses and fair value recommendations provided by the investment team of our investment advisor and the independent valuation firm, if applicable.

Final Valuation Determination. Our Board of Directors discusses the fair values recommended by the Audit Committee (or the Valuation Committee prior to September 30, 2014) and determines the fair value of each investment in our portfolio, in good faith, based on the input of the investment team of our investment advisor, our Audit Committee (or Valuation Committee prior to September 30, 2014) and the independent valuation firm, if applicable.

ASC 820 defines fair value as the price that a seller would receive for an asset or pay to transfer a liability in an orderly transaction between independent, knowledgeable and willing market participants at the measurement date. The fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes the use of observable market inputs over unobservable entity-specific inputs. In accordance with ASC 820, we categorize our investments based on the inputs to our valuation methodologies as follows:
 
Level 1 — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.

Level 2  — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.

Level 3 — Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding what market participants would use to price the asset or liability based on the best available information.

Fair value accounting classifies financial assets and liabilities in their entirety based on the lowest level of input that is significant to the estimated fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment that may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels. We did not have any liabilities measured at fair value at June 30, 2015 or December 31, 2014.
 
Debt Securities and Limited Term Royalties:   In determining the fair value of our debt investments, we first assess the overall financial health of the portfolio company through an evaluation of a number of factors, including, as relevant, historical and projected financial results, the portfolio company's enterprise value, and the nature and realizable value of any collateral. In estimating the portfolio company’s enterprise value, we analyze the discounted value of estimated future net cash flows of the portfolio company, derived, when appropriate, from third party valuations of a portfolio company’s assets, such as engineering

22


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2015
(unaudited)

reserve reports on oil and natural gas properties. We also use a market approach in determining the portfolio company’s estimated enterprise value, considering recent comparable transactions involving similar businesses or assets. We also may consider the markets in which the portfolio company operates; comparison to a peer group of publicly traded securities; the size and scope of the portfolio company and its specific strengths and weaknesses; recent purchases or sales of securities by the portfolio company; recent offers to purchase the portfolio company; the estimated value of comparable securities; and other relevant factors. Based upon these analyses, we assess the sources of cash flow available to the portfolio company to service its debt and the underlying credit risk, and determine an appropriate yield, or discount rate, to apply to our anticipated cash flows to be collected from each debt investment, recognizing that the collection of contractual cash flows may come from one or a combination of cash flows generated from continuing operations of the portfolio company, liquidation of collateral or sale of the portfolio company.  The appropriateness of the yield on our investments is directly relative to our judgment of the associated risks, using observable yield or price data for similar or comparable debt investments when available. Fair value determinations using the discounted cash flow method can be sensitive to significant changes in the inputs. A significant increase (decrease) in the discount rate for a particular security may result in a lower (higher) value for that security.
 
We invest primarily in illiquid debt investments in small and mid-sized private companies, some of which are in the early stages of development, or are start-up companies in need of growth development capital. There is limited activity, transparency and variable data in the markets in which we invest. In circumstances where there is limited observable price or yield data of similar or comparable securities, we base our considerations on our assessments of the credit trends and underlying performance of our portfolio companies and of the markets in which we invest, relying on the collective judgment of the investment team of our investment advisor and our Board of Directors, which is based on their extensive experience and expertise investing in public and private securities markets.
 
Equity Securities:   We record our investments in preferred and common equity securities (including warrants or options to acquire equity securities) for which no market prices are available at fair value based on our pro rata share of the residual equity value available after deducting all outstanding debt and other obligations, as applicable, from the estimated enterprise value of the portfolio company. To estimate the enterprise value of the portfolio company, we analyze the discounted cash flows of the portfolio company and indicative pricing (on an earnings before interest, taxes, depreciation and amortization, or EBITDA, multiple, proved reserve and/or units-of-production basis, as appropriate) in recent comparable market transactions as mentioned above, adjusted for lack of marketability due to the illiquid nature or other restrictions on the sale of the security. In most cases, we may compute an average of the calculated values of our share of the residual equity value (calculated using multiple approaches or various assumptions) in determining the fair value of the equity security to be reported in our financial statements. Estimating a company’s enterprise value involves judgment, and residual equity values can be relatively volatile based on changes in market conditions, the company’s financial performance and outlook, and other factors. Fair value determinations using market comparables can be sensitive to significant changes in the inputs. A significant increase (decrease) in the reserve multiple, or a significant decrease (increase) in the discount for lack of marketability, for a particular equity security may result in a higher (lower) fair value for that security.
 
In some cases, where we deem recent or pending financing or recapitalization transactions involving the portfolio company to be more indicative of enterprise value, we use such recent transactions to value the enterprise, in lieu of the discounted cash flow or market comparables. In addition, in cases where we deem appropriate, we may utilize an option pricing method, or OPM, to value the various preferred stock, common stock and warrants we have in companies with complex capital structures. The OPM treats preferred stock, common stock and warrants as call options on the enterprise value, with exercise prices based on liquidation preference of the security. The OPM commonly uses the Black-Scholes model to price the call option and considers the various terms of the stockholder agreements upon liquidation of the enterprise. In addition, the OPM implicitly considers the effect of the liquidation preference as of a future liquidation date, not as of the valuation date.
 
Royalty Interests : We record our investments in overriding royalty interests at fair value based on a multiple of cash flows generated by such investments, multiples from transactions involving the sale of comparable assets and/or the discounted value of expected future net cash flows from such investments, adjusted for lack of marketability due to the illiquid nature or other restrictions on the sale of our investment. We derive appropriate cash flow multiples from the review of comparable transactions involving similar assets. We derive the discounted value of future net cash flows, when appropriate, from third party valuations of a portfolio company’s assets, such as engineering reserve reports of oil and natural gas properties. A significant increase (decrease) in the cash flow multiple, or a significant decrease (increase) in the discount for lack of marketability, for a particular investment may result in a higher (lower) fair value for that investment.
 

23


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2015
(unaudited)

Contingent Earn-Out : Our contingent earn-out investment resulted from the sale of our investment in Alden Resources, LLC to Globe BG, LLC in July 2011. The amount of the payment, up to $6.8 million, is based on a formula involving the number of clean tons of coal produced multiplied by the difference between the company’s cost of production in 2010 and the cost of production during the optimal consecutive twelve-month period during the three-year period ended July 2014. The reporting and review mechanism to determine the ultimate value of the earn-out has not yet been completed. Globe has informally advised us that the company’s relative cost of production has not improved since July 2011, so we have recorded the value of the earn-out at zero.
 
We hold certain investments in debt or equity securities that are publicly traded, but for which there are relatively few transactions or for which trading activity is relatively infrequent. We value these investments at broker quotes as of the balance sheet date or at prices for which such securities were most recently traded. We consider these investments as Level 2 on the valuation hierarchy, as the values represent quoted prices for identical instruments in thinly-traded markets.
 
Due to the inherent uncertainty in the valuation process, the fair values of our investments may differ materially from the values that would have been used had a ready market for the securities existed. Additionally, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on our investments to be materially different than the valuations currently assigned.
 
We occasionally have investments in our portfolio that contain payment-in-kind, or PIK, interest or dividend provisions. We compute PIK interest income or PIK dividend income at the contractual rate specified in each investment agreement, and we add that amount to the principal balance of the investment. For investments with PIK interest or PIK dividends, we calculate our income accruals on the principal balance plus any PIK amounts. If the portfolio company’s projected cash flows, further supported by estimated total enterprise value, are not sufficient to cover the contractual principal and interest or dividend amounts, as applicable, we do not accrue PIK interest income or PIK dividend income on the investment. To maintain our RIC status, we must pay out this non-cash income to stockholders in the form of distributions, even though we have not yet collected the cash.


24


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2015
(unaudited)

The following tables set forth the fair value of our investments by level within the fair value hierarchy as of June 30, 2015 and December 31, 2014 (in thousands):
 
June 30, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
Portfolio investments
 
 

 
 

 
 

 
 

Control investments
 
 

 
 

 
 

 
 

First lien secured debt
 
$
3,000

 
$

 
$

 
$
3,000

Total control investments
 
3,000

 

 

 
3,000

Affiliate investments
 
 

 
 

 
 

 
 

Subordinated debt
 
15,938

 

 

 
15,938

Equity securities
 
2,842

 

 

 
2,842

Total affiliate investments
 
18,780

 

 

 
18,780

Non-affiliate investments
 
 

 
 

 
 

 
 

First lien secured debt
 
4,870

 

 

 
4,870

Second lien debt
 
69,744

 

 
31,354

 
38,390

Subordinated debt
 
18,540

 

 
10,440

 
8,100

Limited term royalties
 
19,310

 

 

 
19,310

Redeemable preferred units
 
56,067

 

 

 
56,067

CLO residual interests
 
7,639

 

 
7,639

 

Royalty interests
 
48

 

 

 
48

Equity securities
 
48

 

 

 
48

Total non-affiliate investments
 
176,266

 

 
49,433

 
126,833

Total portfolio investments
 
198,046

 

 
49,433

 
148,613

Government securities
 
 

 
 

 
 

 
 

U.S. Treasury Bills
 
30,600

 
30,600

 

 

Total investments
 
$
228,646

 
$
30,600

 
$
49,433

 
$
148,613

 

25


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2015
(unaudited)

December 31, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Portfolio investments
 
 

 
 

 
 

 
 

Control investments
 
 

 
 

 
 

 
 

First lien secured debt
 
$
5,950

 
$

 
$

 
$
5,950

Royalty interests
 
325

 

 

 
325

Equity securities
 

 

 

 

Total control investments
 
6,275

 

 

 
6,275

Affiliate investments
 
 

 
 

 
 

 
 

Subordinated debt
 
15,700

 

 

 
15,700

Equity securities
 
1,730

 

 

 
1,730