As of June 30, 2017, the geographic composition of the Company’s portfolio at fair value was as follows:
Amounts in the previous tables do not include investments in short-term securities, including United States Treasury Bills and money market mutual funds.
As of December 31, 2016 the industry composition of the Company’s portfolio at fair value was as follows:
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Dollar amounts in thousands, except per share amounts
1. ORGANIZATION
Great Elm Capital Corp. (the “Company”) was formed on April 22, 2016 as a Maryland corporation. The Company is structured as an externally managed, non-diversified closed-end management investment company. The Company elected to be regulated as a business development company (a “BDC”) under the Investment Company Act of 1940, as amended (the “Investment Company Act”). The Company is managed by Great Elm Capital Management, Inc., a Delaware corporation (“GECM”), a subsidiary of Great Elm Capital Group, Inc., a Delaware corporation (“Great Elm Capital Group”).
The Company seeks to generate current income and capital appreciation through debt and equity investments. The Company invests primarily in secured and senior unsecured debt instruments that it purchases in the secondary markets.
The Company and Full Circle Capital Corporation, a Maryland corporation (“Full Circle”), entered into an Agreement and Plan of Merger, dated as of June 23, 2016 (the “Merger Agreement”). The Merger Agreement provided for the merger of Full Circle with and into the Company (the “Merger”). The Company agreed to provide indemnity to Full Circle’s directors and officers under certain circumstances. The Company has concluded that its indemnification obligation is remote as of the date of the accompanying financial statements. The Merger was completed on November 3, 2016 and the Company began operations on November 4, 2016. The Company accounted for the Merger as a business combination under Accounting Standards Codification (ASC) Topic 805, Business Combinations (“ASC 805”). The consideration for the Merger consisted of 4,986,585 shares of common stock, par value $0.01 per share, of the Company (the “Common Stock”).
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
. The Company’s functional currency is U.S. dollars and these consolidated financial statements have been prepared in that currency. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to Regulation S-X and Regulation S-K. The Company is an investment company following accounting and reporting guidance in Accounting Standards Codification Topic 946,
Financial Services – Investment Companies
.
Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with accounting principles generally accepted in the United States of America, is not required for interim reporting purposes and has been omitted from these financial statements. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The consolidated financial statements include the accounts of the Company.
The Company’s December 31, 2016 consolidated financial statements were reclassified in order to be consistent with the format used for the June 30, 2017 consolidated financial statements.
Basis of Consolidation
. Under the Investment Company Act, Article 6 of Regulation S-X and the American Institute of Certified Public Accountants’
Audit and Accounting Guide for Investment Companies
, the Company is generally precluded from consolidating any entity other than another investment company or an operating company which provides substantially all of its services and benefits to the Company. The accompanying consolidated financial statements include the Company’s accounts and the accounts of the Company’s wholly-owned, or previously wholly-owned, subsidiaries TransAmerican Asset Servicing Group, Inc., PE Facility Solutions, LLC, Double Deuce Lodging LLC, and FC Shale Inc. All intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition
. Interest and dividend income, including income paid in kind, is recorded on an accrual basis. Origination, structuring, closing, commitment and other upfront fees, including original issue discounts, earned with respect to capital commitments, are generally amortized or accreted into interest income over the life of the respective debt investment, as are end-of-term or exit fees receivable upon repayment of a debt investment if such fees are fixed in nature. The Company currently has no investments with fixed exit fees. Other fees, including certain amendment fees,
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prepayment fees and commitment fees on broken deals, and end-of-term or exit fees that have a contingency feature or are variable in nature are recognized as earned. Prepayment fees and similar income due upon the early
repayment of a loan or debt security are generally included in interest income.
Certain of the Company’s debt investments were purchased at a discount to par as a result of the underlying credit risks and financial results of the issuer, as well as general market factors that influence the financial markets as a whole. Discounts on the acquisition of corporate debt instruments are generally amortized using the effective-interest or constant-yield method assuming there are no material questions as to collectability. For debt instruments where the Company received original issue discounts, when principal payments on the debt instrument are received in an amount in excess of the debt instrument’s amortized cost, the excess principal payments are recorded as interest income.
Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation)
. The Company measures realized gains or losses by the difference between the net proceeds from the repayment or sale of an investment and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Realized gains and losses are computed using the first-in first-out method. Net change in unrealized appreciation or depreciation reflects the net change in portfolio investment values and portfolio investment cost bases during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
Use of Estimates
. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.
Organization and Merger Related Costs
. Organization and Merger-related costs, including costs relating to the formation and incorporation of the business were deemed to be incurred by the Company only subsequent to the Merger being completed.
Cash and Cash Equivalents
. Cash and cash equivalents typically consist of bank demand deposits.
Valuation of Portfolio Investments
. The Company carries its investments in accordance with ASC Topic 820,
Fair Value Measurements and Disclosures
(“ASC 820”), which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations or alternative price sources. In the absence of quoted market prices, broker or dealer quotations or alternative price sources, investments are measured at fair value as determined by the Company’s board of directors (the “Board of Directors”).
Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. See Note 4.
The Company values its portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by the Board of Directors. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (1) are independent of the Company, (2) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (3) are able to transact for the asset, and (4) are willing to transact for the asset (that is, they are motivated but not forced or otherwise compelled to do so).
Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. The Company generally obtains market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker-dealers or market makers. Short term debt investments with remaining maturities within ninety days are generally valued at amortized cost, which approximates fair value. Debt and equity securities for which market quotations are not readily available, which is the case for many of the Company’s investments, or for which market quotations are deemed not to represent fair value, are valued at fair value using a consistently applied valuation process in accordance with the Company’s documented
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valuation policy that has been reviewed and approved by the Board of Directors, who also approve in good faith the valuation of such securities as of the end of each quarter. Due to the inherent uncertainty and subjectivity of determining the fair value
of investments that do not have a readily available market value, the fair value of the Company’s investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may diffe
r materially from the values that the Company may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of the Company’s investments than on the fair value
s of our investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where the Company believes that facts and circumstances applicable to an issuer, a seller or pu
rchaser, or the market for a particular security cause current market quotations to not reflect the fair value of the security.
The valuation process approved by the Board of Directors with respect to investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value is as follows:
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▪
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The investment professionals of GECM provide recent portfolio company financial statements and other reporting materials to an independent valuation firm (or firms) approved by the Board of Directors;
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▪
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Such firms evaluate this information along with relevant observable market data to conduct independent appraisals each quarter, and their preliminary valuation conclusions are documented, discussed, and iterated with senior management of GECM;
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▪
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The fair value of investments comprising in the aggregate less than 5% of the Company’s total capitalization may be determined by GECM in good faith in accordance with the Company’s valuation policy without the employment of an independent valuation firm.
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The Company’s audit committee recommends, and the Board of Directors approves, the fair value of the investments in the Company’s portfolio in good faith based on the input of GECM, the respective independent valuation firms (to the extent applicable) and the inputs of each of the audit committee of the Board of Directors and the Board of Directors;
Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in determining the fair value of its investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, and enterprise values.
Foreign Currency Translation
. Amounts denominated in foreign currencies are translated into U.S. dollars on the following basis: (1) investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates effective on the date of valuation; and (2) purchases and sales of investments and income and expense items denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates prevailing on the transaction dates. The portion of gains and losses on foreign investments resulting from fluctuations in foreign currencies is included in net realized and unrealized gain or loss from investments.
U.S. Federal Income Taxes
. From inception to September 30, 2016, the Company was a taxable association under Internal Revenue Code of 1986, as amended (the “Code”). The Company intends to elect to be taxed as a regulated investment company (“RIC”) under subchapter M of the Code for the partial taxable year beginning on October 1, 2016 and ending December 31, 2016. The Company intends to operate in a manner so as to qualify for the tax treatment applicable to RICs in that taxable year and all future taxable years. In order to qualify as a RIC, among other things, the Company will be required to timely distribute to its stockholders at least 90% of investment company taxable income (“ICTI”) including payment-in-kind (“PIK”) interest, as defined by the Code, for each taxable year in order to be eligible for tax treatment under subchapter M of the Code. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year. Any such
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carryover ICTI must be distributed prior to the 15th d
ay of the ninth month after the tax year-end. So long as the Company maintains its status as a RIC, the Company generally will not be subject to corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least
annually to its stockholders as distributions. Rather, any tax liability related to income earned by the Company represents obligations of the Company’s stockholders and will not be reflected in the financial statements of the Company.
If the Company does not distribute (or is not deemed to have distributed) each calendar year the sum of (1) 98% of its net ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the “Minimum Distribution Amount”), the Company will generally be required to pay an excise tax equal to 4% of the amount by the which Minimum Distribution Amount exceeds the distributions for the year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes, if any, on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.
The Company accrued $80 of excise tax expense in fiscal 2016 and has accrued $0 of excise tax expense in fiscal 2017.
At December 31, 2016, the Company, for federal income tax purposes, had capital loss carryforwards of $41,842 which will reduce its taxable income arising from future net realized gains on investment transactions, if any, to the extent permitted by the Code, and thus will reduce the amount of distributions to shareholders, which would otherwise be necessary to relieve the Company of any liability for federal income or excise tax. Under tax regulations, capital losses incurred in taxable years beginning after December 2010 are considered deferred capital losses and are treated as arising on the first day of the Company’s next taxable year, retaining the same short-term or long-term character as when originally deferred. Deferred capital losses are required to be used prior to capital loss carryforwards, which carry an expiration date. As a result of this ordering rule, capital loss carryforwards may be more likely to expire if unused. Of the capital loss carryforwards at December 31, 2016, $34,502 are limited losses and available for use subject to annual limitation under Section 382. Of the deferred capital losses at December 31, 2016, $7,651 were short-term.
ASC 740
Accounting for Uncertainty in Income Taxes
(“ASC 740”) provides guidance on the accounting for and disclosure of uncertainty in tax position. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company's tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Based on its analysis of its tax position for all open tax years (the current and prior years, as applicable), the Company has concluded that it does not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740. Such open tax years remain subject to examination and adjustment by tax authorities.
Recent Accounting Developments.
In March 2017, FASB issued ASU No. 2017-08; Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20)
Premium Amortization on Purchased Callable Debt Securities
. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The application of this guidance is not expected to have a material impact on the accompanying consolidated financial statements and related disclosures.
In October 2016, the U.S. Securities and Exchange Commission (“SEC”) adopted new rules and amended existing rules (together, “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosures about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management has adopted the final rules in presenting the accompanying consolidated financial statements and related disclosures.
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3. SIGNIFICANT AGREEMENTS AND RELATED PARTIES
Investment Management Agreement.
On September 27, 2016, the Company entered into an investment management agreement (the “Investment Management Agreement”) with GECM in connection with the transactions described in Note 8. Beginning on November 4, 2016, the Company began accruing for GECM’s fees for its services under the Investment Management Agreement. This fee consists of two components: a base management fee and an incentive fee.
Management Fee
The base management fee is calculated at an annual rate of 1.50% of the Company’s average adjusted gross assets, including assets purchased with borrowed funds. The base management fee will be payable quarterly in arrears. The base management fee is calculated based on the average value of the Company’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the then current calendar quarter. Base management fees for any partial quarter are prorated.
For the three and six months ended June 30, 2017, management fees amounted to $546 and $1,139, respectively. As of June 30, 2017, $546 remained payable and is included in our Statement of Assets and Liabilities in Due to Affiliates.
Incentive Fee
The incentive fee consists of two components, an investment income component and a capital gains component. Under the investment income component, on a quarterly basis, the Company will pay GECM 20% of the amount by which the Company’s pre-incentive fee net investment income (the “Pre-Incentive Fee Net Investment Income”) for the quarter exceeds a hurdle rate of 1.75% (7.0% annualized) of the Company’s net assets at the end of the immediately preceding calendar quarter, subject to a “catch-up” provision pursuant to which GECM receives all of such income in excess of the 1.75% level but less than 2.1875% (8.75% annualized) and subject to a total return requirement (described below). The effect of the “catch-up” provision is that, subject to the total return provision, if pre-incentive fee net investment income exceeds 2.1875% of the Company’s net assets at the end of the immediately preceding calendar quarter, in any calendar quarter, GECM will receive 20.0% of the Company’s pre-incentive fee net investment income as if the 1.75% hurdle rate did not apply. These calculations will be appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the then current quarter.
Pre-Incentive Fee Net Investment Income includes any accretion of original issue discount, market discount, payment-in-kind interest, payment-in-kind dividends or other types of deferred or accrued income, including in connection with zero coupon securities, that the Company and its consolidated subsidiaries have recognized in accordance with GAAP, but have not yet received in cash (collectively, “Accrued Unpaid Income”). Pre-Incentive Fee Net Investment Income does not include any realized capital gains or losses or unrealized capital appreciation or depreciation. Accrued Unpaid Income as of June 30, 2017 was $8,618.
Any income incentive fee otherwise payable with respect to Accrued Unpaid Income (collectively, the “Accrued Unpaid Income Incentive Fees”) are deferred, on a security by security basis, and becomes payable only if, as, when and to the extent cash is received by the Company or its consolidated subsidiaries in respect thereof. Any Accrued Unpaid Income that is subsequently reversed in connection with a write-down, write-off, impairment or similar treatment of the investment giving rise to such Accrued Unpaid Income will, in the applicable period of reversal, (A) reduce Pre-Incentive Fee Net Investment Income and (B) reduce the amount of Accrued Unpaid Income Incentive Fees previously deferred.
Under the capital gains component of the incentive fee, the Company is obligated to pay GECM at the end of each calendar year 20% of the aggregate cumulative realized capital gains from November 4, 2016 through the end of that year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized depreciation through the end of such year, less the aggregate amount of any previously paid capital gains incentive fees.
Payment of the incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be payable except to the extent that 20% of the cumulative net increase in net assets resulting from operations from and after November 4, 2016 exceeds the cumulative incentive fees accrued and/or paid from and after November 4, 2016. For the purposes of this calculation, the “cumulative net increase in net assets resulting from operations” is the sum of the Company’s pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation from and after November 4, 2016.
F-20
For the three and six months ended June 30, 2017, the Company incurred Incentive Fees based on income of $871 and
$1,894, respectively. As of June 30, 2017, $2,757 remained payable of which $1,724 of the payable at June 30, 2017 was Accrued Unpaid Income Incentive Fees and $0 was immediately payable after calculating the total return requirement. As of December 31, 2
016, $863 remained payable of which $840 of the payable at December 31, 2016 was Accrued Unpaid Income Incentive Fees and $0 was immediately payable after calculating the total return requirement. The payables are included in Due to Affiliates in the accom
panying Statements of Assets and Liabilities. For the three and six months ended June 30, 2017, the Company accrued Incentive Fees based on capital gains of $0.
The Investment Management Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GECM and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Investment Management Agreement or otherwise as an investment adviser of the Company.
The Company’s chief executive officer is also chief investment officer of GECM, a partner in MAST Capital Management, LLC (“MAST Capital”), the investment manager of the Company’s largest stockholders, and a member of the board of directors of Great Elm Capital Group.
Administration Fees
. On September 27, 2016, the Company entered into an administration agreement (the “Administration Agreement”) with GECM to provide administrative services, including furnishing the Company with office facilities, equipment, clerical, bookkeeping record keeping services and other administrative services. The Company will reimburse GECM for its allocable portion of overhead and other expenses of GECM in performing its obligations under the Administration Agreement.
GECM agreed that the aggregate amount of expenses accrued for reimbursement pursuant to the Administration Agreement that pertain to direct compensation costs of financial, compliance and accounting personnel that perform services for the Company, inclusive of the fees charged by any sub-administrator to provide such financial, compliance and/or accounting personnel to the Company (the “Compensation Expenses”), during the year ending November 4, 2017, when taken together with Compensation Expenses reimbursed or accrued for reimbursement by the Company pursuant to the Investment Management Agreement during such period, shall not exceed 0.50% of the Company’s average net asset value during such period. The Company has accrued $0 through June 30, 2017 under the reimbursement provision of the Administration Agreement. GECM’s expense cap will be determined retrospectively for the year ending November 4, 2017 and as a result such amount may be reduced.
The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GECM and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Administration Agreement or otherwise as administrator for the Company.
For the three and six months ended June 30, 2017, the Company incurred expenses under the Administration Agreement of $272 and $767, respectively. As of June 30, 2017 and December 31, 2016, $534 and $138 remained payable, respectively, and are included in Due To Affiliates in the Statement of Assets and Liabilities.
The Board reviews the methodology employed in determining how the expenses are allocated to the Company. The Board assesses the reasonableness of such reimbursements for expenses allocated to the Company based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party service providers known to be available. In addition, the Board considers whether any third party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Board compares the total amount paid to GECM for such services as a percentage of the Company’s net assets to the same ratio as reported to other comparable business development companies.
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4. FAIR VALUE MEASUREMENT
The fair value of a financial instrument is the amount that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price).
The fair value hierarchy under ASC 820 prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The levels used for classifying investments are not necessarily an indication of the risk associated with investing in these securities. The three levels of the fair value hierarchy are as follows:
Basis of Fair Value Measurement
Level 1 - Investments valued using unadjusted quoted prices in active markets for identical assets.
Level 2 - Investments valued using other unadjusted observable market inputs, e.g. quoted prices in markets that are not active or quotes for comparable instruments.
Level 3 - Investments that are valued using quotes and other observable market data to the extent available, but which also take into consideration one or more unobservable inputs that are significant to the valuation taken as a whole. At a minimum, all Level 3 investments that comprise more than 5% of the investments of the Company are valued by independent third parties.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Note 2 should be read in conjunction with the information outlined below.
The table below presents the valuation techniques and the nature of significant inputs generally used in determining the fair value of Level 2 Instruments.
Level 2 Instruments Valuation Techniques and Significant Inputs
Equity and Fixed Income
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The types of instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency may include commercial paper, most government agency obligations, certain corporate debt securities, certain mortgage-backed securities, certain bank loans, less liquid publicly listed equities, certain state and municipal obligations, certain money market instruments and certain loan commitments.
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Valuations of Level 2 Equity and Fixed Income instruments can be verified to quoted prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g. indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.
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The table below presents
the valuation techniques and the nature of significant inputs generally used in determining the fair value of Level 3 Instruments.
Level 3 Instruments Valuation Techniques and Significant Inputs
Bank Loans, Corporate Debt, and Other Debt Obligations
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Valuations are generally based on discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows, market yields and recovery assumptions. The significant inputs are generally determined based on an analysis of market comparables, transactions in similar instruments and/or recovery and liquidation analyses.
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Equity
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Recent third-party investments or pending transactions are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate and available:
▪
Transactions in similar instruments;
▪
Discounted cash flow techniques;
▪
Third party appraisals; and
▪
Industry multiples and public comparables.
Evidence includes recent or pending reorganizations (for example, merger proposals, tender offers and debt restructurings) and significant changes in financial metrics, including:
▪
Current financial performance as compared to projected performance;
▪
Capitalization rates and multiples; and
▪
Market yields implied by transactions of similar or related assets.
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The tables below present the ranges of significant unobservable inputs used to value the Company’s Level 3 assets and liabilities as of June 30, 2017 and December 31, 2016, respectively. These ranges represent the significant unobservable inputs that were used in the valuation of each type of instrument, but they do not represent a range of values for any one instrument. For example, the lowest yield in 1st Lien/Senior Secured and Unsecured Debt is appropriate for valuing that specific debt investment, but may not be appropriate for valuing any other debt investments in this asset class. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Company’s Level 3.
Level 3 Instruments
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Level 3 Assets as of
June 30, 2017
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Significant Unobservable
Inputs by Valuation
Techniques
1
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Range
2
of Significant Unobservable
Inputs (Weighted Average
3
) as of
June 30, 2017
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Bank Loans, Corporate Debt, and Other Debt Obligations
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1st Lien/Senior Secured and Unsecured Debt
$76,152
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Discounted cash flows:
▪
Discount Rate
Comparable multiples:
▪
EV/EBITDA
4
Liquidation/Waterfall analysis:
▪
EV/EBITDA
4
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12.23% - 50.00% (18.10%)
4.50 - 8.75 (5.87)
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Equity
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Common Stock, LLC Units and Warrants on private stock $98
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Comparable multiples:
▪
EV/EBITDA
4
Liquidation Value
2
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6.00 - 6.00 (6.00)
$65 - $65 ($65)
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Equity
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Warrants on publicly traded stock $74
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Volatility
2
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74.16% - 74.16% (74.16%)
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Level 3 Instruments
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Level 3 Assets as of
December 31, 2016
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Significant Unobservable
Inputs by Valuation
Techniques
1
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Range
2
of Significant Unobservable
Inputs (Weighted Average
3
) as of
December 31, 2016
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Bank Loans, Corporate Debt, and Other Debt Obligations
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1st Lien/Senior Secured and Unsecured Debt
$83,979
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Discounted cash flows:
▪
Discount Rate
Comparable multiples:
▪
EV/EBITDA
4
Liquidation/Waterfall analysis:
▪
EV/EBITDA
4
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11.85% - 39.80% (16.33%)
3.50 - 6.35 (5.76)
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Unsecured Debt
$0
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Liquidation Value
2
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$0 - $0 ($0)
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Equity
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Common Stock, LLC Units and Warrants on private stock
$314
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Comparable multiples:
▪
EV/EBITDA
4
Liquidation Value
2
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3.50 - 6.00 (6.00)
$68 - $68 ($68)
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Equity
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Warrants on publicly traded stock $119
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Volatility
2
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71.10% - 71.10% (71.10%)
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1
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The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparable and discounted cash flows may be used together to determine fair value. Therefore, the Level 3 balance encompasses both of these techniques.
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2
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The range for an asset category consisting of a single investment represents the relevant market data considered in determining the fair value of the investment.
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3
|
Weighted average for an asset category consisting of multiple investments is calculated by weighting the significant unobservable input by the relative fair value of the investment. Weighted average for an asset category consisting of a single investment represents the significant unobservable input used in the fair value of the investment.
|
4
|
Enterprise value of portfolio company as a multiple of earnings before interest, taxes, depreciation and amortization.
|
As noted above, the income and market approaches were used in the determination of fair value of certain Level 3 assets as of June 30, 2017 and December 31, 2016. The significant unobservable inputs used in the income approach are the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. An increase in the discount rate or market yield would result in a decrease in the fair value. Included in the consideration and selection of discount rates is risk of default, rating of the investment (if any), call provisions and comparable company valuations. The significant unobservable inputs used in the market approach are based on market comparable transactions and market multiples of publicly traded comparable companies. Increases or decreases in market multiples would result in an increase or decrease, respectively, in the fair value.
The following is a summary of the Company’s investment assets categorized within the fair value hierarchy as of June 30, 2017:
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
1st Lien/Senior Secured and Unsecured Debt
|
|
$
|
—
|
|
|
$
|
55,075
|
|
|
$
|
76,152
|
|
|
$
|
131,227
|
|
Equity/Other
|
|
|
231
|
|
|
|
—
|
|
|
|
172
|
|
|
|
403
|
|
Short Term Investments
|
|
|
73,941
|
|
|
|
—
|
|
|
|
—
|
|
|
|
73,941
|
|
Total investment assets
|
|
$
|
74,172
|
|
|
$
|
55,075
|
|
|
$
|
76,324
|
|
|
$
|
205,571
|
|
The following is a summary of the Company’s investment assets categorized within the fair value hierarchy as of December 31, 2016:
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
1st Lien/Senior Secured and Unsecured Debt
|
|
$
|
—
|
|
|
$
|
58,031
|
|
|
$
|
83,979
|
|
|
$
|
142,010
|
|
Equity/Other
|
|
|
—
|
|
|
|
—
|
|
|
|
501
|
|
|
|
501
|
|
Unsecured Debt
|
|
|
—
|
|
|
|
12,166
|
|
|
|
—
|
|
|
|
12,166
|
|
Total investment assets
|
|
$
|
—
|
|
|
$
|
70,197
|
|
|
$
|
84,480
|
|
|
$
|
154,677
|
|
F-24
The following is a reconciliation of Level 3 assets for the three and six months ended June 30, 2017:
Level 3
|
|
Beginning
Balance
as of
March 31,
2017
|
|
|
Purchases
(1)
|
|
|
Net
Realized
Gain (Loss)
|
|
|
Net Change
in Unrealized
Appreciation
(Depreciation)
|
|
|
Sales and
Settlements
(1)
|
|
|
Net
Amortization
of Premium/
Discount
|
|
|
Ending
Balance
as of
June 30,
2017
|
|
1st Lien/Senior Secured and
Unsecured Debt
|
|
$
|
81,420
|
|
|
$
|
17,992
|
|
|
$
|
261
|
|
|
$
|
(2,495
|
)
|
|
$
|
(22,093
|
)
|
|
$
|
1,067
|
|
|
$
|
76,152
|
|
Equity/Other
|
|
|
2,336
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(26
|
)
|
|
|
(2,138
|
)
|
|
|
—
|
|
|
|
172
|
|
Total investment assets
|
|
$
|
83,756
|
|
|
$
|
17,992
|
|
|
$
|
261
|
|
|
$
|
(2,521
|
)
|
|
$
|
(24,231
|
)
|
|
$
|
1,067
|
|
|
$
|
76,324
|
|
Level 3
|
|
Beginning
Balance
as of
January 1,
2017
|
|
|
Purchases
(1)
|
|
|
Net
Realized
Gain (Loss)
|
|
|
Net Change
in Unrealized
Appreciation
(Depreciation)
|
|
|
Sales and
Settlements
(1)
|
|
|
Net
Amortization
of Premium/
Discount
|
|
|
Ending
Balance
as of
June 30,
2017
|
|
1st Lien/Senior Secured and
Unsecured Debt
|
|
$
|
83,979
|
|
|
$
|
75,971
|
|
|
$
|
1,488
|
|
|
$
|
(1,841
|
)
|
|
$
|
(85,066
|
)
|
|
$
|
1,621
|
|
|
$
|
76,152
|
|
Equity/Other
|
|
|
501
|
|
|
|
2,138
|
|
|
|
—
|
|
|
|
(329
|
)
|
|
|
(2,138
|
)
|
|
|
—
|
|
|
|
172
|
|
Total investment assets
|
|
$
|
84,480
|
|
|
$
|
78,109
|
|
|
$
|
1,488
|
|
|
$
|
(2,170
|
)
|
|
$
|
(87,204
|
)
|
|
$
|
1,621
|
|
|
$
|
76,324
|
|
(1)
|
Purchases may include PIK, securities received in corporate actions and restructurings. Sales and Settlements may include securities delivered in corporate actions and restructuring of investments.
|
The following is a reconciliation of Level 3 assets for the period ended December 31, 2016:
Level 3
|
|
Beginning
Balance
as of
November
3,
2016
|
|
|
Purchases
(1)
|
|
|
Net
Realized
Gain (Loss)
|
|
|
Net Change
in Unrealized
Appreciation
(Depreciation)
(2)
|
|
|
Sales and Settlements
(1)
|
|
|
Net
Amortization
of Premium/
Discount
|
|
|
Ending
Balance
as of
December 31,
2016
|
|
1st Lien/Senior
Secured and
Unsecured Debt
|
|
$
|
88,849
|
|
|
$
|
35,771
|
|
|
$
|
274
|
|
|
$
|
(926
|
)
|
|
$
|
(41,738
|
)
|
|
$
|
1,749
|
|
|
$
|
83,979
|
|
Equity/Other
|
|
|
526
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
501
|
|
Total investment
assets
|
|
$
|
89,375
|
|
|
$
|
35,771
|
|
|
$
|
274
|
|
|
$
|
(951
|
)
|
|
$
|
(41,738
|
)
|
|
$
|
1,749
|
|
|
$
|
84,480
|
|
No securities were transferred into the Level 3 hierarchy and no securities were transferred out of the Level 3 hierarchy during the three and six months ended June 30, 2017 or the period ended December 31, 2016. Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur.
5. DEBT
On November 3, 2016, the Company assumed $33,646 of Full Circle 8.25% Senior Notes due 2020 (the “Notes”) in connection with the Merger by executing the second supplemental indenture dated November 3, 2016.
The Notes were initially issued pursuant to an indenture, dated June 3, 2013, as supplemented by the first supplemental indenture, dated June 28, 2013 (collectively with the second supplemental indenture, the “Indenture”), between Full Circle and U.S. Bank National Association (the Trustee”). The Notes are unsecured obligations of the Company and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness (including existing unsecured indebtedness that is later secured) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries or financing vehicles. Interest on the Notes is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a fixed rate of 8.25% per annum. The Notes mature on June 30, 2020 and may be redeemed in whole or in part at any time or from time to time at the Company’s option. The Investment Company Act limits, with
F-25
certain exceptions, the Company’s borrowing such that its asset coverage ratio, as defined in the Investment Company Act, is at least 2 to 1 after such borrowing. As of June 30, 2017, the Company’s
outstanding borrowings were $33,646, and the Company’s asset coverage ratio was 6 to 1.
Information about the Company’s senior securities (including debt securities and other indebtedness) is shown in the following tables as of June 30, 2017.
Year
|
|
Total Amount
Outstanding
(1)
|
|
|
Asset
Coverage
Ratio Per Unit
(2)
|
|
|
Involuntary Liquidation
Preference Per Unit
(3)
|
|
|
Average Market
Value Per Unit
(4)
|
|
Unsecured Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017 (unaudited)
|
|
$
|
33,646
|
|
|
$
|
5.59
|
|
|
$
|
N/A
|
|
|
$
|
1.024
|
|
December 31, 2017
|
|
$
|
33,646
|
|
|
$
|
6.17
|
|
|
$
|
N/A
|
|
|
$
|
1.016
|
|
(1)
|
Total amount of each class of senior securities outstanding at the end of the period presented.
|
(2)
|
Asset coverage per unit is the ratio of the carrying value of the Company’s total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1 of indebtedness.
|
(3)
|
The amount to which such class of senior security would be entitled upon the voluntary liquidation of the issuer in preference to any security junior to it.
|
(4)
|
The average market value per unit for the Notes is based on the average daily prices of such notes for the six months ended June 30, 2017 and the period ended December 31, 2016, respectively, and is expressed per $1 of indebtedness.
|
The Indenture’s covenants, include compliance with (regardless of whether the Company is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the Investment Company Act, as well as covenants requiring the Company to provide financial information to the holders of the Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture. The Company may repurchase the Notes in accordance with the Investment Company Act and the rules promulgated thereunder. Any Notes repurchased by the Company may, at the Company’s option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any Notes surrendered for cancellation will be promptly cancelled and no longer outstanding under the Indenture. As of June 30, 2017, the Company had not repurchased any of the Notes. As of June 30, 2017 and December 31, 2016, the Company was in compliance with all covenants under the Indenture.
The summary information of the Notes for the three and six months ended June 30, 2017, is as follows:
|
|
For the Three Months Ended June 30,
|
|
|
|
2017
|
|
Borrowing interest expense
|
|
$
|
694
|
|
Amortization of acquisition premium
|
|
|
(63
|
)
|
Total
|
|
$
|
631
|
|
Weighted average interest rate
|
|
|
7.61
|
%
|
Average outstanding balance
|
|
$
|
33,646
|
|
F-26
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
Borrowing interest expense
|
|
$
|
1,388
|
|
Amortization of acquisition premium
|
|
|
(126
|
)
|
Total
|
|
$
|
1,262
|
|
Weighted average interest rate
|
|
|
7.56
|
%
|
Average outstanding balance
|
|
$
|
33,646
|
|
|
|
June 30, 2017
|
|
Facility
|
|
Commitments
|
|
|
Borrowings
Outstanding
|
|
|
Fair
Value
|
|
Notes
|
|
$
|
33,646
|
|
|
$
|
33,646
|
|
|
$
|
34,144
|
|
Total
|
|
$
|
33,646
|
|
|
$
|
33,646
|
|
|
$
|
34,144
|
|
|
|
As of December 31, 2016
|
|
Facility
|
|
Commitments
|
|
|
Borrowings
Outstanding
|
|
|
Fair
Value
|
|
Notes
|
|
$
|
33,646
|
|
|
$
|
33,646
|
|
|
$
|
34,184
|
|
Total
|
|
$
|
33,646
|
|
|
$
|
33,646
|
|
|
$
|
34,184
|
|
6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company may enter into investment agreements under which it commits to make an investment in a portfolio company at some future date or over a specified period of time. As of June 30, 2017, the Company had approximately $4,713 in unfunded loan commitments, subject to the Company’s approval in certain instances, to provide debt financing to certain of its portfolio companies.
Two complaints, captioned
Daniel Saunders, on behalf of himself and all others similarly situated, v. Full Circle Capital Corporation
, et al., filed on September 23, 2016 (the “Saunders Action”), and
William L. Russell, Jr., individually and on behalf of all
others similarly situated, v. Biderman, et al.
filed on September 12, 2016 and amended on September 22, 2016 (the “Russell Action”), were filed in the United States District Court for the District of Maryland and in the Circuit Court for Baltimore City, (the “Circuit Court”), respectively. On October 7, 2016, a complaint captioned
David Speiser, individually and on behalf
of all others similarly situated v. Felton, et al.,
was filed in the Circuit Court (the “Speiser Action”, and together with the Saunders Action and the Russell Action, the “Actions”).
On October 24, 2016, the Company, Full Circle, Great Elm Capital Group, MAST Capital, certain directors of the Full Circle and plaintiffs in the Actions reached an agreement in principle providing for the settlement of the Actions on the terms and conditions set forth in a memorandum of understanding (the “MOU”). Pursuant to the terms of the MOU, without agreeing that any of the claims in the Actions have merit or that any supplemental disclosure was required under any applicable statute, rule, regulation or law, Full Circle and the Company agreed to and did make the supplemental disclosures with respect to the merger. The MOU further provides that, among other things, (a) the parties to the MOU will enter into a definitive stipulation of settlement (the “Stipulation”) and will submit the Stipulation to the Circuit Court for review and approval; (b) the Stipulation will provide for dismissal of the Actions on the merits; (c) the Stipulation will include a general release of defendants of claims relating to the transactions contemplated by the Merger Agreement; and (d) the proposed settlement is conditioned on final approval by the Circuit Court after notice to Full Circle’s stockholders. There can be no assurance that the settlement will be finalized or that the Circuit Court will approve the settlement.
7. INDEMFICATION
Under the Company’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Company. In addition, in the normal course of business the Company expects to enter into contracts that contain a variety of representations which provide general indemnifications. The Company’s maximum exposure under these agreements cannot be known; however, the Company expects any risk of loss to be remote.
F-27
8. CAPITAL T
RANSACTIONS
Formation Transaction
On June 23, 2016, Great Elm Capital Group contributed $30,000 to the Company and the Company issued 30 shares of Common Stock. Such shares were recapitalized into an aggregate of 1,966,667 shares of Common Stock upon the contribution of the Initial GECC Portfolio.
The Company, Great Elm Capital Group and funds managed by MAST Capital (the “MAST Funds”) entered into a Subscription Agreement, dated as of June 23, 2016 (the “Subscription Agreement”). The Subscription Agreement provided for (a) the $30,000 capital contribution by Great Elm Capital Group in exchange for 1,966,667 shares of Common Stock and (b) contribution by the MAST Funds of a portfolio of debt instruments (the “Initial GECC Portfolio”) to the Company in exchange for 5,935,800 shares of Common Stock.
On September 27, 2016, the MAST Funds conveyed the Initial GECC Portfolio to the Company and that transaction settled November 1, 2016. On November 1, 2016, the Company issued 5,935,800 shares of Common Stock in exchange for the Initial GECC Portfolio in settlement of the transaction. Under ASC 805, the Company accounted for the contribution of the Initial GECC Portfolio as an asset acquisition as of the settlement date. The cost amounts reflected in the following table are the price at which the assets were transferred, which is viewed as representative of fair value as of November 1, 2016.
As of November 3, 2016, the Initial GECC Portfolio was comprised of:
Portfolio Company
|
|
Industry
|
|
Type of
Investment
|
|
Interest
|
|
|
Maturity
|
|
Par Amount/
Quantity
|
|
|
Cost
|
|
|
Fair Value
|
|
Avanti Communications
Group plc
|
|
Wireless Telecommunications Services
|
|
Sr. Secured Notes
|
|
|
10.00
|
%
|
|
10-1-19
|
|
$
|
70,035
|
|
|
$
|
54,629
|
|
|
$
|
53,577
|
|
Everi Payments Inc.
|
|
Hardware
|
|
Sr. Unsecured Notes
|
|
|
10.00
|
%
|
|
1-15-22
|
|
$
|
12,289
|
|
|
|
11,581
|
|
|
|
11,705
|
|
Optima Specialty Steel
Inc.
|
|
Metals and Mining
|
|
Sr. Secured Notes
|
|
|
12.50
|
%
|
|
12-15-16
|
|
$
|
15,100
|
|
|
|
13,726
|
|
|
|
14,164
|
|
Tallage Lincoln, LLC
|
|
Real Estate Services
|
|
Sr. Secured Term Loan
|
|
|
10.00
|
%
|
|
5-21-18
|
|
$
|
372
|
|
|
|
372
|
|
|
|
372
|
|
Tallage Adams, LLC
|
|
Real Estate Services
|
|
Sr. Secured Term Loan
|
|
|
10.00
|
%
|
|
12-12-16
|
|
$
|
169
|
|
|
|
181
|
|
|
|
181
|
|
Trilogy International
Partners
|
|
Wireless Telecommunications Services
|
|
Sr. Secured Notes
|
|
|
13.375
|
%
|
|
5-15-19
|
|
$
|
10,000
|
|
|
|
10,005
|
|
|
|
10,000
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90,494
|
|
|
$
|
89,999
|
|
In the Subscription Agreement, the Company agreed, to reimburse costs associated with the transactions contemplated by the Subscription Agreement and the Merger Agreement incurred by Great Elm Capital Group and the MAST Funds, if the transaction closed.
Merger
On June 23, 2016, the Company entered into the Merger Agreement with Full Circle. Following approval of the Merger on October 31, 2016 by Full Circle’s stockholders, on November 3, 2016:
|
▪
|
Full Circle merged into the Company resulting in the Company’s acquisition, by operation of the Merger, of Full Circle’s portfolio that was valued at $74,658 at November 3, 2016;
|
|
▪
|
The Company became obligated to issue an aggregate of 4,986,585 shares of Common Stock to former Full Circle stockholders; and
|
|
▪
|
The Company’s exchange agent paid a $5,393 special cash dividend to former Full Circle stockholders.
|
F-28
The Company has accounted for the Merger as a business combination under ASC Topic 805 and Regulation S-X’s purchase accounting guidance. The Company was designated as
the accounting acquirer for accounting purposes. The difference between the fair value of Full Circle’s net assets and the consideration was recorded as a purchase accounting loss because the fair value of the assets acquired and liabilities assumed, as o
f the date of the Merger, was less than the fair value of the merger consideration paid by the Company. The calculation of the purchase accounting loss is detailed in the table below.
Consideration Paid:
|
|
|
|
|
Common stock issued
|
|
$
|
73,541
|
|
Assets acquired:
|
|
|
|
|
Cash and cash equivalents
|
|
|
29,109
|
|
Investments
|
|
|
74,658
|
|
Other assets
|
|
|
2,252
|
|
Liabilities assumed:
|
|
|
|
|
Notes payable
|
|
|
(34,574
|
)
|
Other liabilities
|
|
|
(2,600
|
)
|
Net assets acquired
|
|
|
68,845
|
|
Purchase accounting loss
|
|
$
|
4,698
|
|
The Company incurred approximately $3,471 of transaction-related expenses related to the Formation Transaction and Merger. Transaction-related expenses were comprised primarily of legal, accounting and other professional fees and third party costs.
Issuer Purchases of Equity Securities
For the six months ended June 30, 2017 the Company purchased 1,222,325 shares under its tender offer and $15,000 stock buyback program at a weighted average price of $11.41 per share. As of June 30, 2017, the Company had cumulatively purchased 1,320,497 shares under its tender offer and stock buyback program at a weighted average price of $11.36 per share, resulting in $5,000 of cumulative cash paid, under the program since November 4, 2016.
Month
|
|
Total Number of
Shares Purchased
|
|
|
Average Price Per
Share
|
|
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Program
|
|
|
Maximum Number
(or Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
(Amounts in dollars)
|
|
November 2016
|
|
|
16,030
|
|
|
$
|
10.79
|
|
|
|
16,030
|
|
|
$
|
14,826,985
|
|
December 2016
|
|
|
82,142
|
|
|
$
|
10.72
|
|
|
|
82,142
|
|
|
$
|
13,946,200
|
|
Total 2016
|
|
|
98,172
|
|
|
$
|
10.73
|
|
|
|
98,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2017
|
|
|
132,434
|
|
|
$
|
11.48
|
|
|
|
132,434
|
|
|
$
|
12,425,611
|
|
February 2017
|
|
|
72,678
|
|
|
$
|
11.26
|
|
|
|
72,678
|
|
|
$
|
11,607,509
|
|
March 2017
|
|
|
40,617
|
|
|
$
|
11.09
|
|
|
|
40,617
|
|
|
$
|
11,157,069
|
|
April 2017
|
|
|
16,846
|
|
|
$
|
11.38
|
|
|
|
16,846
|
|
|
$
|
10,965,351
|
|
May 2017
(1)
|
|
|
944,535
|
|
|
$
|
11.44
|
|
|
|
944,535
|
|
|
$
|
10,158,672
|
|
June 2017
|
|
|
15,215
|
|
|
$
|
10.42
|
|
|
|
15,215
|
|
|
$
|
10,000,132
|
|
Total 2017
|
|
|
1,222,325
|
|
|
$
|
11.41
|
|
|
|
1,222,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,320,497
|
|
|
$
|
11.36
|
|
|
|
1,320,497
|
|
|
$
|
10,000,132
|
|
(1)
Share amounts in this line include the repurchase of 869,565 shares on May 12, 2017 in accordance with the $10,000 tender offer announced on March 30, 2017 that expired on May 5, 2017.
F-29
9. EARNINGS PER SHARE
The following information sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2017:
|
|
For the Three Months Ended June 30,
|
|
|
|
2017
|
|
Numerator for basic and diluted earnings per
share - increase in net assets resulting from
operations
|
|
$
|
(2,467
|
)
|
Denominator for basic and diluted earnings per
share - weighted average shares outstanding
|
|
|
12,000,803
|
|
Basic and diluted earnings per share
|
|
$
|
(0.20
|
)
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
Numerator for basic and diluted earnings per
share - increase in net assets resulting from
operations
|
|
$
|
912
|
|
Denominator for basic and diluted earnings per
share - weighted average shares outstanding
|
|
|
12,316,884
|
|
Basic and diluted earnings per share
|
|
$
|
0.07
|
|
Diluted earnings per share equals basic earnings per share because there were no common stock equivalents outstanding during the periods presented. Weighted average shares outstanding represents the weighted average shares outstanding for the three and six months ended June 30, 2017.
F-30
10. FINANCIAL HIGHLIGHTS
Below is the schedule of financial highlights of the Company for the six months ended June 30, 2017
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
Per Share Data:
(1)
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
13.52
|
|
Net investment income
|
|
|
0.61
|
|
Net realized gains
|
|
|
0.27
|
|
Net unrealized losses
|
|
|
(0.81
|
)
|
Net increase in net assets resulting from operations
|
|
|
0.07
|
|
Accretion from share buybacks
|
|
|
0.20
|
|
Distributions declared from net investment income
(2)
|
|
|
(0.50
|
)
|
Distributions declared from net realized gains
(2)
|
|
|
0.00
|
|
Net decrease resulting from distributions to common stockholders
|
|
|
(0.50
|
)
|
Net asset value, end of period
|
|
$
|
13.29
|
|
|
|
|
|
|
Shares outstanding, end of year/period
|
|
|
11,568,555
|
|
Total return based on net asset value
(3)
|
|
|
1.98
|
%
|
Total return based on market value
(3)
|
|
|
(4.78
|
)%
|
|
|
|
|
|
Ratio/Supplemental Data:
|
|
|
|
|
Net assets, end of period
|
|
$
|
153,702
|
|
Average net assets
|
|
$
|
165,822
|
|
Ratio of expenses (without management fees, incentive fees and interest and credit facility
expenses) to average net assets
(4)
|
|
|
2.05
|
%
|
Ratio of management fees to average net assets
(4)
|
|
|
1.39
|
%
|
Ratio of interest and credit facility expenses to average net assets
(4)
|
|
|
1.53
|
%
|
Ratio of incentive fees to average net assets
(4)
|
|
|
2.30
|
%
|
Ratio of total expenses to average net assets before waiver
(4)
|
|
|
7.19
|
%
|
Ratio of total expenses to average net assets after waiver
(4)
|
|
|
7.27
|
%
|
Ratio of net investment income to average net assets
(4)
|
|
|
9.21
|
%
|
Portfolio turnover
|
|
|
64
|
%
|
(1)
|
The per share data was derived by using the weighted average shares outstanding during the period.
|
(2)
|
The per share data for distributions declared reflects the actual amount of distributions of record per share for the period.
|
(3)
|
Total return based on net asset value is calculated as the change in net asset value per share, assuming the Company’s distributions were reinvested through its dividend reinvestment plan. Total return based on market value is calculated as the change in market value per, assuming the Company’s distributions were reinvested through its dividend reinvestment plan
|
F-31
Below is the schedule of financial
highlights of the Company for period from November 3, 2016 through December 31, 2016:
|
|
November 3, 2016
(Commencement of Operations) to
December 31, 2016
(5)
|
|
Per Share Data:
(1)
|
|
.
|
|
Net asset value, beginning of period
|
|
$
|
14.41
|
|
Net investment income
|
|
|
0.28
|
|
Net realized gains
|
|
|
0.02
|
|
Net unrealized losses
|
|
|
(1.05
|
)
|
Net decrease in net assets resulting from operations
|
|
|
(0.75
|
)
|
Accretion from share buybacks
|
|
|
0.03
|
|
Distributions declared from net investment income
(2)
|
|
|
(0.17
|
)
|
Distributions declared from net realized gains
(2)
|
|
|
—
|
|
Net decrease resulting from distributions to common stockholders
|
|
|
(0.17
|
)
|
Net asset value, end of period
|
|
$
|
13.52
|
|
|
|
|
|
|
Shares outstanding, end of year/period
|
|
|
12,790,880
|
|
Total return based on net asset value
(3)
|
|
|
(5.30
|
)%
|
Total return based on market value
(3)
|
|
|
(2.03
|
)%
|
|
|
|
|
|
Ratio/Supplemental Data (all amounts in thousands except ratios):
|
|
|
|
|
Net assets, end of period
|
|
$
|
172,984
|
|
Average net assets
|
|
$
|
179,366
|
|
Ratio of expenses (without management fees, incentive fees and interest and credit facility
expenses) to average net assets
(4,6)
|
|
|
4.37
|
%
|
Ratio of management fees to average net assets
(4)
|
|
|
1.38
|
%
|
Ratio of interest and credit facility expenses to average net assets
(4)
|
|
|
1.48
|
%
|
Ratio of incentive fees to average net assets
(4)
|
|
|
3.04
|
%
|
Ratio of total expenses to average net assets before waiver
(4,6)
|
|
|
10.27
|
%
|
Ratio of total expenses to average net assets after waiver
(4,6)
|
|
|
9.99
|
%
|
Ratio of net investment income to average net assets
(4,6)
|
|
|
10.52
|
%
|
Portfolio turnover
|
|
|
27
|
%
|
(1)
|
The per share data was derived by using the weighted average shares outstanding during the period.
|
(2)
|
The per share data for distributions declared reflects the actual amount of distributions of record per share for the period.
|
(3)
|
Total return based on net asset value is calculated as the change in net asset value per share from November 4, 2016 through December 31, 2016, assuming the Company’s distributions were reinvested through its dividend reinvestment plan. Total return based on market value is calculated as the change in market value per share from November 4, 2016 through December 31, 2016, assuming the Company’s distributions were reinvested through its dividend reinvestment plan, and is assumed to be $12.03 per share on November 4, 2016. $12.03 per share represents the closing price of Full Circle’s common stock on its last day of trading prior to the merger, as adjusted by the exchange ratio in the merger agreement.
|
F-32
(5)
|
Net asset value at the beginning of the period is the net asset value per share as of the consummation of the Merger, as described further in Note 8. Management corrected this heading to correspond to
the timing of the Merger. The heading was corrected to read “November 3, 2016 to December 31, 2016,” whereas it had previously been presented as “November 4, 2016 (commencement of operations) to December 31, 2016.” November 3, 2016 is the date on which th
e Merger closed; November 4, 2016 is the date on which the Company began operating as the combined entity resulting from the Merger. On November 3, 2016 the Company recognized approximately $3,444 of organization costs in connection with the Merger, which
were included in calculating the beginning of the period net asset value, and amounted to ($0.27) per share, based on 12,889,104 shares issued and outstanding on November 3, 2016.
|
(6)
|
Management corrected the expense ratios to reflect $3,444 of one-time non-recurring organization costs incurred in connection with the merger/formation transaction in the applicable ratio. The ratio of expenses (without management fees, incentive fees and interest and credit facility expenses) to average net assets was corrected to 4.37% (an increase of 1.92 percentage points); the ratio of total expenses to average net assets before waiver was corrected to 10.27% (an increase of 1.92 percentage points), the ratio of total expenses to average net assets after waiver was corrected to 9.99% (an increase of 1.92 percentage points); and the ratio of net investment income to average net assets was corrected to 10.52% (a reduction of 1.92 percentage points).
|
11. AFFILIATED INVESTMENTS
Affiliated investment as defined by the Investment Company Act, whereby the Company owns between 5% and 25% of the portfolio company's outstanding voting securities and the investments are not classified as controlled investments. The aggregate fair value of non-controlled, affiliated investments at June 30, 2017 represented 1.44% of the Company's net assets. Fair value as of June 30, 2017 along with transactions during the six months ended June 30, 2017 in these affiliated investments were as follows:
|
|
|
For the six months ended
|
|
|
For the six months ended
|
|
|
|
|
June 30, 2017
|
|
|
June 30, 2017
|
|
Non-Controlled,
Affiliated Investments
|
Issue
|
|
Fair Value at
December
31,
2016
|
|
|
Gross
Additions
(Cost)*
|
|
|
Gross
Reductions
(Cost)**
|
|
|
Net
Unrealized
Gain (Loss)
|
|
|
Fair Value at
June 30,
2017
|
|
|
Net Realized
Gain (Loss)
|
|
|
Net Unrealized
Gain (Loss)
|
|
|
Interest
Income
|
|
|
Fee
Income
|
|
|
Dividend
Income
|
|
OPS Acquisitions
Limited and Ocean
Protection Services
Limited
|
Term Loan
|
|
$
|
4,286
|
|
|
$
|
25
|
|
|
$
|
(40
|
)
|
|
$
|
(2,051
|
)
|
|
$
|
2,220
|
|
|
$
|
—
|
|
|
$
|
(2,020
|
)
|
|
$
|
48
|
|
|
$
|
—
|
|
|
$
|
—
|
|
OPS Acquisitions
Limited and Ocean
Protection Services
Limited
|
Equity
(19% of
class)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Totals
|
Term Loan
|
|
$
|
4,286
|
|
|
$
|
25
|
|
|
$
|
(40
|
)
|
|
$
|
(2,051
|
)
|
|
$
|
2,220
|
|
|
$
|
—
|
|
|
$
|
(2,020
|
)
|
|
$
|
48
|
|
|
$
|
—
|
|
|
$
|
—
|
|
*
|
Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
|
**
|
Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
|
F-33
Controlled investment as defined by the Investment Company Act, whereby the Company owns more than 25% of the portfolio company's outstanding voting securities or maintains the ability to nominate
greater than 50% of the board representation. The aggregate fair value of controlled investments at June 30, 2017 represented 11.42% of the Company's net assets. Fair value as of June 30, 2017 along with transactions during the six months ended June 30, 20
17 in these controlled investments were as follows:
|
|
|
For the six months ended
|
|
|
For the six months ended
|
|
|
|
|
June 30, 2017
|
|
|
June 30, 2017
|
|
Controlled
Investments
|
Issue
|
|
Fair
Value at
December 31,
2016
|
|
|
Gross
Additions
(Cost)*
|
|
|
Gross
Reductions
(Cost)**
|
|
|
Net
Unrealized
Gain (Loss)
|
|
|
Fair Value at
June 30,
2017
|
|
|
Net Realized
Gain (Loss)
|
|
|
Net Unrealized
Gain (Loss)
|
|
|
Interest
Income
|
|
|
Fee
Income
|
|
|
Dividend
Income
|
|
Texas Westchester
Financial, LLC
|
Equity
(100% of class)
|
|
$
|
68
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
65
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
PE Facility
Solutions, LLC
|
Revolver
|
|
|
—
|
|
|
|
19,738
|
|
|
|
(18,092
|
)
|
|
|
—
|
|
|
|
1,646
|
|
|
|
—
|
|
|
|
—
|
|
|
|
42
|
|
|
|
457
|
|
|
|
—
|
|
|
Term
Loan A
|
|
|
—
|
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
409
|
|
|
|
—
|
|
|
|
—
|
|
|
Term
Loan B
|
|
|
—
|
|
|
|
7,856
|
|
|
|
—
|
|
|
|
(2,009
|
)
|
|
|
5,847
|
|
|
|
—
|
|
|
|
(2,008
|
)
|
|
|
423
|
|
|
|
—
|
|
|
|
—
|
|
|
Equity
(100%
of class)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Double Deuce
Lodging, LLC
|
Equity
(100%
of class)
|
|
|
—
|
|
|
|
2,138
|
|
|
|
(2,138
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Totals
|
|
|
$
|
68
|
|
|
$
|
39,732
|
|
|
$
|
(20,230
|
)
|
|
$
|
(2,012
|
)
|
|
$
|
17,558
|
|
|
$
|
—
|
|
|
$
|
(2,011
|
)
|
|
$
|
874
|
|
|
$
|
457
|
|
|
$
|
—
|
|
*
|
Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
|
**
|
Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
|
F-34
12. SUBSEQUENT EVENTS
Other than the items discussed below, the Company has concluded that there is no impact requiring adjustment or disclosure in the consolidated financial statements as of August 14, 2017.
In July 2017, the Company purchased $5.0 million par value of Tru Taj, LLC bonds at a price of approximately 97% of par value. Such debt security bears interest at a rate of 12.00% and matures August 15, 2021.
In July and August, the Company purchased an additional $5.0 million par value of the loan to Commercial Barge Line Company at an average price of approximately 88% of par value. Such debt security bears interest at a rate of LIBOR plus 8.75%, which was 9.79% as of June 30, 2017, and matures on November 12, 2020. Including these additional acquisitions, the Company now has a position size of approximately $6.9 million par value of the loan.
The Board of Directors declared the monthly distributions for the third quarter of 2017 at an annual rate of approximately 7.50% of NAV, which equates to $0.083 per month. The schedule of distribution payments is as follows:
Month
|
|
Rate
|
|
|
Record Date
|
|
Payable Date
|
October
|
|
$
|
0.083
|
|
|
October 31, 2017
|
|
November 15, 2017
|
November
|
|
$
|
0.083
|
|
|
November 30, 2017
|
|
December 15, 2017
|
December
|
|
$
|
0.083
|
|
|
December 29, 2017
|
|
January 16, 2018
|
F-35