As filed with the Securities and Exchange Commission on May 18, 2018
Securities Act File
No. 333-217222
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
N-2
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
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Pre-Effective
Amendment No.
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Post-Effective Amendment No. 1
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GREAT ELM CAPITAL CORP.
(Registrants Exact Name as Specified in Charter)
800 South Street,
Suite 230
Waltham, Massachusetts 02453
(Address of Principal Executive Offices)
(617)
375-3006
(Registrants Telephone Number, including Area Code)
Peter A. Reed
Chief Executive Officer
and President
Great Elm Capital Corp.
800 South Street, Suite 230
Waltham,
Massachusetts 02453
(Name and Address of Agent for Service)
Copies to:
Rory T. Hood
Jones Day
250 Vesey Street
New York, New York 10281
(212) 326-3939
Approximate Date of Proposed Public
Offering:
As soon as practicable after the effective date of this Registration Statement.
Check box if any securities being registered on this form will be
offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan.
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It is proposed that this filing will become effective (check appropriate box):
☒
when declared effective pursuant to section 8(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(C) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(C), MAY DETERMINE.
The information in this prospectus is not complete and may be changed. A registration statement
relating to these securities has been filed with the Securities and Exchange Commission. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale
is not permitted.
SUBJECT TO
COMPLETION, DATED MAY 18, 2018
This prospectus relates to the resale from time to time of up to 7,000,268 shares (the Secondary Shares) of common stock, par value $0.01 per share, of
Great Elm Capital Corp., a Maryland corporation, by the selling stockholders identified in this prospectus and any applicable prospectus supplement (the Selling Stockholders).
We are a specialty finance company that is a
closed-end,
non-diversified
management
investment company. We have elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the Investment Company Act). We are an emerging growth company
within the meaning of the Jumpstart Our Business Startups (JOBS) Act (the JOBS Act). Our investment objective is to seek to generate both current income and capital appreciation, while seeking to protect against risk of capital loss, by
investing predominantly in the debt instruments of middle-market companies, which we generally define as companies with enterprise values between $100.0 million and $2.0 billion. We are externally managed by Great Elm Capital Management,
Inc. (GECM), who provides the administrative and other services necessary for us to operate.
Our common stock is traded on The Nasdaq Global Market
(Nasdaq) under the symbol GECC. On May 17, 2018 the last reported sales price of our common stock on Nasdaq was $9.25 per share. The net asset value per share of our common stock at March 30, 2018 (the last date prior to
the date of this prospectus on which we determined net asset value) was $11.79.
Shares of
closed-end
investment companies, including BDCs, frequently trade at a discount from their net asset value. Our
shares currently trade at a discount to our net asset value, and further discounts will increase the risk of loss for you.
We will not receive any of the
proceeds from the sale of the Secondary Shares. The Selling Stockholders will pay all fees and expenses incurred in this offering and in disposing of the Secondary Shares, including all registration and filing fees, any other regulatory fees,
printing and delivery expenses, listing fees and expenses, fees and expenses of counsel, independent certified public accountants, and any special experts retained by us, and any underwriting discounts and commissions and transfer taxes. Each of the
Selling Stockholders or its pledgees, donees, assignees, transferees or other
successors-in-interest,
may offer and sell the Secondary Shares from time to time through
public or private transactions at prevailing market prices, at prices related to prevailing market prices or at privately negotiated prices.
This prospectus
sets forth concisely important information you should know before investing in our common stock. Please read it and the documents we refer you to carefully in their entirety before you invest and keep it for future reference. We file annual,
quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission (the SEC). We maintain a website at http://www.greatelmcc.com and we make all of our annual, quarterly and current
reports, proxy statements and other publicly filed information available, free of charge, on or through our website. You may also obtain such information and make stockholder inquiries by contacting us at 800 South Street, Suite 230, Waltham, MA
02453, or by calling us collect at (617)
375-3006.
The SEC maintains a website at http://www.sec.gov where such information is available without charge.
An investment in our common stock is subject to risks and involves a heightened risk of total loss of investment. In addition, the companies in which we invest are
subject to special risks. For example, our debt investments either are, or if rated would be, rated below investment grade by independent rating agencies. Below investment grade securities, which are often referred to as high yield or
junk, are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. They may be illiquid and difficult to value and typically do not require repayment of
principal before maturity, which potentially heightens the risk that we may lose all or part of our investment.
Further, our investment in Avanti Communications Group plc (Avanti), which represented approximately 21% of our investment
portfolio (excluding cash and short-term investments) as of March
31, 2018 and 41% of our total investment income for the three months ended March
31, 2018, has resulted in significant
payment-in-kind
(PIK) interest, which significantly increases our exposure to the aforementioned risks. Please see Risk FactorsRisks Relating to Our
InvestmentsWe may lose all of our investment in Avanti.
Investing in our securities
involves a high degree of risk. See
Risk Factors
beginning on page 9 of this prospectus and any risk factors included in any accompanying prospectus supplement and in the documents incorporated by reference in
this document, including the risk of leverage.
Neither the SEC nor any state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
This prospectus is
dated , 2018.
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the SEC utilizing a shelf registration process. Under this shelf registration
process, the Selling Stockholders may sell the Secondary Shares. This prospectus and the documents we incorporate by reference into this prospectus provide you with a general description of the securities under this shelf registration statement. We
may provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add, update or change information contained in this prospectus. You should read both this prospectus and
any prospectus supplement together with the additional information described under the heading Available Information on page 107.
You should rely
only on the information contained in this prospectus and any accompanying prospectus supplement. We and the Selling Stockholders have not authorized any other person to provide you with additional information, or with information different from that
contained in this prospectus. If anyone provides you with different or additional information, you should not rely on it. We are not making offers to sell these securities in any jurisdiction where such offers or sales are not permitted. This
prospectus and any accompanying prospectus supplement do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate. You should assume that the information in this
prospectus is accurate only as of the date on the front of this prospectus and the information in any accompanying prospectus supplement is accurate only as of the date on the front of the accompanying prospectus supplement. Our business, financial
condition, results of operations and prospects may have changed since that date. We will update this prospectus to reflect material changes to the information contained herein. We encourage you to consult your own counsel, accountant and other
advisors for legal, tax, business, financial and related advice regarding an investment in our securities.
The terms we, us,
our, the Company and GECC in this prospectus refer to Great Elm Capital Corp., a Maryland corporation, and its subsidiaries for the periods after our consummation of the formation transaction (as described under
The CompanyFormation Transactions, the Formation Transactions) and the merger of Full Circle Capital Corporation with and into us. We maintain a website located at http://www.greatelmcc.com. Information on our website
is not incorporated into or a part of this prospectus.
ii
PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you should consider. You
are urged to carefully read this entire document including the more detailed information set forth under Risk Factors beginning on page 9.
The Company
Great Elm Capital Corp. is a Maryland corporation that was
formed in April 2016 and commenced operations on November 3, 2016 when Full Circle Capital Corporation, a Maryland corporation (Full Circle), was merged with and into us (the Merger). We operate as a
closed-end,
externally managed,
non-diversified
management investment company that has elected to be regulated as a BDC under the Investment Company Act. In addition, for tax
purposes, we elected to be treated as a regulated investment company (RIC) under the Internal Revenue Code of 1986, as amended (the Code), beginning with our tax year starting October 1, 2016.
Our investment objective is to seek to generate both current income and capital appreciation, while seeking to protect against risk of capital loss, by investing
predominantly in the debt instruments of middle-market companies, which we generally define as companies with enterprise values between $100.0 million and $2.0 billion.
To achieve our investment objectives, we primarily focus on investing in secured and senior unsecured debt instruments in middle-market companies that offer
sufficient downside protection but with the opportunity to unlock substantial return potential (interest income plus capital appreciation and fees, if any) that appropriately recognizes potential investment risks.
We target investments that we perceive to be undervalued due to over-leveraging or which operate in industries experiencing cyclical declines and may trade at
discounts to their original issue prices. We source these transactions in the secondary markets and occasionally directly with issuers.
We seek to protect
against risk of loss by investing in borrowers with tangible and intangible assets, where GECM believes asset values are expected to, or do, exceed our investment and any debt that is senior to, or ranks in parity with, our investment. GECMs
investment process includes a focus on an investments contractual documents, as it seeks to identify rights that enhance an investments risk protection and avoid contracts that compromise potential returns or recoveries. Although we
intend to focus on senior debt instruments of middle-market companies, we may make investments throughout a companys capital structure, including subordinated debt, mezzanine debt, and equity or equity-linked securities.
Shares of
closed-end
investment companies, including BDCs, frequently trade at a discount to their net asset value. Our
shares trade at a discount to our net asset value and further discounts will increase the risk of loss for purchasers in this offering.
We are generally unable
to sell our common stock at a price below net asset value per share. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage. We may, however, sell our common stock at a
price below net asset value per share: (1) in connection with a rights offering to our existing stockholders, (2) with the consent of the majority of our common stockholders or (3) under such other circumstances as the SEC may permit.
The Selling Stockholders are permitted to sell the Secondary Shares below net asset value because they are not subject to the restrictions on selling common
shares below net asset value applicable to the Company under the Investment Company Act. This may negatively affect the market price of our common stock.
Before
the Merger, we acquired a portfolio of fixed income securities (the Initial GECC Portfolio) from private investment funds (the MAST Funds) managed by MAST Capital Management, LLC, a Delaware limited liability company
(MAST Capital), a 14
year-old
Boston-based middle-market, credit-focused investment manager. The investments included in the Initial GECC Portfolio had a collective fair value of approximately
$90.0 million as of June 30, 2016, which represented approximately 26.5%, 24.3% and 5.0% respectively, of the June 30, 2016 total assets of the three contributing MAST Funds. See The CompanyFormation Transactions.
Our and GECMs principal executive offices are currently located at 800 South Street, Suite 230, Waltham, MA 02453, and our telephone number is (617)
375-3006.
We maintain a website located at http://www.greatelmcc.com. Information on our website is not incorporated into or a part of this prospectus.
We are and will remain an emerging growth company as defined in the JOBS Act until the earliest of (a) December 31, 2021, (b) the last day of the
fiscal year (i) in which we have total annual gross revenue of at least $1.0 billion or (ii) in
1
which we are deemed to be a large accelerated filer, which means the market value of its common stock that is held by
non-affiliates
exceeds
$700.0 million as of the end of the previous second fiscal quarter, and (c) the date on which we have issued more than $1.0 billion in
non-convertible
debt during the prior three-year period.
For so long as we remain an emerging growth company we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but
not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act). We cannot predict if investors will find our securities less
attractive because we will rely on some or all of these exemptions. If some investors find our securities less attractive as a result, there may be a less active and more volatile trading market for our securities.
Great Elm Capital Management, Inc.
We are managed by GECM, whose
investment team has an aggregate of more than 100 years of experience in financing and investing in leveraged middle-market companies. GECMs team is led by Peter A. Reed. Senior members of GECMs investment team include Adam M. Kleinman,
John S. Ehlinger and Adam W. Yates. The GECM investment team has deployed more than $17.0 billion into more than 550 issuers across 20+ jurisdictions over its
14-year
history.
We entered into an investment management agreement with GECM, dated as of September 27, 2016 (the Investment Management Agreement), pursuant to
which and subject to the overall supervision of our board of directors (our Board), GECM provides investment advisory services to GECC. For providing these services, GECM receives a fee from us, consisting of two components: (1) a
base management fee and (2) an incentive fee.
The base management fee is calculated at an annual rate of 1.50% based on the average value of our total
assets (determined in conformity with generally accepted accounting principles in the United States (GAAP) (other than cash or cash equivalents but including assets purchased with borrowed funds or other forms of leverage)) at the end of
the two most recently completed calendar quarters. The base management fee is payable quarterly in arrears.
The incentive fee has two parts. One part is
calculated and payable quarterly in arrears based on our
pre-incentive
fee net investment income for the quarter.
Pre-incentive
fee net investment income, expressed as a rate of return on the value of our net assets (defined under GAAP) at the end of the immediately preceding calendar quarter, is compared to a fixed
hurdle rate of 1.75% per quarter (7.00% annualized). We pay GECM an incentive fee with respect to our
pre-incentive
fee net investment income in each calendar quarter as follows:
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no incentive fee in any calendar quarter in which the
pre-incentive
fee net investment income does not exceed the hurdle rate;
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100% of our
pre-incentive
fee net investment income with respect to that portion of such
pre-incentive
fee net investment income, if any,
that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized). We refer to this portion of our
pre-incentive
fee net investment income (which exceeds the hurdle rate but is
less than 2.1875%) as the
catch-up
provision. The
catch-up
is meant to provide GECM with 20% of the
pre-incentive
fee
net investment income as if a hurdle rate did not apply if this net investment income exceeds 2.1875% in any calendar quarter; and
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20% of the amount of our
pre-incentive
fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).
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These calculations are adjusted for any share issuances or repurchases during the quarter.
Any income incentive fee otherwise payable with respect to accrued unpaid income (collectively, the Accrued Unpaid Income Incentive Fees) will be
deferred, on a
security-by-security
basis, and will become payable only if, as, when and to the extent cash is received by us or our 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, (1) reduce
pre-incentive
fee net investment income and (2) reduce the amount deferred pursuant to the Investment Management Agreement. Subsequent payments of income
incentive fees deferred pursuant to this paragraph do not reduce the amounts payable for any quarter pursuant to the other terms of the Investment Management Agreement.
2
The following is a graphical representation of the calculation of the income related portion of the incentive fee:
Quarterly Incentive Fee Based on Net Investment Income
Pre-incentive
fee net investment income
(expressed as a percentage of the value of net assets)
Percentage of
pre-incentive
fee net investment income
allocated to income related portion of incentive fee
The second part of the incentive fee, or the Capital Gains Fee, is determined and payable in arrears as of the end of each calendar year (or upon
termination of the Investment Management Agreement, as of the termination date), commencing with the partial calendar year ended December 31, 2016, and is calculated at the end of each applicable year by subtracting (1) the sum of our and
our consolidated subsidiaries cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (2) our and our consolidated subsidiaries cumulative aggregate realized capital gains, in each case
calculated from November 4, 2016. If such amount is positive at the end of such year, then the Capital Gains Fee for such year is equal to 20% of such amount, less the aggregate amount of Capital Gains Fees paid in all prior years. If such
amount is negative, then there is no Capital Gains Fee for such year.
We will defer cash payment of any incentive fee otherwise payable to GECM in any quarter
(excluding Accrued Unpaid Income Incentive Fees with respect to such quarter) that exceeds (1) 20% of the Cumulative
Pre-Incentive
Fee Net Return (as defined below) during the most recent twelve full calendar
quarter period ending on or prior to the date such payment is to be made (the Trailing Twelve Quarters) less (2) the aggregate incentive fees that were previously paid to GECM during such Trailing Twelve Quarters (excluding Accrued
Unpaid Income Incentive Fees during such Trailing Twelve Quarters and not subsequently paid). Cumulative
Pre-Incentive
Fee Net Return during the relevant Trailing Twelve Quarters means the sum of
(a) pre-incentive
fee net investment income in respect of such Trailing Twelve Quarters less (b) net realized capital losses and net unrealized capital depreciation, if any, in each case calculated in
accordance with GAAP, in respect of such Trailing Twelve Quarters.
See The CompanyInvestment Management AgreementExamples of Quarterly
Incentive Fee Calculation for an example of these calculations.
Pursuant to a separate administration agreement with GECM, dated September 27, 2016
(the Administration Agreement), GECM furnishes us with administrative services and we pay GECM our allocable portion of overhead and other expenses incurred by GECM in performing its obligations under the Administration Agreement,
including our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs.
Investment Portfolio
The following tables and graphs summarize information about our portfolio as of March 31, 2018 (dollar amounts in thousands).
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Investment Type
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Cost
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Fair Value
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1st Lien/Senior Secured Debt
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$
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237,538
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$
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194,308
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Equity/Other
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168
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442
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Total Long Term Investments
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$
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237,706
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$
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194,750
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3
Our investment in Avanti represents 100% of our Wireless Telecommunications Services investments as of March 31, 2018. Please
see Risk FactorsRisks Relating to Our InvestmentsWe may lose all of our investment in Avanti.
Risk Factors
Investment in our securities involves a number of significant risks relating to our investments and our business and structure that you should consider before
investing in our securities.
As of March 31, 2018, Avanti is our largest investment (with a total exposure comprised of three different instruments),
representing approximately 21% of our investment portfolio (excluding cash and short-term investments) and 41% of our total investment income for the three months ended March 31, 2018. In December 2017, we agreed to convert our entire
investment in Avanti third lien senior secured notes (the Existing Notes) into Avanti common shares. As of March 31, 2018, we owned $54.1 million in principal amount of Existing Notes representing approximately 10% of our net
asset value. The restructuring closed on April 26, 2018, and we now own approximately 9% of Avantis common shares. The conversion of our Existing Notes to Avanti common shares could result in a significant decrease in our net asset value
if the market value of the Avanti common shares were to decrease following the restructuring, a significant decrease in our total investment income and an increase in the risk of investing in our securities. These factors could also result in lower
trading prices for our common stock and/or debt securities. Please see Risk FactorsRisks Relating to Our InvestmentsWe may lose all of our investment in Avanti.
See Risk Factors and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our
securities.
Conflicts of Interests
Certain of our executive
officers and directors, and the members of the investment committee of GECM, serve or may serve as officers, directors or principals of entities that operate in the same or related lines of business as GECC or of investment funds managed by our
affiliates. Accordingly, they may have obligations to investors in those entities that may require them to devote time to services for other entities, which could interfere with the time available to provide services to us. Further, we may not be
given the opportunity to participate in certain investments made by investment funds managed by advisers affiliated with GECM and any advisers that may in the future become affiliated with Great Elm Capital Group, Inc. (GEC).
Although funds managed by GECM may have different primary investment objectives than us, they may from time to time invest in asset classes similar to those we
target. GECM is not restricted from raising an investment fund with investment objectives similar to ours. Any such funds may also, from time to time, invest in asset classes similar to those we target. GECM will endeavor to allocate investment
opportunities in a fair and equitable manner, and in any event consistent with any duties owed to us and such other funds. Nevertheless, it is possible that we may not be given the opportunity to participate in investments made by investment funds
managed by investment managers affiliated with GECM.
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We pay management and incentive fees to GECM, and reimburse GECM for certain expenses it incurs. In addition,
investors in our common stock will invest on a gross basis and receive distributions on a net basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct investments.
GECMs management fee is based on a percentage of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds and
other forms of leverage) and GECM may have conflicts of interest in connection with decisions that could affect our total assets, such as decisions as to whether to incur indebtedness.
The part of the incentive fee payable by us that relates to our
pre-incentive
fee net investment income is computed and paid
on income that may include interest that is accrued but not yet received in cash. If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of
the incentive fee will become uncollectible.
The Investment Management Agreement renews for successive annual periods if approved by our Board or by the
affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. However, we and GECM each have the right to terminate the
agreement without penalty upon
60-days
written notice to the other party. Moreover, conflicts of interest may arise if GECM seeks to change the terms of the Investment Management Agreement, including,
for example, the terms for compensation. While any material change to the Investment Management Agreement must be submitted to our stockholders for approval under the Investment Company Act, we may from time to time decide it is appropriate to seek
stockholder approval to change the terms of the agreement. For so long as MAST Funds and GEC collectively beneficially own 35% or more of our outstanding shares, the MAST Funds and GEC will vote on any proposed changes to the Investment Management
Agreement in the same proportion as our unaffiliated stockholders.
As a result of the arrangements described above, there may be times when our management team
has interests that differ from those of our stockholders, giving rise to a conflict.
Our stockholders may have conflicting investment, tax and other objectives
with respect to their investments in us. The conflicting interests of individual stockholders may relate to or arise from, among other things, the nature of our investments, the structure or the acquisition of our investments, and the timing of
disposition of our investments. As a consequence, conflicts of interest may arise in connection with decisions we make, including with respect to the nature or structuring of our investments, that may be more beneficial for one stockholder than for
another stockholder, especially with respect to stockholders individual tax situations. In selecting and structuring investments appropriate for us, GECM will consider our investment and tax objectives and our stockholders, as a whole, not the
investment, tax or other objectives of any stockholder individually.
We may also have conflicts of interest arising out of the investment advisory activities of
GECM. GECM may in the future manage other investment funds, accounts or investment vehicles that invest or may invest in assets eligible for purchase by us. To the extent that we compete with entities managed by GECM or any of its affiliates for a
particular investment opportunity, GECM will allocate investment opportunities across the entities for which such opportunities are appropriate, consistent with (1) its internal investment allocation policies, (2) the requirements of the
Investment Advisers Act of 1940 as amended (the Advisers Act), and (3) restrictions under the Investment Company Act regarding
co-investments
with affiliates.
This Offering
The Secondary Shares offered hereby were offered and
sold in a private placement exempt from registration under the Securities Act of 1933, as amended (the Securities Act). We will not receive any proceeds from the sale of the Secondary Shares. See Selling Stockholders and
Plan of Distribution.
Certain U.S. Federal Income Tax Considerations
We currently are a RIC under Subchapter M of the Code for U.S. federal income tax purposes and intend to continue to qualify each year as a RIC. In order to qualify
for tax treatment as a RIC, we generally must satisfy certain
source-of-income,
asset diversification and distribution requirements. As long as we so qualify, we will
not be subject to U.S. federal income tax to the extent that we distribute investment company taxable income and net capital gain on a timely basis. If for any taxable year we do not qualify as a RIC, all of our taxable income for that year
(including our net capital gain) would be subject to tax at regular corporate rates without any deduction for distributions to stockholders, and such distributions would be taxable as ordinary dividends to the extent of our current and accumulated
earnings and profits. See Certain U.S. Federal Income Tax Considerations.
5
FEES AND EXPENSES
The following table is intended to assist you in understanding the costs and expenses that an investor in our common stock will bear, directly or indirectly, based
on the assumptions set forth below. We caution you that some of the percentages indicated in the table below are estimates and may vary. Moreover, the information set forth below does not include any transaction costs and expenses that investors
will indirectly incur in connection with each offering pursuant to this prospectus. As a result, you are urged to read the Fees and Expenses table contained in any corresponding prospectus supplement to fully understand the actual
transaction costs and expenses you will incur in connection with each such offering. Except where the context suggests otherwise, whenever this prospectus contains a reference to our fees or expenses, we will pay such fees and expenses out of our
net assets and, consequently, stockholders will indirectly bear such fees or expenses as investors in the Company.
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Stockholder Transaction Expenses:
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Sales load (as a percentage of offering price)
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N/A
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(1)
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Offering expenses (as a percentage of offering price)
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N/A
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(2)
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Dividend reinvestment plan expenses
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$
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15.00
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(3)
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Total Stockholder Transaction Expenses
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None
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Estimated Annual Expenses (as percentage of net assets attributable to common stock)
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Base management fees
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2.18
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%
(4)
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Incentive fees payable under the Investment Management Agreement (20% of
pre-incentive
fee net income and capital gains)
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3.04
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%
(5)
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Interest payments on borrowed funds
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4.70
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%
(6)
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Acquired fund fees and expenses
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0.04
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%
(7)
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Other expenses
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2.20
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%
(8)
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Total annual expenses
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12.16
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%
(9)
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(1)
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Any underwriting fee related to the Secondary Shares will be paid by the Selling Stockholders.
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(2)
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The related prospectus supplement, including each underwritten offering by the Selling Stockholders, will disclose the estimated amount of total offering expenses (which may include offering expenses borne by third
parties on our behalf), the offering price and the offering expenses borne by us as a percentage of the offering price.
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(3)
|
The expenses of the dividend reinvestment plan are included in Other expenses. The plan administrators fees will be paid by us. There will be no brokerage charges or other charges to stockholders who
participate in the plan except that, if a participant elects by written notice to the plan administrator to have the plan administrator sell part or all of the shares held by the plan administrator in the participants account and remit the
proceeds to the participant, the plan administrator is authorized to deduct a $15.00 transaction fee plus $0.03 per share brokerage commission from the proceeds for open market purchases. For additional information, see Dividend Reinvestment
Plan.
|
(4)
|
We are externally managed by GECM and our management fee will equal 1.50% of our total assets other than cash and cash equivalents (which includes assets purchased with borrowed amounts and other forms of leverage).
Consequently, if we have borrowings outstanding, the management fee as a percentage of net assets attributable to common shares would be higher than if we did not utilize leverage.
|
(5)
|
See The CompanyInvestment Management Agreement.
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(6)
|
Assumes borrowings representing approximately 63% of our average net assets at an annual interest expense to us of 7.47%, which is based on the weighted average interest rate expensed on our outstanding 6.50% notes due
2022 (2022 notes) and 6.75% notes due 2025 (2025 notes), as adjusted for unamortized costs associated with each offering. The amount of leverage that we may employ at any particular time will depend on, among other things,
our Boards and GECMs assessment of market and other factors at the time of any proposed borrowing.
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(7)
|
Acquired fund fees and expenses represents fees and expenses incurred directly by us as a result of investments in other investment companies including money market mutual funds.
|
(8)
|
Other expenses are based on estimated amounts for the current fiscal year.
|
(9)
|
Total annual expenses is different from the ratio of expenses to average net assets contained in the Financial Highlights included in our financial statements due to the fact that the
Financial Highlights reflect only our operating expenses and do not include acquired fund fees and expenses.
|
6
Example
The following
example illustrates the projected dollar amount of total cumulative expenses that you would pay on a $1,000 hypothetical investment in our common stock, assuming (1) no sales load, (2) total net annual expenses of 10.12% of net assets
attributable to common stock as set forth in the table above (other than incentive fees), and (3) a 5% annual return:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
Total Expenses Incurred*
|
|
$
|
99
|
|
|
$
|
281
|
|
|
$
|
445
|
|
|
$
|
787
|
|
Total Expenses Incurred**
|
|
$
|
89
|
|
|
$
|
257
|
|
|
$
|
411
|
|
|
$
|
745
|
|
*
|
Assumes that we will not realize any capital gains computed net of all realized capital losses and unrealized capital depreciation.
|
**
|
Assumes no unrealized capital depreciation or realized capital losses and annual returns resulting entirely from net realized capital gains (and therefore subject to the capital gains incentive fee).
|
This example and the expenses in the table above should not be considered a representation of our future expenses. Actual expenses may be greater or less than
those assumed.
The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5% annual return, our
performance will vary and may result in a return greater or less than 5%. Assuming a 5% annual return, the incentive fee under the Investment Management Agreement would not be earned or payable and is not included in the first row of the example. If
we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher. The second row of the example
therefore assumes the 5% return results entirely from net realized capital gains (and therefore is subject to the capital gains incentive fee) to demonstrate how the incentive fee could impact expenses. In addition, while the example assumes
reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a
participant by 95% of the market price per share of our common stock at the close of trading on the valuation date for the dividend. This applies where we are issuing new shares pursuant to our dividend reinvestment plan. We may also instruct the
plan administrator to purchase shares of our common stock in the open market in connection with our implementation of the plan. If a participant elects by written notice to the plan administrator to have the plan administrator sell part or all of
the shares held by the plan administrator in the participants account and remit the proceeds to the participant, the plan administrator is authorized to deduct a $15.00 transaction fee plus $0.03 per share brokerage commission from the
proceeds for open market purchases. See Dividend Reinvestment Plan for additional information regarding our dividend reinvestment plan.
7
SELECTED FINANCIAL DATA
The following selected financial data for the year ended December 31, 2017 and for the period from inception through December 31, 2016 is derived from our
consolidated financial statements which have been audited by Deloitte & Touche LLP, our independent registered public accounting firm. The following selected financial data for the three months ended March 31, 2018 and 2017 is derived
from our unaudited financial data. Interim results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The selected financial data should be
read in conjunction with our consolidated financial statements and related notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations and Senior Securities as well as other
disclosures included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended March
31,
2018
|
|
|
Three months
ended March
31,
2017
|
|
|
Year ended
December 31,
2017
|
|
|
Period from
inception through
December 31, 2016
|
|
|
|
(Dollar amounts in thousands,
except per share data)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Income
|
|
$
|
7,498
|
|
|
$
|
7,315
|
|
|
$
|
29,728
|
|
|
$
|
5,831
|
|
Total Gross Expenses
(1)
|
|
|
3,632
|
|
|
|
3,226
|
|
|
|
12,153
|
|
|
|
5,906
|
|
Total Net Expenses
|
|
|
3,632
|
|
|
|
3,221
|
|
|
|
12,153
|
|
|
|
5,826
|
|
Net Investment Income
|
|
|
3,866
|
|
|
|
4,094
|
|
|
|
17,575
|
|
|
|
5
|
|
Net Increase (Decrease) in Net Assets Resulting
from Operations
|
|
|
(4,039
|
)
|
|
|
3,379
|
|
|
|
(2,754
|
)
|
|
|
(17,874
|
)
|
Per Share Data
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
0.36
|
|
|
|
0.32
|
|
|
|
1.52
|
|
|
|
0.28
|
(3)
|
Net Increase (Decrease) in Net Assets Resulting from Operations
|
|
|
(0.38
|
)
|
|
|
0.27
|
|
|
|
(0.24
|
)
|
|
|
(0.75
|
)
(3)
|
Dividends Declared
|
|
|
0.25
|
|
|
|
0.25
|
|
|
|
1.20
|
|
|
|
0.17
|
(3)
|
Statement of Assets and Liabilities Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
257,114
|
|
|
$
|
225,448
|
|
|
$
|
239,913
|
|
|
$
|
236,544
|
|
Total Liabilities
|
|
$
|
131,518
|
|
|
$
|
55,011
|
|
|
$
|
107,626
|
|
|
$
|
63,560
|
|
Total Net Assets
|
|
$
|
125,596
|
|
|
$
|
170,437
|
|
|
$
|
132,287
|
|
|
$
|
172,984
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Market Value at the End of the Period
|
|
$
|
9.22
|
|
|
$
|
11.38
|
|
|
$
|
9.84
|
|
|
$
|
11.67
|
|
Total Return based on Market Value
|
|
|
(9.19
|
)%
(4)
|
|
|
(0.31
|
)%
(4)
|
|
|
(5.56
|
)%
(4)
|
|
|
(2.03
|
)%
(5)
|
Total Return based on Net Asset Value
|
|
|
(2.45
|
)%
(4)
|
|
|
2.38
|
%
(4)
|
|
|
0.69
|
%
(4)
|
|
|
(5.30
|
)%
(5)
|
(1)
|
For the year ended December 31, 2017, this number includes the reversal of a previously accrued estimate of the waiver in the Administration Agreement of approximately $70. Without such inclusion, total gross
expenses would have been approximately $12,083.
|
(2)
|
The per share data was derived by using the weighted average shares outstanding during the period.
|
(3)
|
For the period from November 3, 2016 to December 31, 2016. November 3, 2016 is the date on which the Merger closed; November 4, 2016 is the date on which we began operating as the combined entity
resulting from the Merger.
|
(4)
|
Total return based on market value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of our common stock. Total return based on net asset value
is calculated as the change in net asset value per share, assuming our distributions were reinvested through our dividend reinvestment plan. Total return based on market value is calculated as the change in market value per share, assuming our
distributions were reinvested through our dividend reinvestment plan.
|
(5)
|
Total return based on market value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of our common stock. 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 our distributions were reinvested through our 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 our distributions were reinvested through our dividend reinvestment plan, and is assumed to have been $12.03 per share on November 4,
2016. $12.03 per share represents the closing price of Full Circles common stock on its last day of trading prior to the Merger, as adjusted by the exchange ratio in the Merger Agreement (as defined herein).
|
8
RISK FACTORS
Investing in our securities involves a number of significant risks. Before you invest in our securities, you should be aware of various risks, including those
described below. You should carefully consider these risk factors, together with all of the other information included in this prospectus and any accompanying prospectus supplement, before you decide whether to make an investment in our securities.
The risks set out below are the principal risks with respect to an investment in our securities generally and with respect to a BDC with investment objectives, investment policies, capital structures or trading markets similar to ours. However, they
may not be the only risks we face. Additional risks and uncertainties not presently known to us or not presently deemed material by us may also impair our operations and performance. If any of the following events occur, our business, financial
condition, results of operations and cash flows could be materially and adversely affected. In such case, our net asset value and the trading price of our securities could decline, and you may lose all or part of your investment.
Risks Relating to Our Investments
We may lose all of our
investment in Avanti.
As of March 31, 2018, Avanti is our largest investment. Our investments
in Avanti (with a total exposure comprised of three different instruments) represented approximately 21% of our investment portfolio (excluding cash and short-term investments) at March 31, 2018. As of March 31, 2018, we owned
approximately 10% of Avantis outstanding debt and approximately 1% of Avantis outstanding common stock. We acquired our original position in Avanti as part of the Initial GECC Portfolio, which we purchased from the MAST Funds prior to
the Merger.
On July 7, 2016, Avanti announced that under certain circumstances it may not have access to sufficient liquidity to meet its funding
requirements through the second quarter of 2017. On July 11, 2016, Avanti announced the undertaking of a strategic review to consider all financial and strategic options, including a sale of the company pursuant to the City Code on Takeovers
and Mergers (the City Code). Following these announcements, on July 14, 2016, Moodys downgraded the Existing Notes.
On September 16,
2016, Avanti announced that it was launching a consent solicitation process to facilitate paying the October 1, 2016 coupon on the Existing Notes in kind in lieu of cash. In order to further support the strategic review process, Avanti also
announced that it had entered into binding agreements with certain suppliers to defer approximately $39.0 million of capital expenditure payments to the third quarter of fiscal 2017.
On October 17, 2016, Avanti announced the completion of its consent solicitation process with respect to the Existing Notes, receiving consents from the holders
of 89.5% of the Existing Notes to permit paying the interest due on October 1, 2016 with respect to consenting holders Existing Notes in the form of additional Existing Notes in lieu of cash. Because Avanti failed to obtain consent from
at least 90% of the holders of the Existing Notes, it was required to pay $3.39 million of the October coupon in the form of cash rather than additional notes.
On December 20, 2016, Avanti announced the completion of its strategic review, which included termination of the formal sale process and the end of the offer
period (in each case as defined under the City Code), as well as the launch of a consent solicitation, exchange offer and new money offer as part of a larger financial restructuring of the Existing Notes.
On January 6, 2017, Avanti announced that it had received consents from holders of 91.85% of the Existing Notes in connection with the consent solicitation to
permit, among other things, the incurrence of up to $132.5 million in super- senior indebtedness and the payment of PIK interest on the Existing Notes in lieu of cash for certain future interest payments due on the Existing Notes.
On January 27, 2017, Avanti announced the completion of its previously announced refinancing, with the settlement of its (1) consent solicitation to
permit, among other things, the incurrence of up to $132.5 million in super senior indebtedness and the payment of PIK interest on the Existing Notes in lieu of cash for certain future interest payments due on the Existing Notes, (2) offer
to holders of Existing Notes the opportunity to purchase up to $132.5 million aggregate principal amount of 10%/15% senior secured notes due 2021 (the PIK Toggle Notes) (the New Money Offer) and (3) offer to holders
participating in the New Money Offer to exchange a portion of their Existing Notes for additional PIK Toggle Notes. Holders who elected to backstop the New Money Offer also received their pro rata share of additional common equity issued by Avanti
in an aggregate amount equal to 9.09% of Avantis total outstanding shares.
Through completion of the consent solicitation and the New Money Offer, Avanti
received $80.0 million of new cash funding, with an additional $50.0 million of funding available on a delayed draw basis, and had the ability to defer up to $112.0 million of future interest payments through April 2018.
9
We took part in the refinancing, exchanging $22.9 million of Existing Notes for new PIK Toggle Notes and purchasing
an additional $9.2 million of PIK Toggle Notes for $8.9 million of funded cash. At the completion of the refinancing, we continued to hold $47.2 million of Existing Notes and had committed to provide $5.6 million in additional
financing, subject to certain conditions. Additionally, as part of the refinancing, our Chief Executive Officer and representatives of two other significant creditors joined Avantis board of directors.
In June 2017, Avanti announced that it had entered into a $100 million three year super senior facility with HPS Investment Partners, LLC. The proceeds of the
super senior facility replaced an existing, undrawn $50 million debt facility, including the $5.6 million unfunded commitment held by us, and provided additional liquidity to fund the construction and launch of Avantis HYLAS 4
satellite. Following Avantis entry into this new super senior facility, our PIK Toggle Notes became third lien notes and the Existing Notes became second lien notes.
In August 2017, David Williams stepped down as chief executive officer of Avanti and was replaced by Alan Harper, a
non-executive
director of Avanti, on an interim basis. In April 2018, Kyle Whitehill joined Avanti as its new chief executive officer and Alan Harper resumed his prior role as
non-executive
director.
In December 2017, we and other holders of the PIK Toggle Notes and the Existing Notes entered
into a restructuring agreement with Avanti. Under that agreement, among other things:
|
|
|
the Existing Notes would be converted into common shares of Avanti. All of the outstanding Existing Notes, if converted, would represent approximately 92% of the pro forma common shares of Avanti, and our Existing Notes
would represent approximately 9.1% of the pro forma common shares of Avanti. The Existing Notes represented approximately 10% of our net asset value at March 31, 2018; and
|
|
|
|
the cash interest rate on the PIK Toggle Notes would be reduced from 10% to 9% and the PIK interest rate would be reduced from 15% to 9% on the PIK Toggle Notes, the maturity date would be extended by one year to
October 1, 2022 and Avanti would be permitted to issue up to $30 million of indebtedness that ranks equal with or junior to the PIK Toggle Notes and would be provided with relaxed financial covenants, including the elimination of certain
financial maintenance covenants.
|
The restructuring closed on April 26, 2018, and we now own approximately 9% of Avantis common shares.
Completion of the restructuring was subject to a number of conditions, including approval of a scheme of arrangement by a United Kingdom court and a corresponding proceeding under Chapter 15 of the United States Bankruptcy Code. Aspects of the
restructuring were subject to Avanti shareholder approval, including, among other things, the issuance of Avanti shares in the Existing Notes conversion, and Avanti bondholder approval. Holders of the Existing Notes considered and approved a scheme
of arrangement on March 20, 2018, which was subsequently sanctioned by a United Kingdom court at a hearing on March 26, 2018. Avanti stockholders voted to approve of the issuance of Avanti shares in the conversion at a general company
meeting in April 2018. Equity securities expose us to additional risks should Avanti default on its debt or need additional financing. Equity securities rank lower in the capital structure and would likely not pay current income or PIK income, which
we had been receiving on our investment in Avanti. Please see, We are not in a position to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of
our investments and Our investments are very risky and highly speculative, and the lower middle-market companies we target may have difficulty accessing the capital markets to meet their future capital needs, which may limit their
ability to grow or to repay their outstanding indebtedness upon maturity.
Following the restructuring, Avanti may seek to raise up to an additional
$30 million from the sale of its common shares, additional PIK Toggle Notes or other securities that rank equal with or are junior to the PIK Toggle Notes.
Avanti is highly leveraged. If there is an event of default under the indenture governing the PIK Toggle Notes and the obligations under the PIK Toggle Notes are
accelerated, Avanti likely will not have sufficient liquidity to pay the obligations under the PIK Toggle Notes. Under such circumstances, Avanti may consider other restructuring options, such as entering into an insolvency procedure under English
law or by filing for Chapter 11 protection under the United States Bankruptcy Code, the consequences of which could include a reduction in the value of the assets available to satisfy the PIK Toggle Notes and the imposition of costs and other
additional risks on holders of the PIK Toggle Notes, including a material reduction in the value of the PIK Toggle Notes. In such an event, we may lose all or part of our investment in Avanti.
The long-term impact of this refinancing transaction on Avantis financial condition is uncertain and cannot be predicted. The refinancing transaction did not
materially change Avantis long term capital structure and it is unclear whether the refinancing transaction addresses the longer term sustainability of Avantis business model. We may sell at a loss all or a portion of our investment in
Avanti from time to time in order to meet diversification requirements under the Code or as part of our portfolio management strategy.
10
We are currently receiving PIK interest on our Avanti investment under the PIK Toggle Notes. As part of the
restructuring, the PIK Toggle Notes became
pay-if-you-can
(PIYC) notes whereby Avanti is required to make interest payments in
cash, subject to satisfying certain minimum cash thresholds. Otherwise, the interest will be paid as PIK interest. Such PIK interest exposes us to significant risks. Please see Risks Relating to Our Business and StructureWe may
expose ourselves to risks associated with the inclusion of
non-cash
income prior to receipt of cash, and Risks Relating to Our Business and StructureWe may have difficulty paying our
required distributions under applicable tax rules if we recognize income before or without receiving cash representing such income. Additionally, our Existing Notes have been converted into Avanti common shares and both the cash and PIK
interest rates on the PIK Toggle Notes have been reduced. The December 2017 restructuring could result in a significant decrease in our net asset value if the market value of the Avanti common shares that we received in the restructuring decreases
following the restructuring, a significant decrease in our total investment income and an increase in the risk of investing in our securities. These factors could also result in lower trading prices for our common stock and/or debt securities.
Notwithstanding the risks associated with the December 2017 restructuring, we believe the value of the Avanti common shares we received in exchange for the Existing Notes was substantially equal to the value of the Existing Notes (including accrued
PIK interest) converted in the restructuring. There can be no certainty in this respect and a significant decrease in the market value of the Avanti common shares we received in the restructuring could ultimately have a material adverse effect on
our net asset value and the trading prices of our securities, and increase the risks of investing in the shares offered hereby.
We face increasing
competition for investment opportunities. Limited availability of attractive investment opportunities in the market could cause us to hold a larger percentage of our assets in liquid securities until market conditions improve.
We compete for investments with other BDCs and investment funds (including private equity funds, mezzanine funds and small business investment companies), as well as
traditional financial services companies such as commercial banks and other sources of funding. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some
competitors have a lower cost of capital and access to funding sources that are not available to us, including from the Small Business Administration. In addition, increased competition for attractive investment opportunities allows debtors to
demand more favorable terms and offer fewer contractual protections to creditors. Some of our competitors have higher risk tolerances or different risk assessments than we do. These characteristics could allow our competitors to consider a wider
variety of investments, establish more relationships and offer better pricing and more flexible structuring than we are able to offer. We may lose investment opportunities if we do not match our competitors pricing, terms and structure. If we
are forced to match our competitors pricing, terms and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. A significant part of our competitive advantage stems from the
fact that the market for investments in lower middle-market companies is underserved by traditional commercial banks and other financing sources. A significant increase in the number and/or the size of our competitors in this target market would
force us to accept less attractive investment terms. GECM may, at its discretion, decide to pursue such opportunities if it believes that they are in our best interest; however, GECM may decline to pursue available investment opportunities that,
although otherwise consistent with our investment policies and objectives, in GECMs view present unacceptable risk/return profiles. Under such circumstances, we may hold a larger percentage of our assets in liquid securities until market
conditions improve in order to avoid having assets remain uninvested. Furthermore, many of our competitors have greater experience operating under, or are not subject to, the regulatory restrictions that the Investment Company Act imposes on us as a
BDC. We believe that competitors will make first and second lien loans with interest rates and returns that are lower than the rates and returns that we target. Therefore, we do not seek to compete solely on the interest rates and returns offered to
potential portfolio companies.
Changes in the regulatory framework under which the wireless telecommunications industry operates and significant
competition in the wireless telecommunications industry could adversely affect our business prospects or results of operations.
We hold a large position
in Avanti. As a result of our stake in Avanti, we are exposed to risks associated with the wireless telecommunications sector.
For example, Avantis
operations are regulated by various foreign governments and international bodies. These regulatory regimes restrict or impose conditions on Avantis ability to operate in designated areas and to provide specified products or services. In
addition, new laws or regulations or changes to the existing regulatory framework
11
could impose additional costs, impair revenue opportunities and potentially impede Avantis ability to provide services. The further regulation of Avantis activities could impact
Avantis ability to compete in the marketplace and limit the return Avanti, and, as a result, we, can expect to achieve.
In addition, Avantis
business may also be affected by the significant competition in the wireless telecommunications industry. There is rapid development of new technologies, services and products, which brings new competitors to the market. While these changes have
enabled companies like Avanti to offer new types of products and services, they have also allowed other providers to broaden the scope of their own competitive offerings. Avantis ability to compete effectively will depend on, among other
things, how successfully Avanti anticipates and responds to various factors affecting its industry, including new technologies and business models, changes in consumer preferences and demand for existing services, demographic trends and economic
conditions. If Avanti is not able to respond successfully to these competitive challenges, Avanti may face challenges in meeting its required payments under its debt securities held by us, which could result in a material decrease in the fair value
of such debt securities, and a corresponding material adverse change in our financial position and results of operations.
Our portfolio will be limited in
diversification among portfolio companies which may subject us to a risk of significant loss if one or more of these companies defaults on its obligations under any of its debt instruments.
Our portfolio is likely to hold a limited number of portfolio companies. Beyond the asset diversification requirements associated with qualification as a RIC, we do
not have fixed guidelines for diversification, and our investments are likely to be concentrated in relatively few companies. As our portfolio is less diversified than the portfolios of some funds, we are more susceptible to failure if a single
investment fails. Similarly, the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment.
Our portfolio will be concentrated in a limited number of industries, which subjects us to a risk of significant loss if there is a downturn in a particular
industry in which a number of our investments are concentrated.
Our portfolio is likely to be concentrated in a limited number of industries. A downturn
in any particular industry in which we are invested could significantly impact our aggregate realized returns.
In addition, we may from time to time invest a
relatively significant percentage of our portfolio in industries in which GECM does not necessarily have extensive historical research coverage. If an industry in which we have significant investments suffers from adverse business or economic
conditions, as these industries have to varying degrees, a material portion of our investment portfolio could be affected adversely, which, in turn, could adversely affect our financial position and results of operations.
Any unrealized losses we experience in our portfolio may be an indication of future realized losses, which could reduce our income available for distribution.
As a BDC, we are required to carry our investments at fair value as determined in good faith by our Board. Decreases in the fair values of our
investments are recorded as unrealized depreciation. Any unrealized losses in our portfolio could be an indication of a portfolio companys inability to meet its repayment obligations to us with respect to the affected investments. This could
result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods.
Prepayments of our debt
investments by our portfolio companies could adversely impact our results of operations and reduce our returns on equity.
We are subject to the risk
that investments intended to be held over long periods are, instead, repaid prior to maturity. When this occurs, we will generally reinvest these proceeds in temporary investments, repay debt or repurchase shares of our common stock, depending on
expected future investment opportunities. These temporary investments will typically have substantially lower yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future investment may also
be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elects to prepay amounts owed by them. Additionally, prepayments could
negatively impact our return on equity, which could result in a decline in the market price of our common stock.
We are not in a position to exercise
control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments.
We generally do not hold controlling equity positions in our portfolio companies. As a result, we are subject to the risk that a portfolio company may make business
decisions with which we disagree, and that the management and/or
12
stockholders of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity of the debt and equity investments that we typically
hold in our portfolio companies, we may not be able to dispose of our investments if we disagree with the actions of a portfolio company and may therefore suffer a decrease in the value of our investments.
Defaults by our portfolio companies may harm our operating results.
A portfolio companys failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of
our investments and foreclosure on our secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio companys ability to meet its obligations under the debt or equity securities that we hold. We may incur
expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of financial covenants, with a defaulting portfolio company. If any of these occur, it could materially and adversely affect our
operating results and cash flows.
By investing in companies that are experiencing significant financial or business difficulties, we will be exposed to
distressed lending risks.
As part of our lending activities, we may purchase notes or loans to
companies that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization and liquidation proceedings. Although the terms of such financing may result in significant financial
returns to us, they involve a substantial degree of risk. The level of analytical sophistication, both financial and legal, necessary for successful financing to companies experiencing significant business and financial difficulties is unusually
high. We cannot assure you that we will correctly evaluate the value of the assets collateralizing our investments or the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to a
portfolio company, we may lose all or part of the amounts advanced to the borrower or may be required to accept collateral with a value less than the amount of the investment advanced by us to the borrower.
As of March 31, 2018, we held approximately $16.0 million at par value of TRU Taj LLC (TRU Taj) senior secured notes due 2021 (the TRU
notes) and $1.7 million at par value of TRU Taj debtor in possession notes, which represented approximately 7.2% of our total assets at market value as of such date. Toys R Us, Inc. (Toys), the parent company of
TRU Taj, recently announced it has commenced a plan of restructuring, including store closures in the U.S., winding down of certain subsidiary operations and potential insolvency proceedings for certain subsidiaries of TRU Taj. TRU Taj has also
announced that it has commenced a sale of substantially all of its assets, including the Asian and Central European businesses. Counsel for TRU Taj recently indicated at a bankruptcy court hearing that multiple
non-binding
bids for the Asian businesses have been submitted in total amounts in excess of the outstanding TRU notes indebtedness. In addition, TRU Taj has reached an agreement to sell certain of the Central
European businesses. As part of the restructuring, Toys is in discussions with creditors to consider, among other things, the conversion of the TRU notes into equity of one or more either existing or newly-created reorganized TRU Taj entities. At
this time, no definitive agreement or plan has been entered into or settled. However, if consummated, such reorganization could have a material impact on our net investment income.
Our investments are very risky and highly speculative, and the lower middle-market companies we target may have difficulty accessing the capital markets to
meet their future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity.
Senior Secured Loans
and Notes
. There is a risk that the collateral securing our loans and notes may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the
business and market conditions, including as a result of the inability of the portfolio company to raise additional capital, and, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, deterioration in a
portfolio companys financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan or note. Consequently, the fact that a loan or note is
secured does not guarantee that we will receive principal and interest payments according to the loans or notes terms, or at all, or that we will be able to collect on the loan or note should we be forced to enforce our remedies.
Mezzanine Loans
. Our mezzanine debt investments will be generally subordinated to senior loans and will be generally unsecured. As such, other creditors may
rank senior to us in the event of an insolvency, which could likely result in a substantial or complete loss on such investment in the case of such insolvency. This may result in an above average amount of risk and loss of principal.
Unsecured Loans and Notes
. We may invest in unsecured loans and notes. If the issuer defaults or has an event of insolvency, other creditors may rank senior,
be structurally senior or have lien protection that effectively renders their claim superior to our rights under our unsecured notes or loans, which could likely result in a substantial or complete loss on such investment in the case of such
insolvency. This may result in an above average amount of risk and loss of principal.
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Equity Investments
. When we invest in senior secured loans or mezzanine loans, we may acquire equity securities,
including warrants, as well. In addition, we may invest directly in the equity securities of portfolio companies. The equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to
realize gains from our equity interests, and any gains that we realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
In addition, investing in middle-market companies involves a number of significant risks, including:
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these companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a
reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment;
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they typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors actions and market conditions, as
well as general economic downturns;
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they are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material
adverse impact on our portfolio company and, in turn, on you;
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they generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may
require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers, directors and GECM may be named as defendants in litigation arising from our
investments in the portfolio companies;
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they may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity; and
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a portion of our income may be
non-cash
income, such as contractual PIK interest, which represents interest added to the debt balance and due at the end of the instruments
term, in the case of loans, or issued as additional notes in the case of bonds. Instruments bearing PIK interest typically carry higher interest rates as a result of their payment deferral and increased credit risk. When we recognize income in
connection with PIK interest, there is a risk that such income may become uncollectable if the borrower defaults.
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Investing in middle-market
companies involves a high degree of risk and our financial results may be affected adversely if one or more of our portfolio investments defaults on its loans or notes or fails to perform as we expect.
Our portfolio consists primarily of debt and equity investments in privately owned lower middle-market companies. Investing in lower middle-market companies involves
a number of significant risks. Typically, the debt instruments in which we invest is not initially rated by any rating agency; however, we believe that if such investments were rated, they would be below investment grade, which are referred to as
junk bonds. Compared to larger publicly owned companies, these middle-market companies may be in a weaker financial position and experience wider variations in their operating results, which may make them more vulnerable to economic
downturns and other business disruptions. Typically, these companies need more capital to compete; however, their access to capital is limited and their cost of capital is often higher than that of their competitors. Our portfolio companies face
intense competition from larger companies with greater financial, technical and marketing resources and their success typically depends on the managerial talents and efforts of an individual or a small group of persons. Therefore, the loss of any of
their key employees could affect a portfolio companys ability to compete effectively and harm its financial condition. Further, some of these companies conduct business in regulated industries that are susceptible to regulatory changes. These
factors could impair the cash flow of our portfolio companies and result in other events, such as bankruptcy. These events could limit a portfolio companys ability to repay its obligations to us. Deterioration in a borrowers financial
condition and prospects may be accompanied by deterioration in the value of the loans collateral and the fair market value of the loan.
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Most of the loans in which we invest are not structured to fully amortize during their lifetime. In order to create
liquidity to pay the final principal payment, borrowers typically must raise additional capital or sell their assets, which could potentially result in the collateral being sold for less than its fair market value. If they are unable to raise
sufficient funds to repay us, the loan will go into default, which will require us to foreclose on the borrowers assets, even if the loan was otherwise performing prior to maturity. This will deprive us from immediately obtaining full recovery
on the loan and prevent or delay the reinvestment of the loan proceeds in other, more profitable investments. Moreover, there are no assurances that any recovery on such loan will be obtained. Most of these companies cannot obtain financing from
public capital markets or from traditional credit sources, such as commercial banks. Accordingly, loans made to these types of companies pose a higher default risk than loans made to companies that have access to traditional credit sources.
An investment strategy that includes privately held companies presents challenges, including the lack of available information about these companies, a
dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns.
We will invest in
privately held companies. Generally, little public information exists about these companies, and we are required to rely on GECMs ability to obtain adequate information to evaluate the potential returns from investing in these companies. If we
are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and may lose money on our investments. Also, privately held companies frequently have less diverse product lines and smaller
market presence than larger competitors. These factors could adversely affect our investment returns as compared to companies investing primarily in the securities of public companies.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or in some cases senior to, the debt in which we invest. By their
terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invested. Also, in insolvency,
liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any
distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to
share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
Even though we may have structured investments as secured investments, if one of our portfolio companies were to go bankrupt, depending on the facts and
circumstances, and based upon principles of equitable subordination as defined by existing case law, a bankruptcy court could subordinate all or a portion of our claim to that of other creditors and transfer any lien securing such subordinated claim
to the bankruptcy estate. The principles of equitable subordination defined by case law have generally indicated that a claim may be subordinated only if its holder is guilty of misconduct or where the senior investment is
re-characterized
as an equity investment and the senior lender has actually provided significant managerial assistance to the bankrupt debtor. We may also be subject to lender liability claims for actions taken by
us with respect to a borrowers business or instances where we exercise control over the borrower. It is possible that we could become subject to a lenders liability claim, including as a result of actions taken in rendering managerial
assistance or actions to compel and collect payments from the borrower outside the ordinary course of business.
Second priority liens on collateral
securing loans and notes that we invest in may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.
We may purchase loans or notes that are secured by a second priority security interest in the same collateral pledged by a portfolio company to secure
senior debt owed by the portfolio company to commercial banks or other traditional lenders. Often the senior lender has procured covenants from the portfolio company prohibiting the incurrence of additional secured debt without the senior
lenders consent. Prior to and as a condition of permitting the portfolio company to borrow money from us secured by the same collateral pledged to the senior lender, the senior lender will require assurances that it will control the
disposition of any collateral in the event of bankruptcy or other default. In many such cases, the senior lender will require us or the indenture trustee to enter into an intercreditor agreement
15
prior to permitting the portfolio company to borrow. Typically the intercreditor agreements expressly subordinate our debt instruments to those held by the senior lender and further provide that
the senior lender shall control: (1) the commencement of foreclosure or other proceedings to liquidate and collect on the collateral; (2) the nature, timing and conduct of foreclosure or other collection proceedings; (3) the amendment
of any collateral document; (4) the release of the security interests in respect of any collateral; and (5) the waiver of defaults under any security agreement. Because of the control we may cede to senior lenders under intercreditor
agreements we may enter, we may be unable to realize the proceeds of any collateral securing some of our loans and notes.
The reference rates for our
loans may be manipulated or changed.
Concerns have been publicized that some of the member banks surveyed by the British Bankers Association (the
BBA) in connection with the calculation of the London Interbank Offered Rate (LIBOR) across a range of maturities and currencies may have been underreporting or otherwise manipulating the inter-bank lending rate applicable to
them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually
submitted. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various
jurisdictions are ongoing.
Central banks have engaged in quantitative easing, currency purchase programs and other activities that caused government borrowing
rates and currencies to trade at prices different than those that would prevail in an unaffected market.
Actions by market participants, like the BBA, or by
government agencies, like the Federal Reserve Board, may affect prevailing interest rates and the reference rates for loans to our portfolio companies. Actions by governments may create inflation in asset prices that over-state the value of our
portfolio companies and their assets and drive cycles of capital market activities (like mergers and acquisitions) at a rate and at prices in excess of those that would prevail in an unaffected market.
We cannot assure you that actions by market participants, like the BBA, or by government agencies, like the Federal Reserve Board, will not materially adversely
affect trading markets or our portfolio companies or us or our and our portfolio companies respective business, prospects, financial condition or results of operations.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. There is currently no
definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined.
We may mismatch the interest rate and maturity exposure of our assets and liabilities.
Our net investment income depends, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. We cannot
assure you that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds could increase, which could reduce our net investment income.
We expect that our fixed-rate investments will be financed primarily with equity and/or long-term debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include
various interest rate hedging activities to the extent permitted by the Investment Company Act. If we implement these techniques properly, we could experience losses on our hedging positions, which could be material.
If interest rates fall, our portfolio companies are likely to refinance their obligations to us at lower interest rates. Our proceeds from these refinancings are
likely to be reinvested at lower interest rates than our refinanced loans resulting in a material decrease in our net investment income.
We may not
realize gains from our equity investments.
Our portfolio may include warrants or other equity securities. We may take back equity securities in exchange
for our debt investments in workouts of troubled investments. Investments in equity securities involve a number of significant risks, including the risk of further dilution as a result of additional issuances, inability to access additional capital
and failure to pay current distributions. Investments in preferred securities involve special risks, such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights. In addition, we may from time to time make
non-control,
equity investments in portfolio companies. The equity interests we invest in may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our
equity interests, and any gains that we do
16
realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have
a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We may seek puts or similar rights to give it the right to sell our equity securities back to the
portfolio company. We may be unable to exercise these put rights if the issuer is in financial distress or otherwise lacks sufficient liquidity to purchase the underlying equity investment.
Investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.
Our investment strategy contemplates investments in debt securities of foreign companies. Investing in foreign companies may expose us to additional risks not
typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than
is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and
auditing standards and greater price volatility. Such investments will generally not represent qualifying assets under Section 55(a) of the Investment Company Act. Pursuant to the Investment Company Act, qualifying assets must
represent at least 70% of our total assets at the time of acquisition of any additional
non-qualifying
assets. If we do not meet the 70% threshold, we will be limited to purchasing qualifying assets until such
threshold is met. See The CompanyRegulation as a Business Development Company.
Any investments denominated in a foreign currency will be
subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in
relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments. We may employ hedging techniques to minimize these risks, but we offer no assurance that we will,
in fact, hedge currency risk, or that if it does, such strategies will be effective.
We may hold a significant portion of our portfolio assets in cash,
cash equivalents, money market mutual funds, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less, which may have a negative impact on our business and operations.
We may hold a significant portion of our portfolio assets in cash, cash equivalents, money market mutual funds, U.S. government securities, repurchase agreements and
high-quality debt instruments maturing in one year or less for many reasons, including, among others:
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as part of GECMs strategy in order to take advantage of investment opportunities as they arise;
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when GECM believes that market conditions are unfavorable for profitable investing;
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when GECM is otherwise unable to locate attractive investment opportunities;
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as a defensive measure in response to adverse market or economic conditions; or
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to meet RIC qualification requirements.
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We may also be required to hold higher levels of cash, money market mutual
funds or other short-term securities in order to pay our expenses or make distributions to stockholders in the ordinary course of business given the relatively high percentage of our total investment income represented by PIK income. During periods
when we maintain exposure to cash, money market mutual funds or short-term securities, we may not participate in market movements to the same extent that it would if we were fully invested, which may have a negative impact on our business and
operations and, accordingly, our returns may be reduced.
Risks Relating to Our Business and Structure
GEC and the MAST Funds collectively own the majority of our outstanding common stock and may attempt to exert control over us in a manner that is adverse to
your interests.
GEC and the MAST Funds collectively own the majority of the outstanding shares of our common stock and accordingly may control the
results of matters submitted to the vote of our stockholders. GEC and the MAST Funds agreed to vote their shares proportionately to our other stockholders on certain matters until they collectively own less than 35% of the outstanding shares of our
common stock. Although there is no agreement between GEC and the MAST Funds to act in concert with respect to the shares of our common stock they own, funds managed by MAST
17
Capital (including some of the MAST Funds) are a significant stockholder of GEC and Peter A. Reed, our Chief Executive Officer, is Chief Executive Officer and a member of the board of directors
of GEC. GEC and the MAST Funds may use their share ownership, ownership of GECM or otherwise exert control over us in a manner that is adverse to your interests.
Capital markets experience periods of disruption and instability. These market conditions have materially and adversely affected debt and equity capital
markets in the United States and abroad, which had, and may in the future have, a negative impact on our business and operations.
The global capital
markets are subject to disruption as evidenced by, among other things, a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the
re-pricing
of credit risk in
the broadly syndicated credit market and the failure of major financial institutions. Despite actions of the United States federal government and foreign governments, these events contributed to worsening general economic conditions that materially
and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. We cannot provide any assurance that these conditions will
not significantly worsen. Equity capital may be difficult to raise because, as a BDC, we are generally not able to issue additional shares of our common stock at a price less than net asset value. In addition, our ability to incur indebtedness or
issue preferred stock is limited by applicable regulations such that our asset coverage, as defined in the Investment Company Act, must equal at least 150% immediately after each time we incur indebtedness or issue preferred stock. The debt capital
that may be available, if at all, may be at a higher cost and on less favorable terms and conditions in the future. Any inability to raise capital could have a negative effect on our business, financial condition and results of operations.
Market conditions may in the future make it difficult to extend the maturity of or refinance our existing indebtedness, and any failure to do so could have a
material adverse effect on our business. The expected illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we may realize significantly less than the value at which we have recorded our
investments.
In addition, significant changes in the capital markets, including the recent extreme volatility and disruption, have had, and may in the future
have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments. An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material
adverse impact on our business, financial condition and results of operations.
You may not receive distributions or our distributions may not grow over
time.
We intend to make distributions on a monthly basis to our stockholders out of assets legally available for distribution
.
We cannot assure
you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-over-year increases in cash distributions
.
In addition, due to the asset coverage test applicable to us as a BDC, we may be
limited in our ability to make distributions
.
See The CompanyRegulation as a Business Development Company.
We may borrow money,
which would magnify the potential for loss on amounts invested and may increase the risk of investing with us.
We have existing indebtedness and may in
the future borrow additional money, each of which magnifies the potential for loss on amounts invested and may increase the risk of investing with us. Our ability to service our existing and potential future debt depends largely on our financial
performance and is subject to prevailing economic conditions and competitive pressures. The amount of leverage that we could employ at any particular time will depend on GECMs and our Boards assessment of market and other factors at the
time of any proposed borrowing.
Any GECC credit facility would impose financial and operating covenants that would restrict our business activities, including
limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC under the Code. A failure to renew our credit facilities or to add new or replacement debt
facilities could have a material adverse effect on our business, financial condition and results of operations.
Borrowings, also known as leverage, magnify the
potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. When a company issues debt, the issuer gives the debt holders a call right on the issuers business and assets.
Holders of such debt securities would have fixed dollar claims on our consolidated assets that would be superior to the claims of our common stockholders or any preferred stockholders.
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If the value of our consolidated assets decreases while we have debt outstanding, leveraging would cause our net asset
value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any decrease in our consolidated income while we have debt outstanding would cause net income to decline more sharply than it would have had we not borrowed.
Such a decline could negatively affect our ability to make common stock distributions. We cannot assure you that our leveraging strategy will be successful.
Illustration
. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of
expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below.
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Assumed Return on Our Portfolio (net of expenses)
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(10.00
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)%
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(5.00
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)%
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0.00
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%
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5.00
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%
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10.00
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%
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Corresponding net return to common
stockholders
(1)(2)
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(20.20
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)%
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(12.45
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)%
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(4.69
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)%
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3.06
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%
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10.81
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%
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(1)
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Assumes $194.8 million in total portfolio assets as of March 31, 2018, $79.0 million in senior securities outstanding, $125.6 million in net assets as of March 31, 2018, and an average cost of
funds of 7.46%. Actual interest payments may be different.
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(2)
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In order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on our March 31, 2018 total portfolio assets of at least 3.03%.
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We may experience fluctuations in our quarterly results.
Our
quarterly operating results will fluctuate due to a number of factors, including the level of expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our
markets and general economic conditions. Our quarterly operating results will also fluctuate due to a number of other factors, including the interest rates payable on the debt investments we make and the default rates on such investments. As a
result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
Our success depends on the
ability of our investment adviser to attract and retain qualified personnel in a competitive environment.
Our growth requires that GECM retain and
attract new investment and administrative personnel in a competitive market. GECMs ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors, including, but not limited to, its
ability to offer competitive wages, benefits and professional growth opportunities. Many of the entities, including investment funds (such as private equity funds and mezzanine funds) and traditional financial services companies, with compete for
experienced personnel with GECM, have greater resources than GECM.
Our ability to grow depends on our ability to raise capital and/or access debt
financing.
We intend to periodically access the capital markets to raise cash to fund new investments. We expect to continue to elect to be treated as a
RIC and operate in a manner so as to qualify for the U.S. federal income tax treatment applicable to RICs. Among other things, in order to maintain our RIC status, we must distribute to our stockholders on a timely basis generally an amount equal to
at least 90% of our investment company taxable income (as defined by the Code), and, as a result, such distributions will not be available to fund new investments. As a result, we must borrow from financial institutions or issue additional
securities to fund our growth. Unfavorable economic or capital market conditions may increase our funding costs, limit our access to the capital markets or could result in a decision by lenders not to extend credit to us. There has been and will
continue to be uncertainty in the financial markets in general. An inability to successfully access the capital or credit markets for either equity or debt could limit our ability to grow our business and fully execute our business strategy and
could decrease our earnings, if any.
If the fair value of our assets declines substantially, we may fail to maintain the asset coverage ratios imposed upon us
by the Investment Company Act or our lenders. Any such failure, or a tightening or general disruption of the credit markets, would affect our ability to issue senior securities, including borrowings, and pay dividends or other distributions, which
could materially impair our business.
In addition, with certain limited exceptions, we are only allowed to borrow or issue debt securities or preferred stock
such that our asset coverage, as defined in the Investment Company Act, equals at least 150% immediately after such borrowing, which, in certain circumstances, may restrict our ability to borrow or issue debt securities or preferred stock.
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The amount of leverage that we may employ will depend on GECMs and our Boards assessments of market and
other factors at the time of any proposed borrowing or issuance of debt securities or preferred stock. We cannot assure you that we will be able to obtain lines of credit at all or on terms acceptable to us.
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
The economy is subject to periodic downturns that, from time to time, result in recessions or more serious adverse macroeconomic events. Our portfolio companies are
susceptible to economic slowdowns or recessions and may be unable to repay loans or notes during these periods. Therefore, our
non-performing
assets may increase and the value of our portfolio may decrease
during these periods as we are required to record the market value of our investments. Adverse economic conditions may also decrease the value of collateral securing some of our investments and the value of our equity investments. Economic slowdowns
or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision
by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.
A portfolio companys
failure to satisfy financial or operating covenants in its agreements with us or other lenders could lead to defaults and, potentially, acceleration of the time when the debt obligations are due and foreclosure on its secured assets, which could
trigger cross-defaults under other agreements and jeopardize the portfolio companys ability to meet its obligations under the debt that we hold. We may incur additional expenses to the extent necessary to seek recovery upon default or to
negotiate new terms with a defaulting portfolio company. In addition, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided significant managerial
assistance to that portfolio company, a bankruptcy court might
re-characterize
our debt holding and subordinate all or a portion of our claim to that of other creditors.
Uncertainty about the financial stability of the United States and of several countries in the European Union and China could have a significant adverse effect
on our business, financial condition and results of operations.
Due to federal budget deficit concerns, S&P Global Ratings downgraded the federal
governments credit rating from AAA to AA+ for the first time in history on August 5, 2011. Further downgrades or warnings regarding further downgrades by S&P Global Ratings or other rating agencies, and the United States
governments credit and deficit concerns in general, could cause interest rates and borrowing costs to rise, which may negatively impact both the perception of credit risk associated with our debt portfolio and our ability to access the debt
markets on favorable terms. In addition, a decreased U.S. government credit rating could create broader financial turmoil and uncertainty, which may weigh heavily on our financial performance and the value of our common stock.
Protectionism, other governmental causes of recessions and other negative economic factors may increase. Risks resulting from any future debt crisis in Europe or any
similar crisis could have a detrimental impact on the global economic recovery, sovereign and
non-sovereign
debt in these countries and the financial condition of European financial institutions. Market and
economic disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and defaults on consumer debt and home prices, among other factors. We cannot assure you that
market disruptions in Europe, including the increased cost of funding for certain governments and financial institutions, will not impact the global economy. To the extent uncertainty regarding the United Kingdom or the European Union negatively
impacts consumer confidence, market conditions and credit factors, our business, financial condition and results of operations could be materially adversely affected.
In October 2014, the Federal Reserve announced that it was concluding its bond-buying program, or quantitative easing, which was designed to stimulate the economy
and expand the Federal Reserves holdings of long-term securities. It is unclear what effect, if any, the conclusion of the Federal Reserves bond-buying program has had or will have on the value of our investments. However, it is possible
that, without quantitative easing by the Federal Reserve, these developments, along with the United States governments credit and deficit concerns and the European sovereign debt crisis, could cause interest rates and borrowing costs to rise,
which may negatively impact our ability to access the debt markets on favorable terms. The target range for the federal funds rate may increase and cause interest rates and borrowing costs to rise, which may negatively impact our ability to access
the debt markets on favorable terms. In June 2017, the Federal Reserve raised the target range for the federal funds rate, which was only the fourth such interest rate hike in nearly a decade.
In the second quarter of 2015, stock prices in China experienced a significant drop, resulting primarily from a continued
sell-off
of shares trading in Chinese markets. In August 2015, Chinese authorities sharply devalued Chinas currency. These market and economic disruptions affected, and these or similar market and
economic disruptions may in the future affect, the U.S. capital markets, which could adversely affect our business.
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In June 2016, the United Kingdom voted to leave the European Union. It is not possible to ascertain the precise impact
these events may have on us from an economic, financial or regulatory perspective but any such impact could have material adverse consequences for us or our portfolio companies.
The U.S. Congress has passed, and the President signed into law on December 22, 2017, a tax reform bill that, among other things, significantly changed the
taxation of business entities (including by significantly lowering corporate tax rates), the deductibility of interest expense, and the timing in which certain income items are recognized. Additionally, the Trump administration has called for
significant change to U.S. trade, healthcare, immigration, foreign, and government regulatory policy. In this regard, there is significant uncertainty with respect to legislation, regulation and government policy at the federal level, as well as the
state and local levels. Recent events have created a climate of heightened uncertainty and introduced new and
difficult-to-quantify
macroeconomic and political risks
with potentially
far-reaching
implications. There has been a corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and
monetary policy. To the extent the U.S. Congress or Trump administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration,
corporate taxes, healthcare, the U.S. regulatory environment, inflation and other areas. Some particular areas identified as subject to potential change, amendment or repeal include the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Dodd-Frank Act), including the Volcker Rule and various swaps and derivatives regulations, credit risk retention requirements and the authorities of the Federal Reserve, the Financial Stability Oversight Council and the SEC. Although we
cannot predict the impact, if any, of these changes to our business, they could adversely affect our business, financial condition, operating results and cash flows. Until we know what policy changes are made and how those changes impact our
business and the business of our competitors over the long term, we will not know if, overall, we will benefit from them or be negatively affected by them.
Changes in tax laws, including recently enacted U.S. tax reform legislation, could have a negative effect on us.
Recently enacted tax reform legislation has made substantial changes to U.S. tax law, including new tax rates, immediate expensing of certain capital expenses and
significant limitations on deductibility of interest. This legislation could have significant effects on us and on an investment in our shares, some of which may be adverse. The magnitude of the net impact remains uncertain at this time and is
subject to any other regulatory or administrative developments, including any regulations or other guidance promulgated by the Internal Revenue Service (the IRS).
We may acquire other funds, portfolios of assets or pools of debt, and those acquisitions may not be successful.
We may acquire other funds, portfolios of assets or pools of debt investments. Any such acquisition program has a number of risks, including, among others:
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managements attention will be diverted from running our existing business by efforts to source, negotiate, close and integrate acquisitions;
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our due diligence investigation of potential acquisitions may not reveal risks inherent in the acquired business or assets;
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we may over-value potential acquisitions, resulting in dilution to you, incurrence of excessive indebtedness, asset write downs and negative perception of our common stock;
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your interest in GECC may be diluted by the issuance of additional shares of our common stock or preferred stock;
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we may borrow to finance acquisitions, and there are risks associated with borrowing as described in this prospectus;
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GECM has an incentive to increase our assets under management in order to increase its fee stream, which may not be aligned with your interests;
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we and GECM may not successfully integrate any acquired business or assets; and
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GECM may compensate the existing managers of any acquired business or assets in a manner that results in the combined company taking on excessive risk.
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Our failure to maintain our status as a BDC would reduce our operating flexibility.
We have elected to be regulated as a BDC under the Investment Company Act. The Investment Company Act imposes numerous constraints on the operations of BDCs and
their external advisers. For example, BDCs are required to invest at least 70% of their gross assets in specified types of securities, primarily in private companies or illiquid U.S. public companies below a certain market capitalization, cash, cash
equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less. Furthermore, any failure to comply with the requirements imposed on BDCs by the Investment Company Act could cause the SEC to bring an
enforcement action against us and/or expose us to claims of private litigants. In addition, upon approval of a majority of our voting securities (as defined under the Investment Company Act), we may elect to withdraw our status as a BDC. If we
decide to withdraw our BDC election, or if we otherwise fail to qualify, or to maintain our qualification, as a BDC, we may be subject to substantially greater regulation under the Investment Company Act as a
closed-end
management investment company. Compliance with such regulations would significantly decrease our operating flexibility and would significantly increase our costs of doing business.
Regulations governing our operations as a BDC affect our ability to raise additional capital and the way in which we do so. As a BDC, the necessity of raising
additional capital may expose us to risks, including the typical risks associated with leverage.
We may issue debt securities or preferred stock and/or
borrow money from banks or other financial institutions, referred to collectively as senior securities, up to the maximum amount permitted under the Investment Company Act. Under the provisions of the Investment Company Act applicable to
BDCs, we are permitted to issue senior securities (e.g., notes and preferred stock) in amounts such that our asset coverage ratio, as defined in the Investment Company Act, equals at least 150% of gross assets less all liabilities and indebtedness
not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on
the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for distributions to our stockholders. Furthermore, as
a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss.
If we issued
preferred stock, the preferred stock would rank senior to common stock in our capital structure, preferred stockholders would have separate voting rights on certain matters and might have other rights including, for example, the right to
elect one or more of our directors, preferences, or privileges more favorable than those of our common stockholders, and the issuance of preferred stock could have the effect of delaying, deferring or preventing a transaction or a change of control
that might involve a premium price for holders of our common stock or otherwise be in your best interest.
We are not generally able to issue and sell shares of
our common stock at a price below net asset value per share. We may, however, sell shares of our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value per share of our common
stock if our Board determines that such sale is in our and our stockholders best interests. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board,
equals or closely approximates the market value of such securities (less any distributing commission or discount calculated). Certain sales of our common stock below net asset value per share also require approval by our stockholders in accordance
with the Investment Company Act. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then our existing common stockholders percentage ownership at that time
will decrease, and they will experience dilution.
Our common stock price may be volatile and may decrease substantially, and you may lose money in
connection with an investment in our shares.
The trading price of our common stock will likely fluctuate substantially. The price of our common stock
may increase or decrease, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:
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price and volume fluctuations in the overall stock market from time to time;
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investor demand for our shares;
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significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which are not necessarily related to the operating performance of these companies;
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exclusion of our common stock from certain indices, such as the Russell 2000 Financial Services Index, which could reduce the ability of certain investment funds to own our common stock and put short-term selling
pressure on our common stock;
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changes in regulatory policies or tax guidelines with respect to RICs or BDCs;
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failure to qualify as a RIC, or the loss of RIC status;
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any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
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changes, or perceived changes, in the value of our portfolio investments;
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departures of GECMs key personnel;
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operating performance of companies comparable to GECC; or
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general economic conditions and trends and other external factors.
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If the price of shares of our common stock
decreases, you may lose money if you were to sell your shares of our common stock.
In addition, following periods of volatility in the market price of a
companys securities, securities class action litigation has often been brought against that company. Due to the potential volatility of the price of our securities, we may become the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert managements attention and resources from our business.
Our Board may change our investment
objectives, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.
Our Board has the
authority to modify or waive our investment objectives, current operating policies, investment criteria and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies,
investment criteria and strategies would have on our business, net asset value, operating results, and value of our securities. However, the effects might be adverse, which could negatively impact our ability to pay our stockholders dividends or
other distributions and cause you to lose all or part of your investment.
We may have difficulty paying our required distributions under applicable tax
rules if we recognize income before or without receiving cash representing such income.
For U.S. federal income tax purposes, we may be required to
include in income certain amounts before our receipt of the cash attributable to such amounts, such as original issue discount (OID), which may arise if we receive warrants in connection with the making of a loan or possibly in other
circumstances, or PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. For example, such OID or increases in loan balances as a result of PIK interest will be included in income before we
receive any corresponding cash payments. Also, we may be required to include in income other amounts that we will not receive in cash, including, for example,
non-cash
income from PIK securities, deferred
payment securities and hedging and foreign currency transactions. In addition, we intend to seek debt investments in the secondary market that represent attractive risk-adjusted returns, taking into account both stated interest rates and current
market discounts to par value. Such market discount may be included in income before we receive any corresponding cash payments.
Since we may recognize income
before or without receiving cash representing such income, we may have difficulty meeting the U.S. federal income tax requirement to distribute generally an amount equal to at least 90% of our investment company taxable income to maintain our status
as a RIC. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able
to obtain cash from other sources, we may fail to qualify as a RIC and thus become subject to additional corporate-level taxes.
However, in order to satisfy the
annual distribution requirement for a RIC, we may, but have no current intention to, declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a portion of such dividend is paid in cash (which portion may be
as low as 20% of such dividend) and certain requirements are met, the entire distribution will be treated as a dividend for U.S. federal income tax purposes.
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We may expose ourselves to risks associated with the inclusion of
non-cash
income prior to receipt of cash.
To the extent we invest in OID instruments, including PIK loans, zero coupon bonds, and debt securities with attached
warrants, investors will be exposed to the risks associated with the inclusion of such
non-cash
income in taxable and accounting income prior to receipt of cash.
The deferred nature of payments on PIK loans creates specific risks. Interest payments deferred on a PIK loan are subject to the risk that the borrower may default
when the deferred payments are due in cash at the maturity of the loan. Since the payment of PIK income does not result in cash payments to us, we may also have to sell some of our investments at times we would not consider advantageous, raise
additional debt or equity capital or reduce new investment originations (and thus hold higher cash or cash equivalent balances, which could reduce returns) to pay our expenses or make distributions to stockholders in the ordinary course of business,
even if such loans do not default. An election to defer PIK interest payments by adding them to principal increases our gross assets and, thus, increases future base management fees to GECM and, because interest payments will then be payable on a
larger principal amount, the PIK election also increases GECMs future income incentive fees at a compounding rate. The deferral of interest on a PIK loan increases its
loan-to-value
ratio, which is a measure of the riskiness of a loan.
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generally, market prices of OID instruments are more volatile because they are impacted to a greater extent by interest rate changes than instruments that pay interest periodically in cash. Ordinarily, OID would also create the risk of
non-refundable
cash payments to GECM, based on
non-cash
accruals that may never be realized; however, this risk is mitigated since the Investment Management Agreement requires
GECM to defer any incentive fees on accrued but unpaid income, the effect of which is that income incentive fees otherwise payable with respect to accrued unpaid income become payable only if, as, when and to the extent cash is received by us or our
consolidated subsidiaries in respect thereof.
Additionally, we will be required under the tax laws to make distributions of
non-cash
income to stockholders without receiving any cash. Such required cash distributions may have to be paid from the sale of our assets without investors being given any notice of this fact. The required
recognition of
non-cash
income, including PIK and OID interest, for U.S. federal income tax purposes may have a negative impact on liquidity, because it represents a
non-cash
component of our taxable income that must, nevertheless, be distributed in cash to investors to avoid us being subject to corporate level taxation.
Further, our investment in Avanti, which represented approximately 21% of our investment portfolio (excluding cash and short-term investments) as of March 31,
2018 and 41% of our total investment income for the three months ended March 31, 2018, has resulted in significant PIK interest, which significantly increases our exposure to the aforementioned risks. The conversion of Avantis Existing
Notes to equity has resulted in us owning more Avanti common shares which are not expected to generate cash dividends. Please see Risks Relating to Our InvestmentsWe may lose all of our investment in Avanti.
We may choose to pay distributions in our own stock, in which case you may be required to pay tax in excess of the cash you receive.
We may distribute a portion of our taxable distributions in the form of shares of our stock. Under applicable provisions of the Code, distributions payable in cash
or in shares of stock at the election of stockholders may be treated as a taxable distribution. The IRS has issued guidance stating that this rule will apply even if the total amount of cash that may be distributed is limited to no more than 20% of
the total distribution and certain other conditions are met. If we decide to make any distributions consistent with this guidance that are payable in part in our stock, taxable stockholders receiving such distribution will be required to include the
full amount of the distribution (whether received in cash, stock or a combination thereof) as ordinary income (or as a long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our
current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such distribution in excess of any cash received. If a U.S. stockholder sells the
stock it receives as a distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with
respect to
non-U.S.
stockholders, we may be required to withhold U.S. tax with respect to such distribution, including in respect to all or a portion of such distribution that is payable in stock. In addition,
if a significant number of our stockholders determine to sell shares of our common stock, in order to pay taxes owed on distribution, such sales may put downward pressure on the trading price of our common stock.
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We may expose our self to risks if we engage in hedging transactions.
If we engage in hedging transactions, we may expose our self to risks associated with such transactions. We may utilize instruments such as forward contracts,
currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline
in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. Such hedging transactions may also limit the opportunity for gain
if the values of the underlying portfolio positions increase. It may not be possible to hedge against an exchange rate or interest rate fluctuation that is generally anticipated because we may not be able to enter into a hedging transaction at an
acceptable price. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged.
Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or
perfectly against currency fluctuations affecting the value of securities denominated in
non-U.S.
currencies because the value of those securities is likely to fluctuate as a result of factors not related to
currency fluctuations.
We will be subject to corporate-level U.S. federal income tax if we are unable to qualify as a RIC under the Code.
No assurance can be given that we will be able to qualify for and maintain RIC tax treatment under the Code. To maintain RIC tax treatment under the Code, we must
meet certain annual distribution, source of income and asset diversification requirements.
The annual distribution requirement for a RIC will be satisfied if we
distribute to our stockholders on an annual basis at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Because we may use debt financing, we may be subject to
asset coverage ratio requirements under the Investment Company Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution
requirement. If we are unable to make the required distributions, we could fail to qualify for RIC tax treatment and thus become subject to corporate-level U.S. federal income tax.
The source of income requirement will be satisfied if we obtain at least 90% of our income for each year from dividends, interest, gains from the sale of stock or
securities or similar sources.
The asset diversification requirement will be satisfied if we meet asset diversification requirements at the end of each quarter
of our taxable year. We expect to satisfy the asset diversification requirements, but our business model calls for concentration in a relatively small number of portfolio companies. Failure to meet the asset diversification requirements could result
in us having to dispose of investments quickly in order to prevent the loss of RIC status. Because most of our investments will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial
losses. Further, the illiquidity of our investments may make them difficult or impossible to dispose of in a timely manner.
If we fail to qualify for RIC tax
treatment for any reason and become subject to corporate U.S. federal income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution, the amount of our distributions and the value
of your GECC shares.
The incentive fee structure and the formula for calculating the management fee may incentivize GECM to pursue speculative
investments, advise us to use leverage when it may be unwise to do so, or advise us to refrain from reducing debt levels when it would otherwise be appropriate to do so.
The incentive fee payable by us to GECM creates an incentive for GECM to pursue investments on our behalf that are riskier or more speculative than would be the case
in the absence of such a compensation arrangement. The incentive fee payable to GECM is calculated based on a percentage of our return on invested capital. In addition, GECMs base management fee is calculated on the basis of our gross assets,
including assets acquired through the use of leverage. This may encourage GECM to use leverage to increase the aggregate amount of and the return on our investments, even when it may not be appropriate to do so, and to refrain from reducing debt
levels when it would otherwise be appropriate to do so. The use of leverage increases our likelihood of default, which would impair the value of your shares. In addition, GECM will receive the incentive fee based, in part, upon net capital gains
realized on our investments. Unlike that portion of the incentive fee based on income, there will be no hurdle rate applicable to the portion of the incentive fee based on net capital gains. As a result, GECM may have a tendency to invest more
capital in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in us investing in more speculative securities than would otherwise be the case, which could result in higher
investment losses, particularly during economic downturns.
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We may invest in the securities and instruments of other investment companies, including private funds, and we will bear
our ratable share of any such investment companys expenses, including management and performance fees. We will also remain obligated to pay management and incentive fees to GECM with respect to the assets invested in the securities and
instruments of other investment companies. With respect to each of these investments, each of our stockholders will bear its share of the management and incentive fee payable to GECM, as well as indirectly bearing the management and performance fees
and other expenses of any investment companies in which we invest.
In addition, if we purchase our debt instruments and such purchase results in our recording a
net gain on the extinguishment of debt for financial reporting and tax purposes, such net gain will be included in our
pre-incentive
fee net investment income for purposes of determining the income incentive
fee payable to GECM under the Investment Management Agreement.
Finally, the incentive fee payable by us to GECM also may create an incentive for GECM to invest
on our behalf in instruments that have a deferred interest feature, such as investments with PIK provisions. Under these investments, we would accrue the interest over the life of the investment but would typically not receive the cash income from
the investment until the end of the term or upon the investment being called by the issuer. Our net investment income used to calculate the income portion of our incentive fee, however, includes accrued interest. The portion of the incentive fee
that is attributable to deferred interest, such as PIK, will not be paid to GECM until we receive such interest in cash. Even though such portion of the incentive fee will be paid only when the accrued income is collected, the accrued income is
capitalized and included in the calculation of the base management fee. In other words, when deferred interest income (such as PIK) is accrued, a corresponding income incentive fee (if any) is also accrued (but not paid) based on that income. After
the accrual of such income, it is capitalized and added to the debt balance, which increases our total assets and thus the base management fee paid following such capitalization. If any such interest is reversed in connection with any
write-off
or similar treatment of the investment, we will reverse the income incentive fee accrual and an income incentive fee will not be payable with respect to such uncollected interest. If a portfolio company
defaults on a loan, it is possible that accrued interest previously used in the calculation of whether GECM met the hurdle rate to earn the incentive fee will become uncollectible.
A general increase in interest rates will likely have the effect of making it easier for GECM to receive incentive fees, without necessarily resulting in an
increase in our net earnings.
Given the structure of the Investment Management Agreement, any general increase in interest rates, which are currently
near historic lows, will likely have the effect of making it easier for GECM to meet the quarterly hurdle rate for payment of income incentive fees under the Investment Management Agreement without any additional increase in relative performance on
the part of GECM. In addition, in view of the
catch-up
provision applicable to income incentive fees under the Investment Management Agreement, GECM could potentially receive a significant portion of the
increase in our investment income attributable to such a general increase in interest rates. If that were to occur, our increase in net earnings, if any, would likely be significantly smaller than the relative increase in GECMs income
incentive fee resulting from such a general increase in interest rates.
GECM has the right to resign on 60 days notice, and we may not be able to
find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.
GECM has the right, under the Investment Management Agreement, to resign at any time upon not more than 60 days written notice, whether we have found a
replacement or not. If GECM resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we
are unable to do so quickly, our operations are likely to experience a disruption; our financial condition, business and results of operations, as well as our ability to pay distributions, are likely to be adversely affected, and the market price of
our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise
possessed by our investment adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective and current
investment portfolio may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations and cause you to lose your investment.
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We incur significant costs as a result of being a publicly traded company.
As a publicly traded company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a
company whose securities are registered under the Securities Exchange Act of 1934, as amended (the Exchange Act), as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act, the
Dodd-Frank Act and other rules implemented by our government.
Changes in laws or regulations governing our operations may adversely affect our business or
cause us to alter our business strategy.
We and our portfolio companies are subject to applicable local, state and federal laws and regulations. New
legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and you, potentially with retroactive effect.
Additionally, any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment strategy in order to avail our self of new or different opportunities. Such changes could result in
material differences to the strategies and plans and may result in our investment focus shifting from the areas of expertise of GECM to other types of investments in which the investment committee may have less expertise or little or no experience.
Specifically, tax reform legislation could have an adverse impact on us, the credit markets and our portfolio companies, notwithstanding the reduction in corporate tax rates. Thus, any such changes, if they occur, could have a material adverse
effect on our results of operations and the value of your investment in us.
In December 2015, the SEC proposed a new rule to regulate the use of derivatives by
registered investment companies, including us. If the rule goes into effect, it could limit our ability to invest or remain invested in derivatives. In addition, other future regulatory developments may impact our ability to invest or remain
invested in derivatives. Legislation or regulation may also change the way in which we are regulated. We cannot predict the effects of any new governmental regulation that may be implemented on our ability to use swaps or any other financial
derivative product, and there can be no assurance that any new governmental regulation will not adversely affect our ability to achieve our investment objective.
Recently enacted legislation permits us to incur additional debt.
On March 23, 2018, the Consolidated Appropriations Act of 2018, which includes the Small Business Credit Availability Act (the Act), was signed into
law. The Act amends the Investment Company Act to permit a BDC to reduce the required minimum asset coverage ratio applicable to it from 200% to 150%, subject to certain requirements described therein. This reduction significantly increases the
amount of debt that BDCs may incur.
Prior to the enactment of the Act, BDCs were required to maintain an asset coverage ratio of at least 200% in order to incur
debt or to issue other senior securities. Generally, for every $1.00 of debt incurred or in senior securities issued, a BDC was required to have at least $2.00 of assets immediately following such incurrence or issuance. For those BDCs that satisfy
the Acts disclosure and approval requirements, the minimum asset coverage ratio is reduced such that for every $1.00 of debt incurred or in senior securities issued, a BDC must now have at least $1.50 of assets.
At our 2018 annual meeting of stockholders, which was held on May 3, 2018 (the Annual Meeting), a majority of our stockholders approved the
application of the modified minimum asset coverage requirements set forth in Section 61(a)(2) of the Investment Company Act, to the Company. As a result of such approval, and subject to satisfying certain ongoing disclosure requirements,
effective May 4, 2018 the asset coverage ratio test applicable to the Company was decreased from 200% to 150%, permitting us to incur additional leverage and thereby potentially increasing the risk of an investment in us.
Incurring additional indebtedness could increase the risk in investing in our Company.
Pursuant to the Act, at the Annual Meeting our stockholders approved of the reduction of our required minimum asset coverage ratio from 200% to 150%, permitting us
to incur additional leverage. The use of leverage magnifies the potential for gain or loss on amounts invested. The use of leverage is generally considered a speculative investment technique and increases the risks associated with investing in our
securities. If we incur such additional leverage, you may experience increased risks of investing in our common stock.
As of March 31, 2018, we had
approximately $79.0 million of total outstanding indebtedness under two series of senior securities (unsecured senior notes)the 2022 notes and the 2025 notesand our asset coverage ratio was 255%. Holders of our 2022 notes and 2025
notes have fixed dollar claims on our assets that are superior to the claims of our common stockholders, and such holders may seek to recover against our assets in the event of a default.
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If we are unable to meet the financial obligations under the 2022 notes or the 2025 notes, the holders of such
indebtedness would have a superior claim to our assets over our common stockholders in the event of a default by us. If the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have
had we not leveraged, thereby magnifying losses. Similarly, any decrease in our revenue or income will cause our net income to decline more sharply than it would have had we not borrowed. Such a decline would also negatively affect our ability to
make distributions with respect to our common stock. Our ability to service any debt depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures. Moreover, as the base management fee
payable to GECM, our investment adviser, is payable based on the average value of our total assets, including those assets acquired through the use of leverage, GECM will have a financial incentive to incur leverage, which may not be consistent with
our stockholders interests. In addition, our common stockholders bear the burden of any increase in our fees or expenses as a result of our use of leverage, including interest expenses and any increase in the base management fee payable to
GECM.
If our asset coverage ratio falls below the required limit, we will not be able to incur additional debt until we are able to comply with the asset
coverage ratio applicable to us. This could have a material adverse effect on our operations, and we may not be able to make distributions to stockholders. The actual amount of leverage that we employ will depend on GECMs and our Boards
assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to obtain credit at all or on terms acceptable to us.
Incurring additional leverage may magnify our exposure to risks associated with changes in interest rates, including fluctuations in interest rates which could
adversely affect our profitability.
If we incur additional leverage, general interest rate fluctuations may have a more significant negative impact on
our investments and investment opportunities than they would have absent such additional incurrence, and, accordingly, may have a material adverse effect on our investment objectives and rate of return on investment capital. A portion of our income
will depend upon the difference between the rate at which we borrow funds and the interest rate on the debt securities in which we invest. Because we may borrow money to make investments and may issue debt securities, preferred stock or other
securities, our net investment income is dependent upon the difference between the rate at which we borrow funds or pay interest or dividends on such debt securities, preferred stock or other securities and the rate at which we invest these borrowed
funds.
We expect that a majority of our investments in debt will continue to be at floating rates with a floor. However, in the event that we make investments
in debt at variable rates, a significant increase in market interest rates could also result in an increase in our
non-performing
assets and a decrease in the value of our portfolio because our floating-rate
loan portfolio companies may be unable to meet higher payment obligations. In periods of rising interest rates, our cost of funds would increase, resulting in a decrease in our net investment income. Incurring additional leverage will magnify the
impact of an increase to our cost of funds. In addition, a decrease in interest rates may reduce net income, because new investments may be made at lower rates despite the increased demand for our capital that the decrease in interest rates may
produce. To the extent our additional borrowings are in fixed-rate instruments, we may be required to invest in higher-yield securities in order to cover our interest expense and maintain our current level of return to stockholders, which may
increase the risk of an investment in our securities.
There is, and will be, uncertainty as to the value of our portfolio investments.
Under the Investment Company Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value
as determined by us in accordance with our written valuation policy, with our Board having final responsibility for overseeing, reviewing and approving, in good faith, our estimate of fair value. Often, there will not be a public market for the
securities of the privately held companies in which we invest. As a result, we will value these securities quarterly at fair value based on input from management, third-party independent valuation firms and our audit committee, with the oversight,
review and approval of our Board. See Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting PoliciesValuation of Portfolio Investments.
The determination of fair value and consequently, the amount of unrealized gains and losses in our portfolio, are subjective and dependent on a valuation process
approved and overseen by our Board. Factors that may be considered in determining the fair value of our investments include, among others, estimates of the collectability of the principal and interest on our debt investments and expected realization
on our equity investments, as well as external events, such as private mergers, sales and acquisitions involving comparable companies. Because such valuations, and particularly valuations of private securities and private companies and small cap
public companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. Our determinations of fair value may differ
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materially from the values that would have been used if a ready market for these securities existed. Due to this uncertainty, our fair value determinations may cause our net asset value on a
given date to materially misstate the value that we may ultimately realize on one or more of our investments. As a result, investors purchasing our securities based on an overstated net asset value would pay a higher price than the value of our
investments might warrant. Conversely, investors selling securities during a period in which the net asset value understates the value of our investments will receive a lower price for their securities than the value of our investments might
otherwise warrant.
Our financial condition and results of operations depend on our ability to effectively manage and deploy capital.
Our ability to achieve our investment objective depends on our ability to effectively manage and deploy capital, which depends, in turn, on GECMs ability to
identify, evaluate and monitor, and our ability to finance and invest in, companies that meet our investment criteria.
Accomplishing our investment objective on
a cost-effective basis is largely a function of GECMs handling of the investment process, its ability to provide competent, attentive and efficient services and its access to investments offering acceptable terms. In addition to monitoring the
performance of our existing investments, GECM may also be called upon, from time to time, to provide managerial assistance to some of our portfolio companies. These demands on their time may distract them or slow the rate of investment.
Even if we are able to grow and build out our investment operations, any failure to manage our growth effectively could have a material adverse effect on our
business, financial condition, results of operations and prospects. Our results of operations will depend on many factors, including the availability of opportunities for investment, readily accessible short and long-term funding alternatives in the
financial markets and economic conditions.
We may hold assets in cash or short-term treasury securities in situations where we or GECM expects downward pricing
in the high yield market. Our strategic decision not to be fully invested may, from time to time, reduce funds available for distribution and cause downward pressure on the price of our common stock.
The failure of cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning,
could impair our ability to conduct business effectively.
The occurrence of a disaster such as a cyber-attack, a natural catastrophe, an industrial
accident, a terrorist attack or war, events anticipated or unanticipated in our disaster recovery systems, or a failure in externally provided data systems, could have an adverse effect on our ability to conduct business and on our results of
operations and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. Our ability to effectively conduct our business could be severely compromised.
The financial markets we operate in are dependent upon third-party data systems to link buyers and sellers and provide pricing information.
We depend heavily
upon computer systems to perform necessary business functions. Our computer systems could be subject to cyber-attacks and unauthorized access, such as physical and electronic
break-ins
or unauthorized
tampering. Like other companies, we will experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. If one or more of these events occurs, it could potentially
jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to
our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss, respectively.
Terrorist
attacks, acts of war or natural disasters may affect the market for our common stock, impact the businesses in which we invest and harm our business, operating results and financial condition.
Terrorist acts, acts of war or natural disasters may disrupt our operations, as well as the operations of the businesses in which we invest. Such acts have created,
and continue to create, economic and political uncertainties and have contributed to global economic instability. Future terrorist activities, military or security operations, or natural disasters could further weaken the domestic/global economies
and create additional uncertainties, which may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating results and financial condition. Losses from
terrorist attacks and natural disasters are generally uninsurable.
Provisions of the Maryland General Corporation Law and our organizational documents
could deter takeover attempts and have an adverse impact on the prices of our common stock.
The Maryland General Corporation Law and our organizational
documents contain provisions that may discourage, delay or make more difficult a change in control of GECC or the removal of our directors. We are subject to the
29
Maryland Business Combination Act and the Investment Company Act. If our Board does not approve a business combination, the Maryland Business Combination Act may discourage third parties from
trying to acquire control of us and increase the difficulty of consummating such an offer. Our Board could amend our bylaws to repeal our current exemption from the Control Share Acquisition Act; however, our Board will not amend our bylaws to
repeal the current exemption from the Control Share Acquisition Act without a formal determination by the Board that doing so would be in the best interests of our stockholders and without first notifying the SEC staff. The Control Share Acquisition
Act also may make it more difficult for a third party to obtain control of GECC and increase the difficulty of consummating such a transaction.
Our Board
is authorized to reclassify any unissued shares of common stock into one or more classes of preferred stock, which could convey special rights and privileges to its owners.
Under Maryland General Corporation Law and our organizational documents, our Board is authorized to classify and reclassify any authorized but unissued shares of
stock into one or more classes of stock, including preferred stock. Prior to issuance of shares of each class or series, our Board will be required by Maryland law and our charter to set the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, our Board could authorize the issuance of shares of preferred stock with terms and
conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve premium prices for holders of our common stock or otherwise be in their best interest. The cost of any such
reclassification would be borne by our common stockholders. Certain matters under the Investment Company Act require the separate vote of the holders of any issued and outstanding preferred stock. For example, holders of preferred stock would vote
as a separate class from the holders of common stock on a proposal to cease operations as a BDC. In addition, the Investment Company Act provides that holders of preferred stock are entitled to vote separately from holders of common stock to elect
two preferred stock directors. The issuance of preferred shares convertible into shares of common stock may also reduce the net income and net asset value per share of our common stock upon conversion. These effects, among others, could have an
adverse effect on your investment in our common stock.
GECM may not be able to achieve the same or similar returns as those achieved by MAST Capital,
including as a result of operating under the constraints imposed upon us as a BDC.
MAST Capitals track record and achievements are not necessarily
indicative of future results that will be achieved by GECM. We cannot assure you that we will be able to achieve the results realized by prior investment vehicles managed by MAST Capital.
While senior members of GECMs investment team have significant experience investing in debt securities of middle-market companies, GECM is a new entity and has
limited investment advisory experience managing a BDC. Therefore, GECM may not be able to successfully operate our business or achieve our investment objective. As a result, an investment in our shares entails more risk than the shares of a
comparable company with a substantial operating history.
GECMs lack of experience in managing a portfolio of assets under RIC, BDC and Investment Company
Act constraints may hinder our ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective.
The
Investment Company Act and the Code impose numerous constraints on the operations of registered investment companies, BDCs and RICs that do not apply to the other types of investment vehicles. Moreover, qualification for RIC tax treatment requires
satisfaction of certain
source-of-income,
distribution and asset diversification requirements. The failure to comply with these provisions in a timely manner could
prevent us from qualifying as a RIC or could force us to pay unexpected taxes and penalties, which could be material. GECMs lack of experience in managing a portfolio of assets under such constraints may hinder our ability to take advantage of
attractive investment opportunities and, as a result, achieve our investment objective.
We are a new company with limited operating history, and GECM has
no prior experience managing a BDC.
We were formed on April 22, 2016 and commenced operations following the closing of the Merger on
November 3, 2016. As a BDC, we are subject to the regulatory requirements of the SEC, in addition to the specific regulatory requirements applicable to BDCs under the Investment Company Act and RICs under the Code. GECM has not had any prior
experience operating under this regulatory framework, and we may incur substantial additional costs, and expend significant time or other resources, to do so.
We have a limited operating history on which you can evaluate an investment in us or our prior performance. The results of any other funds or clients managed by
affiliates of GECM, which have or have had an investment program that is
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similar to, or different from, our investment program is not indicative of the results that we may achieve. We expect to have a different investment portfolio and may employ different investment
strategies and techniques from other funds and clients advised by affiliates of GECM. Accordingly, our results may differ from and are independent of the results obtained by such other funds and clients. Moreover, past performance is no assurance of
future returns. We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objective and that the value of our common stock could decline substantially
or your investment in us could become worthless.
We cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will
make our securities less attractive to investors.
We are and will remain an emerging growth company, as defined in the JOBS Act, until the
earliest of (a) December 31, 2021, (b) the last day of the fiscal year (i) in which we have total annual gross revenue of at least $1.0 billion or (ii) in which we are deemed to be a large accelerated filer, which means the
market value of its common stock that is held by
non-affiliates
exceeds $700.0 million as of the end of the previous second fiscal quarter, and (c) the date on which we have issued more than
$1.0 billion in
non-convertible
debt during the prior three-year period. For so long as we remain an emerging growth company we may take advantage of exemptions from various reporting
requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act. We cannot predict if investors will find our securities less attractive because we will rely on some or all of these exemptions. If some investors find our securities less attractive as a result, there may be a less active and
more volatile trading market for our securities.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company may
take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of
certain accounting standards until those standards would otherwise apply to private companies. To the extent we take advantage of the extended transition period for complying with new or revised accounting standards, it will be more difficult for
investors and securities analysts to evaluate us since our financial statements may not be comparable to companies that comply with public company effective dates and may result in less investor confidence.
There are significant potential conflicts of interest that could impact our investment returns.
Certain of our executive officers and directors, and members of the investment committee of GECM, serve or may serve as officers, directors or principals of other
entities and affiliates of GECM and investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in our or our stockholders best interests or that may
require them to devote time to services for other entities, which could interfere with the time available to provide services to us. For example, Peter A. Reed, our President, Chief Executive Officer and chairman of our Board is GECMs Chief
Investment Officer and Chief Executive Officer of the second largest beneficial owner of our stock, GEC.
Although funds managed by GECM may have different
primary investment objectives than we do, they may from time to time invest in asset classes similar to those targeted by us. GECM is not restricted from raising an investment fund with investment objectives similar to ours. Any such funds may also,
from time to time, invest in asset classes similar to those targeted by us. It is possible that we may not be given the opportunity to participate in certain investments made by investment funds managed by investment managers affiliated with GECM.
We will pay management and incentive fees to GECM, and will reimburse GECM for certain expenses it incurs. In addition, investors in our common stock will
invest on a gross basis and receive distributions on a net basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct investments.
GECMs management fee is based on a percentage of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) and
GECM may have conflicts of interest in connection with decisions that could affect our total assets, such as decisions as to whether to incur indebtedness.
The
part of the incentive fee payable by us that relates to our
pre-incentive
fee net investment income is computed and paid on income that may include interest that is accrued but not yet received in cash. If a
portfolio company defaults on a loan or note that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible.
The Investment Management Agreement renews for successive annual periods if approved by our Board or by the affirmative vote of the holders of a majority of our
outstanding voting securities, including, in either case, approval by a
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majority of our directors who are not interested persons. However, both we and GECM have the right to terminate the agreement without penalty upon 60 days written notice to the other party.
Moreover, conflicts of interest may arise if GECM seeks to change the terms of the Investment Management Agreement, including, for example, the terms for compensation.
Pursuant to the Administration Agreement, we pay GECM our allocable portion of overhead and other expenses incurred by GECM in performing its obligations under the
Administration Agreement, including our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs.
As a result of the arrangements described above, there may be times when our management team has interests that differ from those of our stockholders, giving rise to
a conflict.
Our stockholders may have conflicting investment, tax and other objectives with respect to their investments in us. The conflicting interests of
individual stockholders may relate to or arise from, among other things, the nature of our investments, the structure or the acquisition of our investments, and the timing of disposition of our investments. As a consequence, conflicts of interest
may arise in connection with decisions made by GECM, including with respect to the nature or structuring of our investments, that may be more beneficial for one stockholder than for another stockholder, especially with respect to stockholders
individual tax situations. In selecting and structuring investments appropriate for us, GECM will consider the investment and tax objectives of us and our stockholders, as a whole, not the investment, tax or other objectives of any stockholder
individually.
Shares of
closed-end
investment companies, including BDCs, frequently trade at a discount from their
net asset value.
Shares of
closed-end
investment companies, including BDCs, frequently trade at a discount from
their net asset value. This characteristic of
closed-end
investment companies is separate and distinct from the risk that our net asset value per share of common stock may decline.
We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value per share of
our common stock if our Board determines that such sale is in the best interests of GECC and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the
determination of our Board, equals the fair value of such securities (less any distributing commission or discount calculated). If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our
common stock, then your percentage ownership at that time will decrease, and you may experience dilution.
You may not receive distributions or our
distributions may not grow over time and a portion of our distributions may be a return of capital.
We intend to make distributions on a monthly basis
to our stockholders out of assets legally available for distribution (i.e., not subject to any legal restrictions under Maryland law on the distribution thereof). We cannot assure you that we will achieve investment results that will allow us to
make a specified level of cash distributions or
year-to-year
increases in cash distributions. Our ability to pay distributions might be adversely affected by the impact
of one or more of the risk factors described in this document. Due to the asset coverage test applicable to us under the Investment Company Act as a BDC, we may be limited in our ability to make distributions.
When we make distributions, we will be required to determine the extent to which such distributions are paid out of current or accumulated earnings and profits.
Distributions in excess of current and accumulated earnings and profits will be treated as a
non-taxable
return of capital to the extent of an investors basis in our stock and, assuming that an investor
holds our stock as a capital asset, thereafter as a capital gain. Stockholders who periodically receive the payment of a distribution consisting of a return of capital may be under the impression that they are receiving net profits when they are
not. Stockholders should not assume that the source of a distribution from us is net profit.
We currently intend to distribute realized net capital gains (i.e.,
net long term capital gains in excess of short term capital losses), if any, at least annually, we may in the future decide to retain such capital gains for investment and elect to treat such gains as deemed distributions to you. If this happens,
you will be treated as if you had received an actual distribution of the capital gains we retain and reinvested the net after tax proceeds in GECC. In this situation, you would be eligible to claim a tax credit (or, in certain circumstances, a tax
refund) equal to your allocable share of the tax we paid on the capital gains deemed distributed to you.
Our current intention is to make any distributions in
additional shares of our common stock under our dividend reinvestment plan out of assets legally available therefor, unless you elect to receive your distributions and/or long-term capital gains distributions in cash. If you hold shares in the name
of a broker or financial intermediary, you should contact the broker or financial intermediary regarding your election to receive distributions in cash.
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We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we
issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the Investment Company Act or if distributions are limited by the terms of any of our
borrowings.
Stockholders may experience dilution in their ownership percentage if they do not participate in our dividend reinvestment plan.
All distributions declared in cash payable to stockholders that are participants in our dividend reinvestment plan are generally automatically reinvested in shares
of our common stock. As a result, stockholders that do not participate in the dividend reinvestment plan may experience dilution over time. Stockholders who receive distributions in shares of common stock may experience accretion to the net asset
value of their shares if our shares are trading at a premium and dilution if our shares are trading at a discount. The level of accretion or discount would depend on various factors, including the proportion of our stockholders who participate in
the plan, the level of premium or discount at which our shares are trading and the amount of the distribution payable to a stockholder.
Existing
stockholders may incur dilution if, in the future, we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock.
The Investment Company Act prohibits us from selling shares of our common stock at a price below the current net asset value per share of such stock, with certain
exceptions. Our shares might trade at premiums that are unsustainable or at discounts from net asset value.
Shares of BDCs like us may, during some periods,
trade at prices higher than their net asset value per share and, during other periods, as frequently occurs with
closed-end
investment companies, trade at prices lower than their net asset value per share. The
perceived value of our investment portfolio may be affected by a number of factors including perceived prospects for individual companies we invest in, market conditions for common stock generally, for initial public offerings and other exit events
for venture capital backed companies, and the mix of companies in our investment portfolio over time. Negative or unforeseen developments affecting the perceived value of companies in our investment portfolio could result in a decline in the trading
price of our common stock relative to our net asset value per share.
The possibility that our shares will trade at a discount from net asset value or at
premiums that are unsustainable are risks separate and distinct from the risk that our net asset value per share will decrease. The risk of purchasing shares of a BDC that might trade at a discount or unsustainable premium is more pronounced for
investors who wish to sell their shares in a relatively short period of time because, for those investors, realization of a gain or loss on their investments is likely to be more dependent upon changes in premium or discount levels than upon
increases or decreases in net asset value per share.
Future offerings of debt securities, which would be senior to our common stock upon liquidation, or
equity securities, which could dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may harm the value of our common stock.
In the future, we may attempt to increase our capital resources by making offerings of debt or equity securities, including commercial paper, medium-term notes,
senior or subordinated notes and classes of preferred stock or common stock, subject to the restrictions of the Investment Company Act. Upon a liquidation of our company, holders of our debt securities and shares of preferred stock and lenders with
respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings by us may dilute the holdings of our existing stockholders or reduce the value of our common
stock, or both. Any preferred stock we may issue would have a preference on distributions that could limit our ability to make distributions to the holders of our common stock. Because our decision to issue securities in any future offering will
depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our
common stock and diluting their stock holdings in us. In addition, proceeds from a sale of common stock will likely be used to increase our total assets or to pay down our borrowings, among other uses. This would increase our asset coverage ratio
and permit us to incur additional leverage under rules pertaining to BDCs by increasing our borrowings or issuing senior securities such as preferred stock or additional debt securities.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
Some of the statements in this prospectus (including in the following discussion) constitute forward-looking statements, which relate to future events or our future
performance or financial conditions. The forward-looking statements contained in this prospectus involve a number of risks and uncertainties, including statements concerning:
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the return or impact of current and future investments;
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the impact of a protracted decline in the liquidity of credit markets on our business;
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the impact of fluctuations in interest rates on our business;
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the impact of changes in laws or regulations governing our operations or the operations of our portfolio companies;
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our contractual arrangements and relationships with third parties;
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the general economy and its impact on the industries in which we invest;
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the financial condition of and ability of our current and prospective portfolio companies to achieve their objectives;
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our expected financings and investments;
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the adequacy of our financing resources and working capital;
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the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments;
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the timing of cash flows, if any, from the operations of our portfolio companies;
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the timing, form and amount of any dividend distributions; and
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our ability to maintain our qualification as a RIC and as a BDC.
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We use words such as anticipate,
believe, expect, intend, will, should, could, may, plan and similar words to identify forward-looking statements. The forward-looking statements
contained in this prospectus involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth under Risk
Factors.
We have based the forward-looking statements included in this prospectus on information available to us on the date of this prospectus, and we
assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to
consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC.
You should
understand that, under Sections 27A(b)(2)(B) of the Securities Act and Section 21E(b)(2)(B) of the Exchange Act, the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in
connection with any offering of securities pursuant to this prospectus or in any report that we file under the Exchange Act.
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USE OF PROCEEDS
All of the Secondary Shares offered by the Selling Stockholders pursuant to this prospectus will be sold by the Selling Stockholders for their own account. We will
not receive any of the proceeds from these sales. The Selling Stockholders have or will pay all fees and expenses incurred in connection with the registration and offering of the Secondary Shares pursuant to an amended and restated registration
rights agreement, dated as of November 4, 2016 (the Registration Rights Agreement), including all registration and filing fees, any other regulatory fees, printing and delivery expenses, listing fees and expenses, fees and expenses
of counsel, independent certified public accountants, and any special experts retained by us, and any underwriting discounts and commissions and transfer taxes.
35
SELLING STOCKHOLDERS
This prospectus relates to the possible resale of up to 7,000,268 shares of our common stock that are currently issued and outstanding. All of such Secondary
Shares are held by the Selling Stockholders as noted in the table and footnotes below. The Selling Stockholders acquired their shares from us in connection with our Formation Transactions. In connection with the Formation Transactions, we entered
into the Registration Rights Agreement pursuant to which we granted these holders registration rights.
The following table sets forth:
|
|
|
the name of the Selling Stockholders;
|
|
|
|
the number and percent of shares of our common stock that each Selling Stockholder beneficially owned prior to the offering for resale of the Secondary Shares under this prospectus;
|
|
|
|
the number of Secondary Shares that may be offered for resale for the account of each Selling Stockholder under this prospectus, some or all of which Secondary Shares may be sold pursuant to this prospectus and any
prospectus supplement; and
|
|
|
|
the number and percent of shares of our common stock to be beneficially owned by each Selling Stockholder after an offering under this prospectus (assuming all of the offered Secondary Shares are sold by each Selling
Stockholder).
|
The number of shares in the column Number of Shares Being Offered represents all of the Secondary Shares that such
Selling Stockholder may offer under this prospectus. We do not know how long each of the Selling Stockholders will hold the Secondary Shares before selling them or how many Secondary Shares it will sell and we currently have no agreements,
arrangements or understandings with any of the Selling Stockholders regarding the sale of any of the Secondary Shares under this registration statement. The Secondary Shares offered by this prospectus may be offered from time to time by the
applicable Selling Stockholder listed below.
This table is prepared solely based on information supplied to us by the listed Selling Stockholder and any public
documents filed with the SEC, and assumes the sale of all of the Secondary Shares. The applicable percentages of beneficial ownership are based on an aggregate of 10,652,401 shares of our common stock issued and outstanding on May 17, 2018,
adjusted as may be required by rules promulgated by the SEC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder
|
|
Shares Beneficially Owned
Prior to Offering
|
|
|
Number of
Shares Being
Offered
|
|
|
Shares Beneficially Owned
After
Offering
|
|
|
Number
|
|
|
Percent
|
|
|
|
Number
|
|
|
Percent
|
|
Great Elm Capital Group, Inc.
(1)
|
|
|
1,966,667
|
|
|
|
18.46
|
%
|
|
|
1,966,667
|
|
|
|
|
|
|
|
|
|
MAST Credit Opportunities I Master Fund
Limited
(2)
|
|
|
2,297,018
|
|
|
|
21.56
|
%
|
|
|
2,297,018
|
|
|
|
|
|
|
|
|
|
MAST Select Opportunities Master Fund,
L.P.
(2)
|
|
|
2,566,592
|
|
|
|
24.09
|
%
|
|
|
2,566,592
|
|
|
|
|
|
|
|
|
|
MAST Admiral Master Fund, L.P.
(2)
|
|
|
155,905
|
|
|
|
1.46
|
%
|
|
|
155,905
|
|
|
|
|
|
|
|
|
|
MAST Select Opportunities, L.P.
(2)
|
|
|
14,086
|
|
|
|
0.13
|
%
|
|
|
14,086
|
|
|
|
|
|
|
|
|
|
(1)
|
An affiliate of our investment adviser, GECM.
|
(2)
|
Each are private funds managed by MAST Capital.
|
Shares of our common stock sold by any of the Selling Stockholders
will generally be freely tradable. Sales of substantial amounts of our common stock, including by the Selling Stockholders, or the availability of such common stock for sale, whether or not sold, could adversely affect the prevailing market prices
for our common stock.
Registration Rights
We entered into the
Registration Rights Agreement with GEC, MAST Credit Opportunities I Master Fund Limited, MAST Admiral Master Fund, L.P. and MAST Select Opportunities Master Fund, L.P., pursuant to which we granted these holders (the Holders) certain
registration rights.
36
The Selling Stockholders have or will pay all fees and expenses incurred in connection with the registration and
offering of the Secondary Shares pursuant to the Registration Rights Agreement, including all registration and filing fees, any other regulatory fees, printing and delivery expenses, listing fees and expenses, fees and expenses of counsel,
independent certified public accountants, and any special experts retained by us, and any underwriting discounts and commissions and transfer taxes.
Shelf
Registration Statement
We agreed to file a shelf registration statement on Form
N-2
under the Securities Act
providing for a public offering of all of the registerable securities held by the Holders (the Mandatory Registration), which was required to be a shelf registration pursuant to Rule 415 under the Securities Act if the
Company was eligible to do so. The filing was to happen as promptly as practicable on or after the date of the Subscription Agreement (as defined herein), but in no event later than 60 days following the closing under the Subscription Agreement.
Demand Registration
Commencing on the first anniversary of
the filing of the registration statement for the Mandatory Registration, a majority of Holders of registration rights have the right to require us to file a registration statement on Form
N-2
for a public
offering of all or part of the registrable securities held by such Holders (a Demand Registration). Each such request shall specify the aggregate number of registrable securities proposed to be sold and we agreed to file the registration
statement in respect of such demand within 45 days after receiving the demand request, but we are not obligated to cause a registration statement with respect to such demand to be declared effective within 90 days after the effective date of a
previous Demand Registration.
37
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We are a BDC that seeks to generate both current income and capital appreciation through debt and equity investments. Our investment focus is on debt obligations of
middle-market companies for which quotations are typically available in the credit markets. We invest primarily in the debt of middle-market companies as well as small businesses, generally in the form of senior secured and unsecured notes, as well
as in senior secured loans, junior loans and mezzanine debt. We will from time to time make equity investments as part of restructuring credits and in rare instances reserve the right to make equity investments directly.
On September 27, 2016, we and GECM entered into the Investment Management Agreement and the Administration Agreement, and, upon closing the Merger, we began to
accrue obligations to our external investment manager under those agreements.
Beginning with our tax year starting October 1, 2016, we elected to be
treated as a RIC for U.S. federal income tax purposes. As a RIC, we will not be taxed on our income to the extent that we distribute such income each year and satisfy other applicable income tax requirements. To qualify for tax treatment as a RIC,
we must, among other things, meet
source-of-income
and asset diversification requirements and annually distribute to our stockholders generally at least 90% of our
investment company taxable income on a timely basis. If we qualify for tax treatment as a RIC, we generally will not have to pay corporate level taxes on any income that we distribute to our stockholders.
All dollar amounts stated in this Managements Discussion and Analysis of Financial Conditions and Results of Operations section, other than per
share amounts, are disclosed in thousands unless otherwise noted.
Formation Transactions
On June 23, 2016, we entered into a subscription agreement with GEC and the MAST Funds, dated as of June 23, 2016 (the Subscription Agreement),
under which:
|
|
|
On June 23, 2016, GEC contributed $30,000 in exchange for 1,966,667 shares of our common stock.
|
|
|
|
On September 27, 2016 before we elected to be a BDC, the MAST Funds contributed to us the Initial GECC Portfolio that we valued at $90,000 in exchange for 5,935,800 shares of our common stock.
|
For financial reporting purposes, we have accounted for the contribution of the Initial GECC Portfolio as an asset acquisition per Topic 805,
Business
Combinations
, of the Accounting Standards Codification (the ASC). For tax purposes, we recorded our basis in the Initial GECC Portfolio at the fair market value of the Initial GECC Portfolio as of the date of contribution.
Under the Subscription Agreement, upon consummation of the Merger, we became obligated to reimburse the costs incurred by GEC and the MAST Funds in connection with
the Merger and the transactions contemplated by the Subscription Agreement.
Following the closing of the Merger, we entered into the Registration Rights
Agreement with GEC and the MAST Funds.
Full Circle Merger
On June 23, 2016, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Full Circle. Following approval on October 31,
2016 of the Merger by Full Circles stockholders, on November 3, 2016:
|
|
|
Full Circle merged into us resulting in our acquisition by operation of the Merger of Full Circles portfolio that we valued at $74,658 at November 3, 2016;
|
|
|
|
We became obligated to issue an aggregate of 4,986,585 shares of our common stock to former Full Circle stockholders; and
|
|
|
|
Our exchange agent paid a $5,393 special cash dividend to former Full Circle stockholders.
|
We accounted for the
Merger as a business combination under ASC Topic 805 and Regulation
S-Xs
purchase accounting guidance. GECC was designated as the acquirer for accounting purposes. The difference between the fair value
of Full Circles net assets and the consideration was recorded as a purchase accounting loss because the fair value of the assets acquired and liabilities assumed, as of the date of the Merger, was less than that of the merger consideration
paid.
38
Investments
Our
level of investment activity can and does vary substantially from period to period depending on many factors, including, among others, the amount of debt and equity capital available from other sources to middle-market companies, the level of merger
and acquisition activity, pricing in the high yield credit markets, our expectations of future investment opportunities, the general economic environment as well as the competitive environment for the types of investments we make.
As a BDC, our investments and the composition of our portfolio are required to comply with regulatory requirements. See The CompanyRegulation as a
Business Development Company and Certain U.S. Federal Income Tax Considerations.
Revenues
We generate revenue primarily in the form of interest on the debt investments that we hold. We also may generate revenue from dividends on the equity investments that
we hold, capital gains on the disposition of investments, and certain lease, fee, and other income. Our investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint
on maturity. Our debt investments generally pay interest quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In
some cases, our debt investments and preferred stock investments may defer payments of cash interest or dividends or PIK. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, due diligence fees,
end-of-term
or exit fees, fees for providing significant managerial assistance, consulting fees and other investment-related income.
Expenses
Our primary operating expenses include the payment of
a base management fee, administration fees (including the allocable portion of overhead under the Administration Agreement), and, depending on our operating results, an incentive fee. The base management fee and incentive fee remunerates GECM for
work in identifying, evaluating, negotiating, closing and monitoring our investments. Our Administration Agreement provides for reimbursement of costs and expenses incurred for office space rental, office equipment and utilities allocable to us
under the Administration Agreement, as well as certain costs and expenses incurred relating to
non-investment
advisory, administrative or operating services provided by GECM or its affiliates to us. We also
bear all other costs and expenses of our operations and transactions. Our expenses include interest on our outstanding indebtedness.
Critical Accounting
Policies
Valuation of Portfolio Investments
We value
our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our Board. 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 us; (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. We generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker-dealers or market makers.
However, short term debt investments with remaining maturities within 90 days are generally valued at amortized cost, which approximates fair value.
Debt and
equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value, are valued at fair value using a valuation process consistent with our Board-approved policy. Our Board
approves in good faith the valuation of our portfolio 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
our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in
the market environment and other events may impact the market quotations used to value some of our investments.
39
The valuation process approved by our Board 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:
|
|
|
The investment professionals of GECM provide recent portfolio company financial statements and other reporting materials to independent valuation firms approved by our Board;
|
|
|
|
Such firms evaluate this information along with relevant observable market data to conduct independent appraisals each quarter, and their preliminary valuation conclusions are documented and discussed with senior
management of GECM;
|
|
|
|
The fair value of smaller investments comprising in the aggregate less than 5% of our total capitalization may be determined by GECM in good faith in accordance with our valuation policy without the employment of an
independent valuation firm; and
|
|
|
|
Our audit committee recommends, and our Board determines, the fair value of the investments in our portfolio in good faith based on the input of GECM, our independent valuation firms (to the extent applicable) and the
business judgment of our audit committee and our Board, respectively.
|
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 we may take into account in determining the fair value of our 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 companys 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.
We prefer the use of observable inputs and minimize the use of
unobservable inputs in our valuation process. Inputs refer broadly to the assumptions that market participants would use in pricing an asset. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset
developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing an asset developed based on the best information
available in the circumstances.
Investments are classified by GAAP into the three broad levels as follows:
|
|
|
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.
|
All Level 3 investments that comprise more than 5% of the investments of GECC are valued by independent third parties.
Revenue Recognition
Interest and dividend income, including PIK
income, is recorded on an accrual basis. Origination, structuring, closing, commitment and other upfront fees, including OID, 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. Other fees, including
certain amendment fees, 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 recognized when earned and are included in interest income.
40
We may purchase debt investments at a discount to their face value. Discounts on the acquisition of corporate debt
instruments are generally amortized using the effective-interest or constant-yield method, unless there are material questions as to collectability. For debt instruments where we are amortizing OID, when principal payments on the debt instrument are
received in an amount in excess of the debt instruments amortized cost, the excess principal payments are recorded as interest income.
Net Realized
Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation)
We measure 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.
Portfolio and Investment Activity
The following is a summary of our investment activity since our inception in April 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Period
|
|
Acquisitions
(1)
|
|
|
Dispositions
(2)
|
|
|
Weighted Average
Interest Rate
End of
Period
(3)
|
|
Formation Transactions
|
|
$
|
90,494
|
|
|
$
|
|
|
|
|
|
|
Merger
|
|
|
74,658
|
|
|
|
|
|
|
|
|
|
November 4, 2016 through December 31, 2016
|
|
|
42,006
|
|
|
|
(41,738
|
)
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended December 31, 2016
|
|
|
207,158
|
|
|
|
(41,738
|
)
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2017
|
|
|
75,852
|
|
|
|
(78,758
|
)
|
|
|
9.87
|
%
|
Quarter ended June 30, 2017
|
|
|
21,395
|
|
|
|
(37,570
|
)
|
|
|
9.59
|
%
|
Quarter ended September 30, 2017
|
|
|
49,467
|
|
|
|
(18,884
|
)
|
|
|
9.62
|
%
|
Quarter ended December 31, 2017
|
|
|
53,163
|
|
|
|
(39,772
|
)
|
|
|
11.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
|
|
199,877
|
|
|
|
(174,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2018
|
|
|
63,220
|
|
|
|
(29,069
|
)
|
|
|
11.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ending March 31, 2018
|
|
|
63,220
|
|
|
|
(29,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since inception
|
|
$
|
470,255
|
|
|
$
|
(245,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes new deals, additional fundings (inclusive of those on revolving credit facilities), refinancings and PIK income. Investments in short-term securities, including United States Treasury Bills and money market
mutual funds, were excluded
|
(2)
|
Includes scheduled principal payments, prepayments, sales and repayments (inclusive of those on revolving credit facilities). Investments in short-term securities, including United States Treasury Bills and money market
mutual funds, were excluded
|
(3)
|
Weighted average interest rate is based upon the stated coupon rate and par value of outstanding debt securities at the measurement date. Debt securities on
non-accrual
status are
included in the calculation and are treated as having 0.00% as their applicable interest rate for purposes of this calculation.
|
41
Portfolio Reconciliation
The following is a reconciliation of the investment portfolio for the three months ended March 31, 2018, the year ended December 31, 2017 and the period
from inception through December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three
months ended
March 31, 2018
|
|
|
For the year
ended
December
31,
2017
|
|
|
For the period from
inception
through
December 31, 2016
|
|
Beginning Investment Portfolio
|
|
$
|
164,870
|
|
|
$
|
154,677
|
|
|
$
|
|
|
Portfolio Investments acquired via the Formation Transactions and the Merger
|
|
|
|
|
|
|
|
|
|
|
165,152
|
|
Portfolio Investments acquired
(1)
|
|
|
63,220
|
|
|
|
199,878
|
|
|
|
42,006
|
|
Amortization of premium and accretion of discount, net
|
|
|
951
|
|
|
|
5,627
|
|
|
|
2,438
|
|
Portfolio Investments repaid or sold
|
|
|
(29,069
|
)
|
|
|
(174,983
|
)
|
|
|
(41,738
|
)
|
Net change in unrealized appreciation (depreciation) on investments
(2)
|
|
|
(5,539
|
)
|
|
|
(23,962
|
)
|
|
|
(13,455
|
)
|
Net realized gain (loss) on investments
|
|
|
317
|
|
|
|
3,633
|
|
|
|
274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Investment Portfolio
|
|
$
|
194,750
|
|
|
$
|
164,870
|
|
|
$
|
154,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Does not include any fair value adjustment on PIK interest receivable.
|
Investments in short-term securities,
including United States Treasury Bills and money market mutual funds, were excluded.
During the three months ended March 31, 2018, we recorded net
unrealized depreciation of $(8,222). $(2,680) of the unrealized depreciation was related to valuation of interest receivable at March 31, 2018 that is anticipated to settle in kind.
During the three months ended March 31, 2018, we recorded net realized gains on investments of $317.
Portfolio Classifications
The following table shows the fair
value of our portfolio of investments by asset class as of March 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total
Portfolio
|
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total
Portfolio
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Instruments
|
|
$
|
194,308
|
|
|
|
99.8
|
%
|
|
$
|
164,521
|
|
|
|
99.8
|
%
|
Equity Investments
|
|
|
442
|
|
|
|
0.2
|
%
|
|
|
349
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments at Fair Value
|
|
$
|
194,750
|
|
|
|
100.0
|
%
|
|
$
|
164,870
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in short-term securities, including United States Treasury Bills and money market mutual funds, were excluded.
42
The following table shows the fair value of our portfolio of investments by industry, as of March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
Investments at Fair
Value
|
|
|
Percentage of Total
Investment
Portfolio
|
|
Wireless Telecommunications Services
|
|
$
|
47,948
|
|
|
|
31.5
|
%
|
Building Cleaning and Maintenance Services
|
|
|
18,681
|
|
|
|
12.3
|
%
|
Metals & Mining
|
|
|
12,655
|
|
|
|
8.3
|
%
|
Wireless Communications
|
|
|
9,226
|
|
|
|
6.1
|
%
|
Radio Broadcasting
|
|
|
9,139
|
|
|
|
6.0
|
%
|
Industrial Other
|
|
|
7,840
|
|
|
|
5.1
|
%
|
Consumer Discretionary
|
|
|
6,880
|
|
|
|
4.5
|
%
|
Hardware
|
|
|
6,555
|
|
|
|
4.3
|
%
|
Casinos and Gaming
|
|
|
6,135
|
|
|
|
4.0
|
%
|
Real Estate Services
|
|
|
6,045
|
|
|
|
4.0
|
%
|
Real Estate Holding Company
|
|
|
5,988
|
|
|
|
3.9
|
%
|
Information and Data Services
|
|
|
4,423
|
|
|
|
2.9
|
%
|
Hotel Operator
|
|
|
3,816
|
|
|
|
2.5
|
%
|
Consumer Financing
|
|
|
3,493
|
|
|
|
2.3
|
%
|
Maritime Security Services
|
|
|
2,674
|
|
|
|
1.8
|
%
|
Internet Advertising
|
|
|
666
|
|
|
|
0.4
|
%
|
Grain Mill Products
|
|
|
70
|
|
|
|
0.1
|
%
|
Energy Efficiency Services
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
152,234
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
The following table shows the fair value of our portfolio of investments by industry, as of March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
Investments at Fair
Value
|
|
|
Percentage of
Total
Investment
Portfolio
|
|
Wireless Telecommunications Services
|
|
$
|
40,685
|
|
|
|
20.9
|
%
|
Building Cleaning and Maintenance Services
|
|
|
17,297
|
|
|
|
8.9
|
%
|
Manufacturing
|
|
|
16,538
|
|
|
|
8.5
|
%
|
Retail
|
|
|
14,083
|
|
|
|
7.2
|
%
|
Software Services
|
|
|
12,088
|
|
|
|
6.2
|
%
|
Technology Services
|
|
|
10,381
|
|
|
|
5.3
|
%
|
Wireless Communications
|
|
|
10,025
|
|
|
|
5.1
|
%
|
Gaming, Lodging & Restaurants
|
|
|
9,820
|
|
|
|
5.0
|
%
|
Chemicals
|
|
|
9,603
|
|
|
|
4.9
|
%
|
Industrial Conglomerates
|
|
|
9,120
|
|
|
|
4.7
|
%
|
Radio Broadcasting
|
|
|
8,898
|
|
|
|
4.6
|
%
|
Business Services
|
|
|
6,744
|
|
|
|
3.5
|
%
|
Water Transport
|
|
|
5,387
|
|
|
|
2.8
|
%
|
Real Estate Services
|
|
|
5,122
|
|
|
|
2.6
|
%
|
Oil, Gas & Coal
|
|
|
4,935
|
|
|
|
2.5
|
%
|
Information and Data Services
|
|
|
4,807
|
|
|
|
2.5
|
%
|
Industrial Other
|
|
|
3,481
|
|
|
|
1.8
|
%
|
Consumer Finance
|
|
|
2,811
|
|
|
|
1.4
|
%
|
Hotel Operator
|
|
|
2,501
|
|
|
|
1.3
|
%
|
Maritime Security Services
|
|
|
287
|
|
|
|
0.1
|
%
|
Grain Mill Products
|
|
|
137
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
194,750
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
43
Results of Operations
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
In Thousands
|
|
|
Per Share
(1)
|
|
Total Investment Income
(2)
|
|
$
|
7,315
|
|
|
$
|
0.58
|
|
Interest Income
|
|
|
6,826
|
|
|
|
0.54
|
|
Dividend Income
|
|
|
46
|
|
|
|
0.00
|
|
Other Income
|
|
|
443
|
|
|
|
0.04
|
|
|
|
|
Net Operating Expenses
|
|
|
3,221
|
|
|
|
0.26
|
|
Management Fee
|
|
|
593
|
|
|
|
0.05
|
|
Incentive Fee
|
|
|
1,023
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Total Advisory Fees
|
|
|
1,616
|
|
|
|
0.13
|
|
Total Costs Incurred Under Administration Agreement
|
|
|
495
|
|
|
|
0.04
|
|
Directors Fees
|
|
|
27
|
|
|
|
0.00
|
|
Interest Expenses
|
|
|
631
|
|
|
|
0.05
|
|
Professional Services Expense
|
|
|
331
|
|
|
|
0.03
|
|
Custody Fees
|
|
|
13
|
|
|
|
0.00
|
|
Other
|
|
|
113
|
|
|
|
0.01
|
|
Fees Waivers and Expense Reimbursement
|
|
|
(5
|
)
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
$
|
4,094
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The per share amounts are based on a weighted average of 12,636,477 shares for the three months ended March 31, 2017, except where such amounts need to be adjusted to be consistent with the financial highlights of
our consolidated financial statements.
|
(2)
|
Total investment income includes PIK income of $1,142 for the three months ended March 31, 2017.
|
Three
Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
In Thousands
|
|
|
Per Share
(1)
|
|
Total Investment Income
(2)
|
|
$
|
7,498
|
|
|
$
|
0.70
|
|
Interest income
|
|
|
7,365
|
|
|
|
0.69
|
|
Dividend income
|
|
|
106
|
|
|
|
0.01
|
|
Other income
|
|
|
27
|
|
|
|
0.00
|
|
|
|
|
Net Operating Expenses
|
|
|
3,632
|
|
|
|
0.34
|
|
Management fees
|
|
|
693
|
|
|
|
0.07
|
|
Incentive fees
|
|
|
966
|
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
Total investment management fees
|
|
|
1,659
|
|
|
|
0.16
|
|
Administration fees
|
|
|
310
|
|
|
|
0.03
|
|
Directors fees
|
|
|
49
|
|
|
|
0.00
|
|
Interest expense
|
|
|
1,275
|
|
|
|
0.12
|
|
Professional services
|
|
|
171
|
|
|
|
0.02
|
|
Custody fees
|
|
|
14
|
|
|
|
0.00
|
|
Other
|
|
|
154
|
|
|
|
0.01
|
|
Fees waivers and expense reimbursement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
$
|
3,866
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The per share amounts are based on a weighted average of 10,652,401 shares for the three months ended March 31, 2018, except where such amounts need to be adjusted to be consistent with the financial highlights of
our consolidated financial statements.
|
(2)
|
Total investment income includes PIK income of $244 for the three months ended March 31, 2018.
|
44
Period Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
In Thousands
|
|
|
Per Share
(1)
|
|
Total
Investment
Income
(2)
|
|
$
|
5,831
|
|
|
$
|
0.45
|
|
Interest Income
|
|
|
5,313
|
|
|
|
0.41
|
|
Other Income
|
|
|
518
|
|
|
|
0.04
|
|
|
|
|
Net Operating Expenses
|
|
|
5,826
|
|
|
|
0.45
|
|
Management Fee
|
|
|
392
|
|
|
|
0.03
|
|
Incentive Fee
|
|
|
863
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
Total Advisory Fees
|
|
|
1,255
|
|
|
|
0.10
|
|
Total Costs Incurred Under Administration
Agreement
|
|
|
224
|
|
|
|
0.02
|
|
Directors Fees
|
|
|
38
|
|
|
|
0.00
|
|
Interest Expenses
|
|
|
420
|
|
|
|
0.03
|
|
Professional Services Expense
|
|
|
186
|
|
|
|
0.01
|
|
Professional Services Expense related to the Merger and Formation transactions
|
|
|
3,471
|
|
|
|
0.27
|
|
Bank Fees
|
|
|
10
|
|
|
|
0.00
|
|
Other
|
|
|
214
|
|
|
|
0.02
|
|
Income tax expense, including excise tax
|
|
|
88
|
|
|
|
0.01
|
|
Fees Waivers and Expense Reimbursement
|
|
|
80
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
$
|
5
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The per share amounts are based on a weighted average of 12,852,758 shares for the period ended December 31, 2016, except where such amounts need to be adjusted to be consistent with the financial highlights of our
consolidated financial statements.
|
(2)
|
Total investment income includes PIK income of $510 for the period from inception through December 31, 2016.
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
In Thousands
|
|
|
Per Share
(1)
|
|
Total Investment Income
(2)
|
|
$
|
29,728
|
|
|
$
|
2.55
|
|
Interest Income
|
|
|
28,924
|
|
|
|
2.48
|
|
Dividend Income
|
|
|
298
|
|
|
|
0.03
|
|
Other Income
|
|
|
506
|
|
|
|
0.04
|
|
|
|
|
Net Operating Expenses
|
|
|
12,153
|
|
|
|
1.03
|
|
Management fees
|
|
|
2,298
|
|
|
|
0.20
|
|
Incentive fees
|
|
|
4,394
|
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
|
Total Investment Management Fees
|
|
|
6,692
|
|
|
|
0.57
|
|
Administration fees
|
|
|
1,362
|
|
|
|
0.12
|
|
Directors fees
|
|
|
136
|
|
|
|
0.01
|
|
Interest expense
|
|
|
2,039
|
|
|
|
0.17
|
|
Professional services
|
|
|
1,013
|
|
|
|
0.09
|
|
Custody Fees
|
|
|
62
|
|
|
|
0.01
|
|
Other
|
|
|
655
|
|
|
|
0.06
|
|
Income Taxes
|
|
|
124
|
|
|
|
0.01
|
|
Fees Waivers and Expense Reimbursement
|
|
|
(70
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
$
|
17,575
|
|
|
$
|
1.52
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The per share amounts are based on a weighted average of 11,655,370 shares for the year ended December 31, 2017, except where such amounts need to be adjusted to be consistent with the financial highlights of our
consolidated financial statements.
|
(2)
|
Total investment income includes PIK income of $11,709 for the year ended December 31, 2017.
|
Total Investment Income
Three Months Ended March 31,
2017
|
|
|
|
|
|
|
|
|
|
|
In Thousands
|
|
|
Per Share
(1)
|
|
Total Investment Income
(2)
|
|
$
|
7,315
|
|
|
$
|
0.58
|
|
Interest Income
|
|
|
6,826
|
|
|
|
0.54
|
|
Dividend Income
|
|
|
46
|
|
|
|
0.00
|
|
Other Income
|
|
|
443
|
|
|
|
0.04
|
|
(1)
|
The per share amounts are based on a weighted average of 12,636,477 shares for the three months ended March 31, 2017.
|
(2)
|
Total investment income includes PIK income of $1,142 for the three months ended March 31, 2017.
|
45
Total Investment Income for the three months ended March 31, 2017 was $7,315, which included $6,826 of interest
income. Interest income included net accretion of OID and market discount of $1,178 and total investment income included PIK income of $1,142.
We also generated
$443 of fee income.
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
In Thousands
|
|
|
Per Share
(1)
|
|
Total Investment Income
(2)
|
|
$
|
7,498
|
|
|
$
|
0.70
|
|
Interest income
|
|
|
7,365
|
|
|
|
0.69
|
|
Dividend income
|
|
|
106
|
|
|
|
0.01
|
|
Other income
|
|
|
27
|
|
|
|
0.00
|
|
(1)
|
The per share amounts are based on a weighted average of 10,652,401 shares for the three months ended March 31, 2018.
|
(2)
|
Total investment income includes PIK income of $244 for the three months ended March 31, 2018.
|
Interest income
included net accretion of OID and market discount of $951 and total investment income included PIK income of $244.
We also generated $27 of fee income, which is
included in other income and is typically not recurring in nature.
Total Investment Income increased for the three months ended March 31, 2018 as compared
to the three months ended March 31, 2017 primarily due to increased interest income, as a result of the interest earning investment portfolio growing year over year. Dividend income increased due to larger distributions received from our short
term investments in money market mutual funds, as our short term investments were larger during the 2018 first quarter. Fee income decreased as there were fewer amendment fees earned as the instruments generating the fees were primarily exited
during fiscal year 2017.
Period Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
In Thousands
|
|
|
Per Share
(1)
|
|
Total
Investment
Income
(2)
|
|
$
|
5,831
|
|
|
$
|
0.45
|
|
Interest Income
|
|
|
5,313
|
|
|
|
0.41
|
|
Other Income
|
|
|
518
|
|
|
|
0.04
|
|
(1)
|
The per share figures are based on a weighted average of 12,852,758 shares for the period ended December 31, 2016.
|
(2)
|
Total investment income includes PIK income of $510 for the period from inception through December 31, 2016.
|
Total Investment Income for the period from inception through December 31, 2016 was $5,831, which included $5,313 of interest income. Interest income included
non-cash
income of $2,438, which includes net accretion of OID and market discount. Of the accretion of OID and market discount, $1,374 was associated with our investment in Optima Specialty Steel which matured in
December 2016.
We also generated $518 of fee income. Fee income was largely comprised of amendment fees on our loans to RiceBran Technologies Inc. and Pristine
Environments, LLC.
Year Ended December 31, 2017
For the year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
In Thousands
|
|
|
Per Share
(1)
|
|
Total
Investment
Income
(2)
|
|
$
|
29,728
|
|
|
$
|
2.55
|
|
Interest Income
|
|
|
28,924
|
|
|
|
2.48
|
|
Dividend Income
|
|
|
298
|
|
|
|
0.03
|
|
Other Income
|
|
|
506
|
|
|
|
0.04
|
|
(1)
|
The per share figures are based on a weighted average of 11,655,370 shares for the year ended December 31, 2017.
|
(2)
|
Total investment income includes PIK income of $11,709 for the year ended December 31, 2017.
|
Total Investment
Income for the year ended December 31, 2017 was $29,728, which included $28,924 of interest income. Interest income included
non-cash
income of $17,336, which includes net accretion of OID and market
discount and PIK income. Of the PIK Income, $8,702 was associated with our investments in Avanti. At December 31, 2017, we had accrued $1,091 of interest income that was subject to future PIK toggle elections.
46
We also generated $506 of fee income. Fee income was largely comprised of amendment fees on our loans to RiceBran
Technologies Inc. and Pristine Environments, LLC and our Avanti bonds.
Total Investment Income increased for the year ended December 31, 2017 as compared
to the period ended December 31, 2016 primarily due to increased interest income, related to the investment portfolio being held for a longer time period during the year ended December 31, 2017. Dividend income increased due to payments
related to our short term investments in money market mutual funds, as our short term investments were held for a longer time period during the year ended December 31, 2017.
Expenses
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
In Thousands
|
|
|
Per Share
(1)
|
|
Net Operating Expenses
|
|
$
|
3,221
|
|
|
$
|
0.26
|
|
Management Fee
|
|
|
593
|
|
|
|
0.05
|
|
Incentive Fee
|
|
|
1,023
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Total Advisory Fees
|
|
|
1,616
|
|
|
|
0.13
|
|
Total Costs Incurred Under Administration Agreement
|
|
|
495
|
|
|
|
0.04
|
|
Directors Fees
|
|
|
27
|
|
|
|
0.00
|
|
Interest Expenses
|
|
|
631
|
|
|
|
0.05
|
|
Professional Services Expense
|
|
|
331
|
|
|
|
0.03
|
|
Bank Fees
|
|
|
13
|
|
|
|
0.00
|
|
Other
|
|
|
113
|
|
|
|
0.01
|
|
Fees Waivers and Expense Reimbursement
|
|
|
(5
|
)
|
|
|
(0.00
|
)
|
(1)
|
The per share amounts are based on a weighted average of 12,636,477 shares for the three months ended March 31, 2017.
|
Total expenses for the three months ended March 31, 2017 were $3,226.
Total advisory fees were $1,616, with $593 of management fees and $1,023 of incentive fees accrued during the period. We deferred incentive fees in accordance with
the Investment Management Agreement.
Total administration fees were $495, which include direct costs deemed reimbursable under the Administration Agreement and
fees paid for
sub-administration
services.
Interest expense for the period was $631.
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
In Thousands
|
|
|
Per Share
(1)
|
|
Net Operating Expenses
|
|
$
|
3,632
|
|
|
$
|
0.34
|
|
Management fees
|
|
|
693
|
|
|
|
0.07
|
|
Incentive fees
|
|
|
966
|
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
Total investment management fees
|
|
|
1,659
|
|
|
|
0.16
|
|
Administration fees
|
|
|
310
|
|
|
|
0.03
|
|
Directors fees
|
|
|
49
|
|
|
|
0.00
|
|
Interest expense
|
|
|
1,275
|
|
|
|
0.12
|
|
Professional services
|
|
|
171
|
|
|
|
0.02
|
|
Custody fees
|
|
|
14
|
|
|
|
0.00
|
|
Other
|
|
|
154
|
|
|
|
0.01
|
|
Fees waivers and expense reimbursement
|
|
|
|
|
|
|
|
|
(1)
|
The per share amounts are based on a weighted average of 10,652,401 shares for the three months ended March 31, 2018.
|
Total expenses for the three months ended March 31, 2018 were $3,632.
47
Total investment management fees were $1,659, with $693 of management fees and $966 of incentive fees accrued during the
period. We deferred incentive fees in accordance with the Investment Management Agreement.
Total administration fees were $310, which include direct costs
deemed reimbursable under the Administration Agreement and fees paid for
sub-administration
services.
Interest expense
for the period was $1,275, and includes interest on our 2022 notes, and our newly issued 2025 notes for the period subsequent to their issuance. See Liquidity and Capital ResourcesNotes Payable.
Net expenses increased for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 primarily due to increased interest
expense, as a result of having a greater amount of debt outstanding compared to the prior year.
Period Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
In Thousands
|
|
|
Per Share
(1)
|
|
Net Operating Expenses
|
|
$
|
5,826
|
|
|
$
|
0.45
|
|
Management Fee
|
|
|
392
|
|
|
|
0.03
|
|
Incentive Fee
|
|
|
863
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
Total Advisory Fees
|
|
|
1,255
|
|
|
|
0.10
|
|
Total Costs Incurred Under Administration
Agreement
|
|
|
224
|
|
|
|
0.02
|
|
Directors Fees
|
|
|
38
|
|
|
|
0.00
|
|
Interest Expenses
|
|
|
420
|
|
|
|
0.03
|
|
Professional Services Expense
|
|
|
186
|
|
|
|
0.01
|
|
Professional Services Expense related to the Merger and Formation transactions
|
|
|
3,471
|
|
|
|
0.27
|
|
Bank Fees
|
|
|
10
|
|
|
|
0.00
|
|
Other
|
|
|
214
|
|
|
|
0.02
|
|
Income tax expense, including excise tax
|
|
|
88
|
|
|
|
0.01
|
|
Fees Waivers and Expense Reimbursement
|
|
|
80
|
|
|
|
0.01
|
|
(1)
|
The per share figures are based on a weighted average of 12,852,758 shares for the period ended December 31, 2016.
|
Total expenses for the period from inception through December 31, 2016 were $5,826, which included $3,471 of costs associated with the Formation Transactions
and Merger, which are
non-recurring.
Total advisory fees were $1,255, with $392 of management fees and $863 of incentive
fees accrued during the period. The incentive fees are currently expected to be deferred in accordance with our Investment Management Agreement.
Total
administration fees were $224, which includes direct costs deemed reimbursable under our Administration Agreement and fees paid for
sub-administration
services. We accrued $80 as of December 31, 2016
under the reimbursement provision of the Administration Agreement, based on expenses accrued through December 31, 2016. The cap on costs was determined to be zero and $70 of this was reversed for the year ended December 31, 2017 with $10
due from our
sub-administrator
remaining waived.
Interest expense for the period was $420.
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
In Thousands
|
|
|
Per Share
(1)
|
|
Net Operating Expenses
|
|
$
|
12,153
|
|
|
$
|
1.03
|
|
Management fees
|
|
|
2,298
|
|
|
|
0.20
|
|
Incentive fees
|
|
|
4,394
|
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
|
Total Investment Management Fees
|
|
|
6,692
|
|
|
|
0.57
|
|
Administration fees
|
|
|
1,362
|
|
|
|
0.12
|
|
Directors fees
|
|
|
136
|
|
|
|
0.01
|
|
Interest expense
|
|
|
2,039
|
|
|
|
0.17
|
|
Professional services
|
|
|
1,013
|
|
|
|
0.09
|
|
Custody Fees
|
|
|
62
|
|
|
|
0.01
|
|
Other
|
|
|
655
|
|
|
|
0.06
|
|
Income Taxes
|
|
|
124
|
|
|
|
0.01
|
|
Fees Waivers and Expense Reimbursement
|
|
|
(70
|
)
|
|
|
(0.01
|
)
|
(1)
|
The per share figures are based on a weighted average of 11,655,370 shares for the year ended December 31, 2017.
|
48
Total expenses for the year ended December 31, 2017 were $12,153.
Total advisory fees were $6,692, with $2,298 of management fees and $4,394 of incentive fees accrued during the year. The incentive fees are currently expected to be
deferred in accordance with our Investment Management Agreement.
Total administration fees were $1,362 which includes direct costs deemed reimbursable under our
Administration Agreement and fees paid for
sub-administration
services.
Interest expense for the year was $2,039.
Net Operating Expenses increased for the year ended December 31, 2017 as compared to the period ended December 31, 2016 primarily due to increased advisory
fees, administration fees and interest expense, related to the Company being in operations for a longer time period during the year ended December 31, 2017. This was partially offset, by a reduction in professional fees related to the Merger
and Formation Transactions, as these were
one-time
expenses.
Net Investment Income
Net investment income for the three months ended March 31, 2017 was $4,094.
Net investment income for the three months ended March 31, 2018 was $3,866.
Net investment income for the period from inception through December 31, 2016 was $5, which included $3,471 of costs associated with the Formation Transactions
and Merger, which are
non-recurring.
Net investment income for the year ended December 31, 2017 was $17,575.
Net Realized Gains (Losses) on Investments
During the three
months ended March 31, 2017, we recorded net realized gains of $1,980, primarily in connection with our disposition of our investment in JN Medical, which resulted in a $1,007 gain. We also realized gains of $281 on the sale of our Trilogy
International bonds and $354 on the sale of a portion of our Everi Payments bonds.
During the three months ended March 31, 2018, we recorded net realized
gains of $317, primarily in connection with principal.
During the period from inception through December 31, 2016, we recorded net realized gains of $274,
primarily in connection with our disposition of our debt investments in US Shale Solutions, LLC. We also realized a loss of $4,698 million associated with the purchase accounting for the Merger. We have accounted for the Merger as a business
combination under ASC Topic 805 and Regulation
S-Xs
purchase accounting guidance. GECC was designated as the acquirer for financial reporting purposes. The difference between the fair value of net assets
of Full Circle and the consideration was recorded as a purchase accounting loss because the fair value of the assets acquired and liabilities assumed, as of the date of the Merger, was less than that of the merger consideration paid.
During the year ended December 31, 2017, we recorded net realized gains of $3,633, primarily in connection with the partial sale and repayments of our loan to
Sonifi, which resulted in a $1,997 gain. We also realized gains of $1,134 on the sale of our Everi Payments bonds, $1,007 on our disposition of our investment in JN Medical, and a loss of $745 on the write off of our loan to Ads Direct Media.
Net Change in Unrealized Appreciation (Depreciation) on Investments
Net change in unrealized appreciation (depreciation) on investments was $(2,695) for the three months ended March 31, 2017. The following table summarizes the
significant changes in unrealized appreciation (depreciation) of our investment portfolio, for the three months ended March 31, 2017, by portfolio company.
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar amounts in thousands
|
|
|
|
|
December 31, 2016
|
|
|
March 31, 2017
|
|
Portfolio Company
|
|
Change in Unrealized
Appreciation
(Depreciation)
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
Avanti Communications Group plc
|
|
$
|
(3,192
|
)
|
|
$
|
55,298
|
|
|
$
|
42,021
|
|
|
$
|
(13,277
|
)
|
|
$
|
64,417
|
|
|
$
|
47,948
|
|
|
$
|
(16,469
|
)
|
OPS Acquisitions Limited and Ocean Protection Services Limited
|
|
|
(1,591
|
)
|
|
|
4,255
|
|
|
|
4,286
|
|
|
|
31
|
|
|
|
4,234
|
|
|
|
2,674
|
|
|
|
(1,560
|
)
|
Sonifi Solutions, Inc.
|
|
|
1,347
|
|
|
|
5,933
|
|
|
|
6,715
|
|
|
|
782
|
|
|
|
4,751
|
|
|
|
6,880
|
|
|
|
2,129
|
|
Other
(1)
|
|
|
741
|
|
|
|
102,646
|
|
|
|
101,655
|
|
|
|
(991
|
)
|
|
|
94,982
|
|
|
|
94,732
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
(2,695
|
)
|
|
$
|
168,132
|
|
|
$
|
154,677
|
|
|
$
|
(13,455
|
)
|
|
$
|
168,384
|
|
|
$
|
152,234
|
|
|
$
|
(16,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Other represents all remaining investments.
|
Net change in unrealized appreciation (depreciation) on investments was
$(8,222) for the three months ended March 31, 2018. The following table summarizes the significant changes in unrealized appreciation (depreciation) of our investment portfolio, for the three months ended March 31, 2018, by portfolio
company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar amounts in thousands
|
|
|
|
|
December 31, 2017
|
|
|
March 31, 2018
|
|
Portfolio Company
|
|
Change in Unrealized
Appreciation
(Depreciation)
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
Avanti Communications Group plc
(1)
|
|
$
|
(4,692
|
)
|
|
$
|
75,461
|
|
|
$
|
42,278
|
|
|
$
|
(33,183
|
)
|
|
$
|
75,882
|
|
|
$
|
40,685
|
|
|
$
|
(35,197
|
)
|
TRU Taj, LLC
|
|
|
(2,481
|
)
|
|
|
15,264
|
|
|
|
14,800
|
|
|
|
(464
|
)
|
|
|
17,028
|
|
|
|
14,083
|
|
|
|
(2,945
|
)
|
OPS Acquisitions Limited and Ocean Protection Services Limited
|
|
|
(1,483
|
)
|
|
|
4,240
|
|
|
|
1,770
|
|
|
|
(2,470
|
)
|
|
|
4,240
|
|
|
|
287
|
|
|
|
(3,953
|
)
|
Other
(2)
|
|
|
434
|
|
|
|
107,320
|
|
|
|
106,022
|
|
|
|
(1,298
|
)
|
|
|
140,556
|
|
|
|
139,695
|
|
|
|
(861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
(8,222
|
)
|
|
$
|
202,285
|
|
|
$
|
164,870
|
|
|
$
|
(37,415
|
)
|
|
$
|
237,706
|
|
|
$
|
194,750
|
|
|
$
|
(42,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Recognition of accretion of discount increased our cost basis during the period. We did not fund any incremental investment during the period. $(2,680) of the unrealized depreciation was related to valuation of interest
receivable that is anticipated to pay in kind.
|
(2)
|
Other represents all remaining investments.
|
Liquidity and Capital Resources
At March 31, 2018, we had approximately $6,030 of cash and cash equivalents, none of which was restricted in nature. At March 31, 2018, we also had $23,869
invested in a money market fund that is classified as an investment rather than cash and cash equivalents.
At March 31, 2018, we had investments in 30 debt
instruments across 23 companies, totaling approximately $194,308 at fair value and equity investments in four companies, totaling approximately $442 at fair value. $11,953 of cumulative accrued PIK income is included in the carrying value of our
investments.
In the normal course of business, we may enter into investment agreements under which we commit to make an investment in a portfolio company at
some future date or over a specified period of time. As of March 31, 2018, we had approximately $22,406 in unfunded loan commitments, subject to our approval in certain instances, to provide debt financing to certain of our portfolio companies.
We had sufficient cash and other liquid assets on our March 31, 2018 balance sheet to satisfy the unfunded commitments.
For the three months ended
March 31, 2018, net cash used for operating activities, consisting primarily of net purchases of investments and the items described in Results of Operations, was approximately $36,551, reflecting the purchases and repayments of
investments, net investment income resulting from operations, offset by
non-cash
income related to OID and PIK income, changes in working capital and accrued interest receivable. Net cash used for purchases
and sales of investments was approximately $34,151, reflecting principal repayments and sales of $29,069, offset by additional investments of $63,220. Such amounts included draws and repayments on revolving credit facilities. Our Board previously
set our distribution rate at $0.083 per share per month and we intend to
re-evaluate
our dividend rate from time to time.
50
Contractual Obligations
A summary of our significant contractual payment obligations as of March 31, 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5
years
|
|
2022 Notes
|
|
$
|
32,631
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
32,631
|
|
|
$
|
|
|
2025 Notes
|
|
|
46,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,029
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
32,631
|
|
|
$
|
46,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have certain contracts under which we have material future commitments. Under the Investment Management Agreement, GECM provides
investment advisory services to us. For providing these services, we pay GECM a fee, consisting of two components: (1) a base management fee based on the average value of our total assets and (2) an incentive fee based on our performance.
We are also party to the Administration Agreement with GECM. Under the Administration Agreement, GECM furnishes us with, or otherwise arranges for the provision
of, office facilities, equipment, clerical, bookkeeping, finance, accounting, compliance and record keeping services at such office facilities and other such services as our administrator.
If any of the contractual obligations discussed above are terminated, our costs under any new agreements that we enter into may increase. In addition, we would
likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Management Agreement and our Administration Agreement. Any new investment management agreement would also be
subject to approval by our stockholders.
Both the Investment Management Agreement and the Administration Agreement may be terminated by either party without
penalty upon no fewer than 60 days written notice to the other.
Stock Buyback Program
We implemented a stock buyback program pursuant to Rule 10b5 1 and Rule
10b-18
under the Exchange Act, to repurchase our
shares in an aggregate amount of up to $15,000 through May 2018 at market prices at any time our shares trade below 90% of net asset value, subject to our compliance with our liquidity, covenant, leverage and regulatory requirements. Our Board
previously increased the overall size of the stock buyback program to a total of $50,000 with $25,000 remaining available under the program.
Inflation
Inflation has not had a significant effect on our results of operations in any of the reporting periods presented in our financial statements. However,
from time to time, inflation may impact the operating results of our portfolio companies.
Off-Balance
Sheet
Arrangements
We currently have no
off-balance
sheet arrangements, including any risk management of commodity
pricing or other hedging practices.
51
Notes Payable
On
November 3, 2016, we assumed approximately $33,646 in aggregate principal amount of Full Circles 8.25% Notes due June 30, 2020 (the 2020 notes). Interest on the 2020 notes was paid quarterly in arrears at a rate of 8.25%
per annum. The 2020 notes had a maturity date of June 30, 2020. On October 20, 2017, we redeemed the 2020 notes completely at their par value plus accrued and unpaid interest.
On September 18, 2017, we sold $28,375 in aggregate principal amount of 6.50% notes due 2022. On September 29, 2017, we sold an additional $4,256 of the
2022 notes upon full exercise of the underwriters over-allotment option. As a result of the issuance of these notes, the aggregate principal balance of 2022 notes outstanding is $32,631.
The 2022 notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The 2022 notes are
effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the 2022 notes on
January 31, April 30, July 31 and October 31 of each year. The 2022 notes will mature on September 18, 2022 and can be called on, or after, September 18, 2019. Holders of the 2022 notes do not have the option to have
the 2022 notes repaid prior to the stated maturity date. The 2022 notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.
On January 11, 2018, we sold $43,000 in aggregate principal amount of 6.75% notes due 2025. On January 19, 2018 and February 9, 2018, we sold an
additional $1,898 and $1,500 of the 2025 notes upon partial exercise of the underwriters over-allotment option. As a result of the issuance of these notes, the aggregate principal balance of 2025 notes outstanding is $46,398.
The 2025 notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The 2025 notes are
effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the 2025 notes on
March 31, June 30, September 30 and December 31 of each year. The 2025 notes will mature on January 31, 2025 and can be called on, or after, January 31, 2021. Holders of the 2025 notes do not have the option to have the
2025 notes repaid prior to the stated maturity date. The 2025 notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.
Recent Developments
In December 2017, Avanti announced a proposed
restructuring plan whereby the terms of its second lien debt would be amended (its coupon rate reduced to 9.0%; the company to have the option to pay in kind its interest payments for the remaining life of the security; and its maturity date to be
extended by a year) and its current third lien debt would be equitized in a
debt-for-equity
swap. In April 2018, a majority of the Avanti shareholders voted
in support of the proposed restructuring plan, allowing for the plan to close on April 26, 2018. In consideration for their support, the existing shareholders retain 7.5% of the common equity
pro-forma
for the issuance associated with the restructuring and the third lien debtholders own 92.5%. GECC now owns approximately 9.1% of Avantis common equity.
In
April 2018, Kyle Whitehill joined Avanti as its new CEO, replacing Alan Harper, previously the companys Interim CEO. With Mr. Whitehill starting in April, Mr. Harper resumed his role as a
Non-Executive
Director of the company.
In April 2018, Avanti successfully launched HYLAS 4 . HYLAS 4 is Avantis
largest capacity satellite and will provide data communications services with fixed beams serving Africa and Europe and steerable beams that can cover territory as far west as the United States and as far south as the southern tip of South America.
HYLAS 4 is now in its period of
in-orbit
testing, a period that typically lasts approximately three months.
In April
2018, we purchased an additional $1,764 of par value of Aptean Holdings, Inc. second lien term loan at a price of approximately 101% of par value.
In April
2018, we purchased an additional $500 of par value of SESAC Holdco II LLC second lien term loan at a price of approximately 100% of par value.
In April 2018,
the senior secured term loan to PR Wireless, Inc. was sold for par, resulting in a realized gain of approximately $800.
In April and May 2018, we funded an
additional $1,750 of par value to Tallage Davis, LLC.
In May 2018, we purchased an additional $5,000 of par value of Michael Baker International, LLC second
lien senior secured bonds at a price of approximately 95% of par value.
52
Our Board declared the monthly distributions for the third quarter of 2018 at an annual rate of approximately 8.45% of
our March 31, 2018 net asset value, which equates to $0.083 per month. The schedule of distribution payments is as follows:
|
|
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|
|
|
|
|
|
Month
|
|
Rate
|
|
|
Record Date
|
|
Payable Date
|
July
|
|
$
|
0.083
|
|
|
July 31, 2018
|
|
August 15, 2018
|
August
|
|
$
|
0.083
|
|
|
August 31, 2018
|
|
September 14, 2018
|
September
|
|
$
|
0.083
|
|
|
September 28, 2018
|
|
October 15, 2018
|
Reduction in Required Minimum Asset Coverage Ratio
On March 23, 2018, the Consolidated Appropriations Act of 2018, which includes the Act, was signed into law. The Act amends the Investment Company Act to permit
a BDC to reduce the required minimum asset coverage ratio applicable to it from 200% to 150%, subject to certain requirements described therein. This reduction significantly increases the amount of debt that BDCs may incur.
Prior to the enactment of the Act, BDCs were required to maintain an asset coverage ratio of at least 200% in order to incur debt or to issue other senior
securities. Generally, for every $1.00 of debt incurred or in senior securities issued, a BDC was required to have at least $2.00 of assets immediately following such incurrence or issuance. For those BDCs that satisfy the Acts disclosure and
approval requirements, the minimum asset coverage ratio is reduced such that for every $1.00 of debt incurred or in senior securities issued, a BDC must now have at least $1.50 of assets.
At our Annual Meeting, which was held on May 3, 2018, a majority of our stockholders approved the application of the modified minimum asset coverage
requirements set forth in Section 61(a)(2) of the Investment Company Act, to the Company. As a result of such approval, and subject to satisfying certain ongoing disclosure requirements, effective May 4, 2018 the asset coverage ratio test
applicable to the Company was decreased from 200% to 150%, permitting us to incur additional leverage.
As of March 31, 2018, we had approximately
$79.0 million of total outstanding indebtedness under two series of senior securities (unsecured senior notes)the 2022 notes and the 2025 notesand our asset coverage ratio was 255%. For risks associated with the reduction in our
required minimum asset coverage ratio from 200% to 150%, see Risk FactorsRisks Relating to Our Business and StructureRecently enacted legislation permits us to incur additional debt, Incurring additional
indebtedness could increase the risk of investing in our Company and Incurring additional leverage may magnify your exposure to risks associated with changes in interest rates, including fluctuations in interest rates which could
adversely affect our profitability.
53
THE COMPANY
Overview
We are a Maryland corporation that was formed in April 2016
and commenced operations on November 3, 2016 when Full Circle merged with and into us. We operate as a
closed-end,
externally managed,
non-diversified
management
investment company that has elected to be regulated as a BDC under the Investment Company Act. In addition, for tax purposes, we elected to be treated as a RIC under the Code beginning with our tax year starting October 1, 2016.
Our investment objective is to seek to generate both current income and capital appreciation, while seeking to protect against loss of principal, by investing
predominantly in the debt instruments of middle-market companies, which we generally define as companies with enterprise values between $100.0 million and $2.0 billion.
To achieve our investment objectives, we primarily focus on investing in secured and senior unsecured debt instruments in middle-market companies that offer
sufficient downside protection but with the opportunity to unlock substantial return potential (interest income plus capital appreciation and fees, if any) that appropriately recognizes potential investment risks.
We target investments that we perceive to be undervalued due to over leveraging or which operate in industries experiencing cyclical declines and may trade at
discounts to their original issue prices. We source these transactions in the secondary markets and occasionally directly with issuers.
We seek to protect
against loss of principal by investing in borrowers with tangible and intangible assets, where GECM believes asset values are expected to, or do, exceed our investment and any debt that is senior to, or ranks in parity with, our investment.
GECMs investment process includes a focus on an investments contractual documents, as it seeks to identify rights that enhance an investments risk protection and avoid contracts that compromise potential returns or recoveries.
Although we intend to focus on senior debt instruments of middle-market companies, we may make investments throughout a companys capital structure, including subordinated debt, mezzanine debt, and equity or equity-linked securities.
Our Portfolio at March 31, 2018
The following table sets forth
certain information as of March 31, 2018 regarding each portfolio company in which we have a debt or equity investment. For information regarding material portfolio transactions occurring after March 31, 2018, please see
Managements Discussion and Analysis of Financial Condition and Results of OperationsRecent Developments. Additional information about the general terms of our loans and other investments are described above under Risk
Factors and Overview. We offer to make available significant managerial assistance to our portfolio companies. We may receive rights to observe the meetings of our portfolio companies boards of directors or equivalent
governing bodies. Other than these investments and any additional relationships described below with respect to a particular portfolio company, our only relationships with our portfolio companies are the managerial assistance we may separately
provide to our portfolio companies, which services would be ancillary to our investments.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Security
|
|
Industry
|
|
Interest
(2)
|
|
% of
Class
|
|
Maturity
|
|
Par Amount/
Quantity
|
|
|
Cost
|
|
|
Fair Value
|
|
|
% of NAV
|
|
Investments at Fair
Value - 174.43%
of Net
Assets
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlled Investments - 13.77% of Net
Assets
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PE Facility Solutions, LLC
San Diego, CA
|
|
1st Lien, Senior Secured Revolver
(5,15)
|
|
Building Cleaning and Maintenance Services
|
|
10.88% (L + 9.00%)
(6)
|
|
|
|
02/27/2022
|
|
|
2,348
|
|
|
$
|
2,348
|
|
|
$
|
2,348
|
|
|
|
1.87
|
%
|
|
|
1st Lien, Senior Secured Revolver - Unfunded
(5,15)
|
|
|
|
10.88% (L + 9.00%)
(6)
|
|
|
|
02/27/2022
|
|
|
3,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Lien, Senior Secured Loan A
(5,15)
|
|
|
|
12.38% (L + 11.00%)
(6)
|
|
|
|
02/27/2022
|
|
|
9,900
|
|
|
|
9,900
|
|
|
|
9,900
|
|
|
|
7.88
|
%
|
|
|
1st Lien, Senior Secured Loan B
(5,15)
|
|
|
|
15.88% (L + 14.00%)
(6,7)
|
|
|
|
02/27/2022
|
|
|
6,000
|
|
|
|
5,713
|
|
|
|
5,049
|
|
|
|
4.02
|
%
|
|
|
Common Equity
(5,8,15)
|
|
|
|
|
|
83%
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,961
|
|
|
|
17,297
|
|
|
|
13.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Controlled Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,961
|
|
|
|
17,297
|
|
|
|
13.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments - 0.23% of Net
Assets
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPS Acquisitions Limited and Ocean Protection Services Limited
London, UK
|
|
1st Lien, Senior Secured Loan
(5,10,16)
|
|
Maritime Security Services
|
|
16.88% (L + 12.00%, 12.50% Floor)
(6,7,9)
|
|
|
|
06/01/2018
|
|
|
4,903
|
|
|
|
4,240
|
|
|
|
287
|
|
|
|
0.23
|
%
|
|
|
Common Equity
(5,8,10,16)
|
|
|
|
|
|
20%
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,240
|
|
|
|
287
|
|
|
|
0.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,240
|
|
|
|
287
|
|
|
|
0.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control,
Non-Affiliate
Investments - 141.05% of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Almonde, Inc.
Philadelphia, PA
|
|
2nd Lien, Senior Secured Loan
(5,10,17)
|
|
Software Services
|
|
9.56% (L + 7.25%, 8.25% Floor)
(13)
|
|
|
|
06/13/2025
|
|
|
10,000
|
|
|
|
9,953
|
|
|
|
9,885
|
|
|
|
7.87
|
%
|
Aptean Holdings, Inc.
Alpharetaa, GA
|
|
2nd Lien, Senior Secured Loan
(5,29)
|
|
Software Services
|
|
11.81% (L + 9.50%, 10.50%)
(13)
|
|
|
|
12/02/2023
|
|
|
2,189
|
|
|
|
2,216
|
|
|
|
2,203
|
|
|
|
1.75
|
%
|
Avanti Communications Group plc
London, UK
|
|
2nd Lien, Senior Secured Bond
(10,11)
|
|
Wireless Telecommunications Services
|
|
12.50%
|
|
|
|
10/01/2021
|
|
|
34,917
|
|
|
|
30,633
|
|
|
|
27,934
|
|
|
|
22.24
|
%
|
|
|
3rd Lien, Senior Secured Bond
(10,11)
|
|
|
|
14.50% (20.00% if PIK election is made)
(7)
|
|
|
|
10/01/2023
|
|
|
54,113
|
|
|
|
45,226
|
|
|
|
12,446
|
|
|
|
9.91
|
%
|
|
|
Common Equity
(8,10)
|
|
|
|
|
|
1%
|
|
|
|
|
1,829,496
|
|
|
|
23
|
|
|
|
305
|
|
|
|
0.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,882
|
|
|
|
40,685
|
|
|
|
32.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Barge Line Company
Jeffersonville, IN
|
|
1st Lien, Senior Secured Loan
(5,18)
|
|
Water Transport
|
|
10.63% (L + 8.75%, 9.75% Floor)
(6)
|
|
|
|
11/12/2020
|
|
|
9,127
|
|
|
|
7,543
|
|
|
|
5,387
|
|
|
|
4.29
|
%
|
Davidzon Radio, Inc.
Brooklyn, NY
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Radio Broadcasting
|
|
14.88% (L + 10.00%, 11.00% Floor)
(6,14)
|
|
|
|
03/31/2020
|
|
|
9,572
|
|
|
|
9,090
|
|
|
|
8,898
|
|
|
|
7.08
|
%
|
Foresight Energy LP
Saint Louis, MO
|
|
1st Lien, Senior Secured Loan
(5,27)
|
|
Oil, Gas & coal
|
|
7.63% (L + 5.75%, 6.75% floor)
(6)
|
|
|
|
03/28/2022
|
|
|
5,000
|
|
|
|
4,941
|
|
|
|
4,935
|
|
|
|
3.93
|
%
|
Full House Resorts, Inc.
|
|
1st Lien, Senior Secured Loan
(5,25)
|
|
Gaming, Lodging & Restaurants
|
|
9.31% (L + 7.00%, 8.00% floor)
(13)
|
|
|
|
02/02/2024
|
|
|
9,975
|
|
|
|
9,780
|
|
|
|
9,820
|
|
|
|
7.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geo Specialty Chemicals, Inc.
Lafayette, IN
|
|
1st Lien, Senior Secured Revolver
(5,19)
|
|
Chemicals
|
|
6.63% (L + 4.75%, 5.75% Floor)
(6)
|
|
|
|
04/30/2019
|
|
|
3,719
|
|
|
|
3,573
|
|
|
|
3,596
|
|
|
|
2.85
|
%
|
|
|
1st Lien, Senior Secured Revolver - Unfunded
(5,19)
|
|
|
|
6.63% (L + 4.75%, 5.75% Floor)
(6)
|
|
|
|
04/30/2019
|
|
|
656
|
|
|
|
(26
|
)
|
|
|
(22
|
)
|
|
|
(0.02
|
)%
|
|
|
1st Lien, Senior Secured Loan
(5,19)
|
|
|
|
6.63% (L + 4.75%, 5.75% Floor)
(6)
|
|
|
|
04/30/2019
|
|
|
6,234
|
|
|
|
5,990
|
|
|
|
6,029
|
|
|
|
4.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,573
|
|
|
|
9,603
|
|
|
|
7.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Wire Group, Inc.
Camden, NY
|
|
2nd Lien, Senior Secured Bond
(11)
|
|
Manufacturing
|
|
10.75%
|
|
|
|
08/01/2021
|
|
|
17,500
|
|
|
|
16,409
|
|
|
|
16,538
|
|
|
|
13.17
|
%
|
Luling Lodging, LLC
Luling, TX
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Hotel Operator
|
|
18.38% (L + 12.00%, 12.25% Floor)
(6,9,12)
|
|
|
|
12/18/2017
|
|
|
2,715
|
|
|
|
1,300
|
|
|
|
2,501
|
|
|
|
1.99
|
%
|
Michael Baker International, LLC
Pittsburgh, PA
|
|
2nd Lien, Senior Secured Bond
(11)
|
|
Industrial Conglomerates
|
|
8.75%
|
|
|
|
03/01/2023
|
|
|
9,500
|
|
|
|
9,279
|
|
|
|
9,120
|
|
|
|
7.26
|
%
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NANA Development Corp.
Anchorage, AK
|
|
1st Lien, Senior Secured Bond
(11)
|
|
Industrial Other
|
|
9.50%
|
|
|
|
03/15/2019
|
|
|
3,519
|
|
|
|
3,455
|
|
|
|
3,481
|
|
|
|
2.77
|
%
|
PEAKS Trust 2009-1
Carmel, IN
|
|
1st Lien, Senior Secured Loan
(5,10,16)
|
|
Consumer Finance
|
|
7.50% (L + 5.50%, 7.50% Floor)
(6)
|
|
|
|
01/27/2020
|
|
|
1,361
|
|
|
|
990
|
|
|
|
848
|
|
|
|
0.69
|
%
|
PR Wireless, Inc.
Guaynabo, PR
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Wireless Communications
|
|
7.56% (L + 5.25%)
(13)
|
|
|
|
06/29/2020
|
|
|
9,727
|
|
|
|
8,959
|
|
|
|
9,752
|
|
|
|
7.76
|
%
|
|
|
1st Lien, Senior Secured Delayed Draw Loan
(5,20)
|
|
|
|
7.56% (L + 5.25%)
(13)
|
|
|
|
06/29/2020
|
|
|
274
|
|
|
|
274
|
|
|
|
275
|
|
|
|
0.22
|
%
|
|
|
1st Lien, Senior Secured Unfunded Delayed Draw Loan
(5,20)
|
|
|
|
7.56% (L + 5.25%)
(13)
|
|
|
|
06/29/2020
|
|
|
1,098
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,233
|
|
|
|
10,025
|
|
|
|
7.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RiceBran Technologies Corporation
Scottsdale, AZ
|
|
Warrants
(5,8,16)
|
|
Grain Mill Products
|
|
$1.60 Strike Price
|
|
|
|
05/12/2020
|
|
|
300,000
|
|
|
|
145
|
|
|
|
137
|
|
|
|
0.11
|
%
|
SESAC Holdco II LLC
Nashville, TN
|
|
2nd Lien, Senior Secured Loan
(5,21)
|
|
Business Services
|
|
9.13% (L + 7.25%)
(6)
|
|
|
|
02/24/2025
|
|
|
6.795
|
|
|
|
6,744
|
|
|
|
6,744
|
|
|
|
5.37
|
%
|
|
|
1st Lien, Senior Secured Loan
(5,22)
|
|
|
|
11.88% (L + 10.00%, 11.00%)
(6)
|
|
|
|
10/01/2022
|
|
|
6,000
|
|
|
|
5,711
|
|
|
|
5,736
|
|
|
|
4.57
|
%
|
Sungard Availability Services Capital, Inc.
Wayne, PA
|
|
1st Lien, Senior Secured Loan
(5,24)
|
|
Technology Services
|
|
8.88% (L + 7.00%, 8.00%
Floor)
(6)
|
|
|
|
9/30/2021
|
|
|
5,000
|
|
|
|
4,637
|
|
|
|
4,645
|
|
|
|
3.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,348
|
|
|
|
10,381
|
|
|
|
8.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tallage Davis, LLC
Boston, MA
|
|
1st Lien, Senior Secured Loan
(5,26)
|
|
Real Estate Service
|
|
11.00%
|
|
|
|
01/26/2023
|
|
|
250
|
|
|
|
250
|
|
|
|
249
|
|
|
|
0.20
|
%
|
|
|
1st Lien, Senior Secured Loan - Unfunded
(5,26)
|
|
|
|
11.00%
|
|
|
|
01/26/2023
|
|
|
14,750
|
|
|
|
|
|
|
|
(89
|
)
|
|
|
(0.07
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
160
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tallage Lincoln, LLC
Boston, MA
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Real Estate Services
|
|
12.31% (L + 10.00%, 11.00% Floor)
(13)
|
|
|
|
12/31/2019
|
|
|
4,998
|
|
|
|
4,999
|
|
|
|
4,973
|
|
|
|
3.96
|
%
|
|
|
1st Lien, Senior Secured Loan - Unfunded
(5,16)
|
|
|
|
12.31% (L + 10.00%, 11.00% Floor)
(13)
|
|
|
|
12/31/2019
|
|
|
2,250
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
(.0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,999
|
|
|
|
4,962
|
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Finance Company
Silver Springs, MD
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Consumer Finance
|
|
18.88% (L + 14.00%, 14.75% Floor)
(6,12)
|
|
|
|
03/31/2018
|
|
|
2,191
|
|
|
|
2,191
|
|
|
|
1,993
|
|
|
|
1.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Selling Source, LLC
Las Vegas, NV
|
|
1st Lien, Senior Secured Loan
(5,16,23)
|
|
Information and Data Services
|
|
17.00% (9.00% PIK, 8.00% Cash)
(7,9)
|
|
|
|
12/31/2017
|
|
|
5,689
|
|
|
|
4,202
|
|
|
|
4,807
|
|
|
|
3.83
|
%
|
TRU Taj LLC
Wayne, NJ
|
|
1st Lien, Senior Secured Bond
(11)
|
|
Retail
|
|
12.00%
|
|
|
|
08/15/2021
|
|
|
16,000
|
|
|
|
15,304
|
|
|
|
12,360
|
|
|
|
9.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
st
Lien, Debtor in Possession Note
(5, 28)
|
|
|
|
11.0%
|
|
|
|
01/22/2019
|
|
|
1,655
|
|
|
|
1,724
|
|
|
|
1,723
|
|
|
|
1.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,028
|
|
|
|
14,083
|
|
|
|
11.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Control,
Non-Affiliate
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
215,505
|
|
|
$
|
177,166
|
|
|
|
141.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
Investments -
38.82% of Net
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Street Institutional Treasury Money Market Fund
|
|
Money Market Mutual Fund
|
|
|
|
|
|
<1%
|
|
|
|
|
23,868,201
|
|
|
$
|
28,869
|
|
|
$
|
23,869
|
|
|
|
19.00
|
%
|
United States Treasury
|
|
Treasury Bill
|
|
|
|
1.69%
|
|
|
|
6/28/2018
|
|
|
25,000
|
|
|
|
24,901
|
|
|
|
24,898
|
|
|
|
19.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Short-Term Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,770
|
|
|
$
|
48,767
|
|
|
|
38.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENTS
(14)
193.88%
of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
286,476
|
|
|
$
|
243,517
|
|
|
|
193.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities in Excess of Assets (93.88)% of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(117,921
|
)
|
|
|
(93.88
|
)%
|
NET ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
125,596
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
A majority of GECCs variable rate debt investments bear interest at a rate that is determined by reference to LIBOR or the U.S. prime rate, and which is reset daily, monthly, quarterly or semiannually. For each
debt investment, GECC has provided the interest rate in effect as of March 31, 2018. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the minimum rate that will be applied in calculating an interest rate. A
cap is the maximum rate that will be applied in calculating an interest rate.
|
(2)
|
GECCs investments are generally acquired in private transactions exempt from registration under the Securities Act and, therefore, are generally subject to limitations on resale, and may be deemed to be
restricted securities under the Securities Act.
|
(3)
|
Controlled Investments are investments in those companies that are Controlled Investments of GECC, as defined in the Investment Company Act. A company is deemed to be a
Controlled Investment of GECC if GECC owns more than 25% of the voting securities of such company.
|
(4)
|
Affiliate Investments are investments in those companies that are Affiliated Companies of GECC, a defined in the Investment Company Act, which are not
Controlled Investments. A company is deemed to be an Affiliate of GECC if GECC owns 5% or more, but less than 25%, of the voting securities of such company.
|
(5)
|
Investments classified as Level 3 whereby fair value was determined by the GECCs Board.
|
(6)
|
The interest rate on these loans may be subject to the greater of a LIBOR floor, if any, or 1 month LIBOR plus a base rate. The 1 month LIBOR as of March 31, 2018 was 1.88%.
|
(7)
|
Security pays, or has the option to pay, all of its interest in kind.
|
(8)
|
Non-income
producing security.
|
(9)
|
Investment was on
non-accrual
status as of March 31, 2018.
|
(10)
|
Indicates assets that GECC believes do not represent qualifying assets under Section 55(a) of the Investment Company Act. Qualifying assets must represent at least 70% of GECCs total
assets at the time of acquisition of any additional
non-qualifying
assets. Of the GECCs total assets, 20.12% were
non-qualifying
assets as of March 31, 2018.
|
(11)
|
Security exempt from registration pursuant to Rule 144A under the Securities Act. Such security may be sold in certain transactions (normally to qualified institutional buyers) and remain exempt from registration.
|
(12)
|
The interest rate on these loans includes a default interest rate.
|
(13)
|
The interest rate on these loans is subject to the greater of a LIBOR floor or
3-month
LIBOR plus a base rate. The
3-month
LIBOR as of
March 31, 2018 was 2.31%.
|
(14)
|
As of March 31, 2018, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $2,245; the aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value was $46,284; the net unrealized depreciation was $44,039; the aggregate cost of securities for Federal income tax purposes was $287,553.
|
(15)
|
Restricted security initially obtained on February 28, 2017.
|
(16)
|
Restricted security initially obtained on November 3, 2016.
|
(17)
|
Restricted security initially obtained on December 14, 2017.
|
(18)
|
Restricted security initially obtained on May 17, 2017.
|
(19)
|
Restricted security initially obtained on September 28, 2017.
|
(20)
|
Restricted security initially obtained on November 15, 2017.
|
(21)
|
Restricted security initially obtained on December 13, 2017.
|
57
(22)
|
Restricted security initially obtained on December 20, 2017.
|
(23)
|
Loan defaulted on January 1, 2018.
|
(24)
|
Restricted security initially obtained on January 24, 2018.
|
(25)
|
Restricted security initially obtained on February 2, 2018.
|
(26)
|
Restricted security initially obtained on March 20, 2018.
|
(27)
|
Restricted security initially obtained on March 22, 2018.
|
(28)
|
Restricted security initially obtained on March 26, 2018.
|
(29)
|
Restricted security initially obtained on March 27, 2018.
|
|
Investment is a debt investment and thus the percentage of class held does not apply.
|
Dollar amounts in thousands
L = LIBOR
Set forth below is a brief description of each portfolio
company in which the fair value of our investment represents greater than 5% of our total assets as of March 31, 2018.
Avanti Communications Group
plc
Avanti, located in London, UK, is a leading provider of satellite-enabled data communications services in Europe, the Middle East and Africa.
Avantis network consists of: three high throughput satellites, HYLAS 1, HYLAS 2 and HYLAS 4; a multiband satellite, Artemis; one satellite that is not yet launched, HYLAS 3; and an international fiber network connecting data centers in several
countries. Avantis satellites primarily operate in the Ka band frequency range. The Ka band allows for the delivery of greater capacity at faster speeds than Ku band capacity.
PE Facility Solutions, LLC
PE Facility Solutions, LLC
(PEFS), located in San Diego, CA, provides facilities maintenance services to local and national commercial clients. PEFS manages, maintains and optimizes the performance of mission critical facilities for corporate real estate owners in
nearly 100 million square feet of specialized buildings across North America. PEFS is headquartered in San Diego, California and has operations nationwide. Two members of our investment committee serve as members of the Board of Managers of
PEFS.
International Wire Group, Inc.
International Wire
Group, Inc. (ITWG) is headquartered in Camden, New York, and is the largest bare copper wire and copper wire products manufacturer in the United States with operations in Europe. ITWGs products include a broad line of copper wire
configurations and gauges with a variety of electrical and conductive characteristics, which are utilized by customers primarily in the industrial and energy, electronics and data communications, aerospace and defense, medical products, automotive,
and consumer and appliance industries. In addition to its Camden headquarters, ITWG has multiple offices across the United States, as well as offices in France, Italy, and Poland.
TRU Taj LLC
TRU Taj is a leading global retailer of toys and
juvenile products. As of January 2017, the company operated approximately 730 stores in 37 countries under the Toys R Us and Babies R Us banners. TRU Taj is a subsidiary of Toys and operates substantially all of the
companys international operations (excluding Canada). Toys has recently announced it has commenced a plan of restructuring and has engaged in discussions with creditors to consider, among other things, the conversion of the TRU notes into
equity of one or more either existing or newly-created reorganized TRU Taj entities. See Risk FactorsRisks Relating to Our InvestmentsBy investing in companies that are experiencing significant financial or business difficulties,
we will be exposed to distressed lending risks.
Investment Manager and Administrator
GECMs investment team has more than 100 years of experience in the aggregate financing and investing in leveraged middle-market companies. GECMs team is
led by Peter A. Reed, GECMs Chief Investment Officer. Senior members of GECMs team include Adam M. Kleinman, John S. Ehlinger and Adam W. Yates. The GECM investment team has deployed more than $17.0 billion into more than 550
issuers across 20+ jurisdictions during its prior and current experience together.
58
Investment Selection
GECM
employs a team of investment professionals with experience in leveraged finance. The sector-focused research team performs fundamental research at both the industry and company level. Through
in-depth
industry
coverage, GECMs investment team seeks to develop a thorough understanding of the fundamental market, sector drivers, mergers and acquisition activity, security pricing and trading and new issue trends. GECMs investment team believes that
understanding industry trends is an important element of investment success.
Idea Generation, Origination and Refinement
Idea generation and origination is maximized through long-standing and extensive relationships with industry contacts, brokers, commercial and investment bankers, as
well as current and former clients, portfolio companies and investors. GECMs investment team is expected to supplement these lead sources by also utilizing broader research efforts, such as attendance at prospective borrower industry
conferences and an active calling effort to brokers and investment bankers. GECMs investment team focuses their idea generation and origination efforts on middle-market companies. In screening potential investments, GECMs investment team
utilizes a value-oriented investment philosophy with analysis and research focused on the preservation of capital. GECM has identified several criteria that it believes are important in identifying and investing in prospective portfolio companies.
GECMs process requires focus on the terms of the applicable contracts and instruments perfecting security interests. GECMs criteria provide general guidelines for GECMs investment committees decisions; however, not all of
these criteria will be met by each prospective portfolio company in which they choose to invest.
Asset Based Investments.
Debt issued by firms with
negative free cash flow but where GECMs investment thesis is based on the value of the collateral or the issuers assets. This type of investment focuses on expected realizable value of the issuers assets.
Enterprise Value Investments.
Debt issued by firms whose business generates free cash flow to service the debt with a margin of safety and the enterprise
value of the firm represents the opportunity for principal to be repaid by refinancing or in connection with a merger or acquisition transaction. These investments focus on the going concern value of the enterprise.
Other Debt Investments.
The issuer has the ability to pay interest and principal of its debt out of expected free cash flow from its business. These
investments focus on the sustainability and defensibility of cash flows from the business.
Due Diligence
GECMs due diligence typically includes:
|
|
|
analysis of the credit documents by GECMs investment team (including the members of the team with legal training and years of professional experience). GECM will engage outside counsel when necessary as well;
|
|
|
|
review of historical and prospective financial information;
|
|
|
|
research relating to the companys management, industry, markets, customers, products and services and competitors;
|
|
|
|
verification of collateral;
|
|
|
|
interviews with management, employees, customers and vendors of the potential portfolio company; and
|
|
|
|
informal or formal background and reference checks.
|
Upon the completion of due diligence and a decision to proceed
with an investment in a company, the investment professionals leading the diligence process present the opportunity to GECMs investment committee, which then determines whether to pursue the potential investment.
Approval of Investment Transactions
GECMs procedures call
for each new investment under consideration by the GECM analysts to be preliminarily reviewed at periodic meetings of GECMs investment team. GECMs investment team then prepares a summary of the investment, including a financial model and
risk cases and a legal review checklist. GECMs investment committee then will hold a formal review meeting and following approval of a specific investment, authorization is given to GECMs traders, including execution guidelines.
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GECMs investment analysts conduct periodic reviews of the positions for which they are responsible with members of
GECMs investment committee. On a quarterly basis, formal reviews of each position are conducted by GECMs investment committee.
GECMs
investment analysts and members of the GECM investment committee will jointly decide when to sell a position. The sale decision will then be given to GECMs traders, who will execute the trade in consultation with the analyst and the applicable
member of GECMs investment committee.
Ongoing Relationship with Portfolio Companies
As a BDC, we offer, and must provide upon request, significant managerial assistance to certain of our portfolio companies. This assistance could involve, among other
things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance.
GECMs investment team monitors our portfolio companies on an ongoing basis. They monitor the financial trends of each portfolio company and its respective
industry to assess the appropriate course of action for each investment. GECMs ongoing monitoring of a portfolio company will include both a qualitative and quantitative analysis of the company and its industry.
Valuation Procedures
We value our assets, an essential input in the
determination of our net asset value, consistent with GAAP and as required by the Investment Company Act. See Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies
for an extended discussion of our methodology.
Staffing
We do not
currently have any employees. Mr. Reed is our Chief Executive Officer and President and GECMs Chief Investment Officer. Under the Administration Agreement, GECM provides the services of Michael J. Sell, our Chief Financial Officer and
Treasurer, and Adam M. Kleinman, our Secretary and Chief Compliance Officer.
Competition
We compete for investments with other BDCs and investment funds (including private equity funds, hedge funds, mutual funds, mezzanine funds and small business
investment companies), as well as traditional financial services companies such as commercial banks, direct lending funds and other sources of funding. Additionally, because competition for investment opportunities generally has increased among
alternative investment vehicles, those entities have begun to invest in areas they have not traditionally invested in, including making investments in the types of portfolio companies we target. Many of these entities have greater financial and
managerial resources than we do.
Exemptive Relief
We intend to
apply to the SEC for exemptive relief that will allow us to
co-invest,
together with other investment vehicles managed by GECM, in specific investment opportunities. We are unable to predict whether or not the
SEC will grant the requested exemption. If the SEC does not provide the requested exemption, GECM will allocate investment opportunities to different investment vehicles in accordance with its allocation policies.
Formation Transactions
On June 23, 2016, we entered into the
Merger Agreement with Full Circle that provided for the Merger. Concurrent with delivery of the Merger Agreement, we entered into the Subscription Agreement with GEC and the MAST Funds. Per the Subscription Agreement, GEC contributed
$30.0 million to us. Prior to the Merger and our election to be regulated as a BDC under the Investment Company Act, per the Subscription Agreement, we acquired the Initial GECC Portfolio from the MAST Funds. As a result of the transactions
contemplated by the Subscription Agreement, the MAST Funds owned approximately 75% of the
pre-Merger
outstanding shares of our common stock and GEC owned 25% of the
pre-Merger
outstanding shares of our common stock. The Merger was completed on November 3, 2016.
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Investment Management Agreement
Management Services
GECM serves as our investment adviser and is
registered as an investment adviser under the Advisers Act. Subject to the overall supervision of our Board, GECM manages our
day-to-day
operations and provides
investment advisory and management services to us. Under the terms of the Investment Management Agreement, GECM:
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determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;
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identifies, evaluates and negotiates the structure of our investments (including performing due diligence on our prospective portfolio companies);
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closes and monitors our investments; and
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determines the securities and other assets that we purchase, retain or sell.
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GECM was initially formed to provide
investment advisory services to us. However, GECMs services to us under the Investment Management Agreement are not exclusive, and GECM is free to furnish similar services to other entities.
Management & Incentive Fees
Under the Investment
Management Agreement, GECM receives a fee from us, consisting of two components: (1) a base management fee and (2) an incentive fee.
The base
management fee is calculated at an annual rate of 1.50% based on the average value of our total assets (determined under GAAP) (other than cash or cash equivalents but including assets purchased with borrowed funds or other forms of leverage) at the
end of the two most recently completed calendar quarters. The base management fee is payable quarterly in arrears.
The incentive fee has two parts. One part is
calculated and payable quarterly in arrears based on our
pre-incentive
fee net investment income for the quarter.
Pre-incentive
fee net investment income means interest
income, dividend income and any other income (including any other fees such as commitment, origination, diligence and consulting fees or other fees that we receive from portfolio companies but excluding fees for providing managerial assistance)
accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement, and any interest expense and dividends paid on any outstanding preferred
stock, but excluding the incentive fee).
Pre-incentive
fee net investment income includes any accretion of OID, market discount, PIK interest, PIK dividends or other types of deferred or accrued income,
including in connection with zero coupon securities, that we and our 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 unrealized capital appreciation or
depreciation. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a quarter where we incur a loss. For example, if we receive
pre-incentive
fee net investment
income in excess of the hurdle rate (as defined below) for a quarter, we will pay the applicable incentive fee even if we have incurred a loss in that quarter due to realized and unrealized capital losses.
Pre-incentive
fee net investment income, expressed as a rate of return on the value of our net assets (defined in accordance
with GAAP) at the end of the immediately preceding calendar quarter, is compared to a fixed hurdle rate of 1.75% per quarter (7.00% annualized). If market interest rates rise, we may be able to invest in debt instruments that provide for
a higher return, which would increase our
pre-incentive
fee net investment income and make it easier for GECM to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income.
Our
pre-incentive
fee net investment income used to calculate this part of the incentive fee is also included in the amount of our total assets (other than cash and cash equivalents but including assets
purchased with borrowed funds) used to calculate the 1.50% base management fee.
We pay the incentive fee with respect to our
pre-incentive
fee net investment income in each calendar quarter as follows:
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no incentive fee in any calendar quarter in which the
pre-incentive
fee net investment income does not exceed the hurdle rate;
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100% of our
pre-incentive
fee net investment income with respect to that portion of such
pre-incentive
fee net investment income, if any,
that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized). We refer to this portion of our
pre-incentive
fee net investment income (which exceeds the hurdle rate but is
less than 2.1875%) as the
catch-up
provision. The
catch-up
is meant to provide GECM with 20% of the
pre-incentive
fee
net investment income as if a hurdle rate did not apply if this net investment income exceeds 2.1875% in any calendar quarter; and
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20% of the amount of our
pre-incentive
fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).
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These calculations are adjusted for any share issuances or repurchases during the quarter. Any income incentive fee otherwise payable with respect to Accrued Unpaid
Income will be deferred, on a
security-by-security
basis, and will become payable only if, as, when and to the extent cash is received by us or our 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, (1) reduce
pre-incentive
fee net investment income and (2) reduce the amount deferred pursuant to the terms of the Investment
Management Agreement. Subsequent payments of income incentive fees deferred pursuant to this paragraph do not reduce the amounts payable for any quarter pursuant to the other terms of the Investment Management Agreement.
The following is a graphical representation of the calculation of the income related portion of the incentive fee:
Quarterly Incentive Fee Based on Net Investment Income
Pre-incentive
fee net investment income
(expressed as a percentage of the value of net assets)
Percentage of
pre-incentive
fee net investment income
allocated to income related portion of incentive fee
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.
The second part of the incentive fee, the Capital Gains Fee, is determined and payable in arrears as of the end of each calendar year (or upon
termination of the Investment Management Agreement, as of the termination date), commencing with the partial calendar year ended December 31, 2016, and is calculated at the end of each applicable year by subtracting (1) the sum of our and
our consolidated subsidiaries cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (2) our and our consolidated subsidiaries cumulative aggregate realized capital gains, in each case
calculated from November 4, 2016. If such amount is positive at the end of such year, then the Capital Gains Fee for such year is equal to 20% of such amount, less the aggregate amount of Capital Gains Fees paid in all prior years. If such
amount is negative, then there is no Capital Gains Fee for such year.
The cumulative aggregate realized capital gains are calculated as the sum of the
differences, if positive, between (a) the net sales price of each investment in our portfolio when sold and (b) the accreted or amortized cost basis of such investment. The cumulative aggregate realized capital losses are calculated as the
sum of the amounts by which (1) the net sales price of each investment in our portfolio when sold is less than (2) the accreted or amortized cost basis of such investment. The aggregate unrealized capital depreciation is calculated as the
sum of the differences, if negative, between (a) the fair value of each investment in our portfolio as of the applicable Capital Gains Fee calculation date and (b) the accreted or amortized cost basis of such investment.
We will defer cash payment of any incentive fee otherwise payable to GECM in any quarter (excluding Accrued Unpaid Income Incentive Fees with respect to such
quarter) that exceeds (1) 20% of the Cumulative
Pre-Incentive
Fee Net Return during the most recent Trailing Twelve Quarters less (2) the aggregate incentive fees that were previously paid to GECM during
such Trailing Twelve Quarters (excluding Accrued Unpaid Income Incentive Fees during such Trailing Twelve Quarters and not subsequently paid).
Examples of
Quarterly Incentive Fee Calculation
The following hypothetical calculations illustrate the calculation of net investment income based incentive fees
under the Investment Management Agreement.
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Assumption 1
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Assumption 2
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Assumption 3
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Investment income (including interest, dividends, fees,
etc.)
(1)
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1.25
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%
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2.70
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%
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3.00
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%
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Hurdle rate
(2)
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1.75
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%
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1.75
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%
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1.75
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%
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Management fee
(3)
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0.38
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%
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0.38
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%
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0.38
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%
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Pre-incentive
fee net income (net of management fee + other
expenses)
(4)
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0.68
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%
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2.125
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%
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2.425
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%
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Incentive fee
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0
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0.38
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%
(5)(6)
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0.485
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%
(6)(7)(8)
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(1)
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The hypothetical amount of
pre-incentive
fee net investment income shown is based on a percentage of total net assets.
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(2)
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Represents 7.0% annualized hurdle rate.
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(3)
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Represents 1.5% annualized management fee.
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(4)
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Excludes organizational and offering expenses. Other Expenses are assumed to be 0.19% in the examples.
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(5)
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100% x
pre-incentive
fee net income, subject to the catch up is calculated as 100% x (2.125% 1.75%)
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(6)
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The
catch-up
provision is intended to provide GECM with an incentive fee of 20% on all of our
pre-incentive
fee net investment
income as if a hurdle rate did not apply when our net investment income exceeds 2.1875% in any calendar quarter.
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(7)
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The
catch-up
is calculated as 2.1875% 1.75%= 0.4375%
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(8)
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The incentive fee is calculated as (100% × 0.4375%) + (20% × (2.425% 2.1875%)) = 0.475%. The total fee is the sum of 0.4375 (the
catch-up)
plus 0.0475% (20% of
the excess over the hurdle rate).
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The following hypothetical calculations illustrate the calculation of the capital gains based incentive fee
under the Investment Management Agreement.
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In millions
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Assumption 1
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Assumption 2
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Year 1 Investment in Company A
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$
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20.00
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$
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20.00
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Year 1 Investment in Company B
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$
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30.00
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$
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30.00
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Year 1 Investment in Company C
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$
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25.00
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Year 2 Proceeds from sale of investment in Company A
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$
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50.00
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$
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50.00
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Year 2 Fair market value (FMV) of investment in Company B
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$
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32.00
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$
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25.00
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Year 2 FMV of investment in Company C
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$
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25.00
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Year 3 FMV of investment in Company B
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$
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25.00
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$
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24.00
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Year 3 Proceeds from sale of investment in Company C
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$
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30.00
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Year 4 Proceeds from sale of investment in Company B
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$
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31.00
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Year 4 FMV of investment in Company B
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$
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35.00
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Year 5 Proceeds from sale of investment in Company B
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$
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20.00
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Capital gains portion of the incentive fee:
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Year 1
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$
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0
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$
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0
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Year 2
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$
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6.0
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(1)
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$
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5.0
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(4)
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Year 3
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$
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0
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(2)
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$
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0.8
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(5)
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Year 4
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$
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0.2
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(3)
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$
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1.2
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(6)
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Year 5
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$
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0
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(7)
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(1)
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$30.0 million realized capital gain on sale of Investment A multiplied by 20%
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(2)
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The greater of (i) zero and (ii) $5.0 million (20% multiplied by ($30.0 million cumulative capital gains less $5.0 million cumulative capital depreciation)) less $6.0 million (capital gain fee
paid in Year 2)
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(3)
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$6.2 million ($31.0 million cumulative realized capital gains multiplied by 20%) less $6.0 million (capital gain fee paid in Year 2)
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(4)
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20% multiplied by $25.0 million ($30.0 million realized capital gains on Investment A less $5.0 million unrealized capital depreciation on Investment B)
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(5)
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$5.8 million (20% multiplied by $29.0 million ($35.0 million cumulative realized capital gains less $6.0 million unrealized capital depreciation)) less $5.0 million capital gains fee paid in
Year 2
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(6)
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$7.0 million (20% multiplied by $35.0 million ($35.0 million cumulative realized capital gains)) less $5.8 million cumulative capital gains fee paid in Year 2 and Year 3
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(7)
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Greater of (i) zero and (ii) $5.0 million (20% multiplied by $25 million (cumulative realized capital gains of $35.0 million less realized capital losses of $10.0 million)) less $7.0 million
cumulative capital gains fee paid in Year 2, Year 3, and Year 4
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As illustrated in Year 3 of Assumption 1 above, if GECC were to be wound up on a
date other than December 31 of any year, we may have paid aggregate capital gain incentive fees that are more than the amount of such fees that would be payable if GECC had been wound up on December 31 of such year.
For the year ended December 31, 2017, we incurred $2.3 million in base management fees and $4.4 million in income based fees accrued during the
period. The incentive fees were deferred in accordance with the Investment Management Agreement. There was no capital gains incentive fee earned by GECM as calculated under the Investment Management Agreement for the year ended December 31,
2017.
For the period ended December 31, 2016, we incurred $0.4 million in base management fees and $0.9 million in income based fees accrued
during the period. The incentive fees were deferred in accordance with the Investment Management Agreement. There was no capital gains incentive fee earned by GECM as calculated under the Investment Management Agreement for the period ended
December 31, 2016.
Payment of Expenses
The services
of all investment professionals and staff of GECM, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services, are provided
and paid for by GECM. We bear all other costs and expenses of our operations and transactions, including (without limitation):
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our organizational expenses;
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fees and expenses, including reasonable travel expenses, actually incurred by GECM or payable to third parties related to our investments, including, among others, professional fees (including the fees and expenses of
counsel, consultants and experts) and fees and expenses relating to, or associated with, evaluating, monitoring, researching and performing due diligence on investments and prospective investments (including payments to third party vendors for
financial information services);
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out-of-pocket
fees and expenses, including reasonable travel expenses, actually incurred by GECM or payable to third parties related to the
provision of managerial assistance to our portfolio companies that we agree to provide such services to under the Investment Company Act (exclusive of the compensation of any investment professionals of GECM);
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interest or other costs associated with debt, if any, incurred to finance our business;
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fees and expenses incurred in connection with our membership in investment company organizations;
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investment advisory and management fees;
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fees and expenses associated with calculating our net asset value (including the costs and expenses of any independent valuation firm);
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fees and expenses relating to offerings of our common stock and other securities;
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legal, auditing or accounting expenses;
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federal, state and local taxes and other governmental fees;
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the fees and expenses of GECM, in its role as the administrator, and any
sub-administrator,
our transfer agent or
sub-transfer
agent, and
any other amounts payable under the Administration Agreement, or any similar administration agreement or
sub-administration
agreement to which we may become a party;
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the cost of preparing stock certificates or any other expenses, including clerical expenses of issue, redemption or repurchase of our securities;
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the expenses of and fees for registering or qualifying our shares for sale and of maintaining our registration and registering us as a broker or a dealer;
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the fees and expenses of our directors who are not interested persons (as defined in the Investment Company Act);
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the cost of preparing and distributing reports, proxy statements and notices to stockholders, the SEC and other governmental or regulatory authorities;
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costs of holding stockholders meetings;
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the fees or disbursements of custodians of our assets, including expenses incurred in the performance of any obligations enumerated by our charter or bylaws insofar as they govern agreements with any such custodian;
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any amounts payable under the Administration Agreement;
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our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;
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our allocable portion of the costs associated with maintaining any computer software, hardware or information technology services (including information systems, Bloomberg or similar terminals, cyber security and
related consultants and email retention) that are used by us or by GECM or its respective affiliates on our behalf (which allocable portion shall exclude any such costs related to investment professionals of GECM providing services to us);
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direct costs and expenses incurred by us or GECM in connection with the performance of administrative services on our behalf, including printing, mailing, long distance telephone, cellular phone and data service,
copying, secretarial and other staff, independent auditors and outside legal costs;
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all other expenses incurred by us or GECM in connection with administering our business (including payments under the Administration Agreement based upon our allocable portion of GECMs overhead in performing its
obligations under the Administration Agreement, including rent and the allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs (including reasonable travel expenses); and
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costs incurred by us in connection with any claim, litigation, arbitration, mediation, government investigation or dispute in connection with our business and the amount of any judgment or settlement paid in connection
therewith, or the enforcement of our rights against any person and indemnification or contribution expenses payable by us to any person and other extraordinary expenses not incurred in the ordinary course of our business.
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GECM agreed that the aggregate amount of expenses accrued for reimbursement that pertain to direct compensation costs of financial, compliance and accounting
personnel that perform services for us, including the fees charged by any
sub-administrator
to provide such personnel to us for the twelve months ending November 3, 2017, when taken together with such
expenses reimbursed or accrued for reimbursement by us pursuant to the Administration Agreement during such period, shall not exceed 0.50% of our average net asset value during such period. Our expenses did not exceed the cap for the period, and as
such no reimbursement was required under the agreement.
Duration and Termination
Our Board approved the Investment Management Agreement on August 8, 2016. Unless terminated earlier, the Investment Management Agreement will continue in effect
until September 27, 2018, and will renew for successive annual periods thereafter if approved annually by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case,
approval by a majority of our directors who are not interested persons. The Investment Management Agreement will automatically terminate if it is assigned. The Investment Management Agreement may be terminated by either party without
penalty upon 60 days written notice to the other.
Conflicts of interest may arise if GECM seeks to change the terms of the Investment Management
Agreement, including, for example, the terms for compensation. Any material change to the Investment Management Agreement must be submitted to stockholders for approval under the Investment Company Act and we may from time to time decide it is
appropriate to seek stockholder approval to change the terms of the Investment Management Agreement.
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Indemnification
We
agreed to indemnify GECM, its stockholders and their respective officers, managers, partners, agents, employees, controlling persons, members and any other person affiliated with it, to the fullest extent permitted by law, 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, for any damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts
reasonably paid in settlement) arising from the rendering of GECMs services under the Investment Management Agreement or otherwise as our investment adviser.
Organization of the Investment Adviser
GECM is a Delaware
corporation and is registered as an investment adviser under the Advisers Act. GECMs principal executive offices are located at 800 South Street, Suite 230, Waltham, MA 02453.
Regulation as a Business Development Company
We may not change the
nature of our business so as to cease to be, or withdraw our election as, a BDC unless authorized by vote of a majority of the outstanding voting securities, as required by the Investment Company Act. A majority of the outstanding voting securities
of a company is defined under the Investment Company Act as the lesser of:
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67% or more of such companys voting securities present at a meeting if more than 50% of the outstanding voting securities of such company are present or represented by proxy, or
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more than 50% of the outstanding voting securities of such company.
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A majority of our directors must be persons who
are not interested persons, as that term is defined in the Investment Company Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the BDC. Furthermore, as a BDC, we are
prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons
office.
We are required to meet a coverage ratio of the value of total assets to total senior securities, which include all of our borrowings and any preferred
stock we may issue in the future, of at least 150%. We may also be prohibited under the Investment Company Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors who are not
interested persons and, in some cases, prior approval by the SEC.
We are generally unable to sell shares of our common stock at a price below net asset value
per share. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage. We may, however, sell shares of our common stock at a price below net asset value per share:
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in connection with a rights offering to our existing stockholders,
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with the consent of the majority of our common stockholders, or
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under such other circumstances as the SEC may permit.
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For example, we may sell shares of our common stock at a price
below the then current net asset value of our common stock if our Board determines that such sale is in our and our stockholders best interests, and our stockholders approve our policy and practice of making such sales. In any such case, under
such circumstances, the price at which shares of our common stock may be the fair value of such shares of common stock. We may be examined by the SEC for compliance with the Investment Company Act.
We may not acquire any assets other than qualifying assets unless, at the time we make such acquisition, the value of our qualifying assets represents at
least 70% of the value of our total assets. The principal categories of qualifying assets relevant to our business are:
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securities purchased in transactions not involving any public offering, the issuer of which is an eligible portfolio company;
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securities received in exchange for or distributed with respect to securities described in the bullet above or pursuant to the exercise of options, warrants or rights relating to such securities; and
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cash, cash items, government securities or high quality debt securities (within the meaning of the Investment Company Act), maturing in one year or less from the time of investment.
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An eligible portfolio company is generally a domestic company that is not an investment company (other than a small business investment company wholly owned by a
BDC) and that:
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does not have a class of securities with respect to which a broker may extend margin credit at the time the acquisition is made;
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is controlled by the BDC and has an affiliate of the BDC on its board of directors;
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does not have any class of securities listed on a national securities exchange;
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is a public company that lists its securities on a national securities exchange with a market capitalization of less than $250.0 million; or
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meets such other criteria as may be established by the SEC.
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Control, as defined by the Investment Company Act, is
presumed to exist where a BDC beneficially owns more than 25% of the outstanding voting securities of the portfolio company.
In addition, a BDC must have been
organized and have its principal place of business in the United States and must be operated for the purpose of making investments in eligible portfolio companies, or in other securities that are consistent with its purpose as a BDC.
To include certain securities described above as qualifying assets for the purpose of the 70% test, a BDC must offer to the issuer of those securities managerial
assistance such as providing guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company. We offer to provide managerial assistance to our portfolio companies.
Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash equivalents, U.S. government
securities or high-quality debt securities maturing in one year or less from the time of investment, which are referred to, collectively, as temporary investments, so that 70% of our assets, as applicable, are qualifying assets. We will invest in
U.S. Treasury bills or in repurchase agreements that are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor of a specified security and the
simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion
of our assets that may be invested in such repurchase agreements. However, if more than 25% of our gross assets constitute repurchase agreements from a single counterparty, we would not meet the diversification tests in order to qualify as a RIC for
federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit.
We are permitted,
under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock, if our asset coverage, as defined in the Investment Company Act, is at least equal to 150% immediately after each such issuance.
In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of our common stock unless we meet the applicable asset coverage ratios at the time of the
distribution or repurchase. We may also borrow amounts up to 5% of the value of our gross assets for temporary purposes without regard to asset coverage.
We and
GECM have each adopted a code of ethics pursuant to Rule
17j-1
under the Investment Company Act and Rule
204A-1
under the Advisers Act, respectively, that establishes
procedures for personal investments and restricts certain transactions by our or GECMs personnel, respectively. Our and GECMs codes of ethics generally do not permit investments by our or GECMs employees, as applicable, in
securities that may be purchased or held by us or GECM, as applicable. You may read and copy these codes of ethics at the SECs Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room
by calling the SEC at (202)
551-8090.
In addition, each code of ethics is available on the EDGAR Database on the SECs Internet site at http://www.sec.gov. You may also obtain copies of the codes of
ethics, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing the SECs Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.
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Proxy Voting Policies and Procedures
We have delegated our proxy voting responsibility to GECM. The Proxy Voting Policies and Procedures of GECM are set forth below. The guidelines are reviewed
periodically by GECM and our
non-interested
directors, and, accordingly, are subject to change. For purposes of these Proxy Voting Policies and Procedures described below, we, our and
us refers to GECM.
Introduction
As an
investment adviser registered under the Advisers Act, GECM has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, GECM recognizes that it must vote client securities in a timely manner free of conflicts of
interest and in the best interests of its clients.
These policies and procedures for voting proxies for GECMs investment advisory clients are intended to
comply with Section 206 of, and Rule
206(4)-6
under, the Advisers Act.
Proxy Policies
GECM votes proxies relating to our portfolio securities in what it perceives to be the best interest of its clients. GECM reviews on a
case-by-case
basis each proposal submitted to a shareholder vote to determine its impact on the portfolio securities held by its clients. Although GECM generally votes
against proposals that may have a negative impact on its clients portfolio securities, GECM may vote for such a proposal if there exists compelling long-term reasons to do so.
GECM proxy voting decisions are made by the senior officers who are responsible for monitoring each of its clients investments. To ensure that our vote is not
the product of a conflict of interest, GECM requires that: (i) anyone involved in the decision-making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with
any interested party regarding a proxy vote; and (ii) employees involved in the decision-making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from
interested parties.
Proxy Voting Records
You may obtain
information about how GECM voted proxies by making a written request for proxy voting information to: Chief Compliance Officer, Great Elm Capital Corp., 800 South Street, Suite 230, Waltham, MA 02453.
Material Federal Income Tax Matters
We elected to be taxed as a RIC
beginning with our tax year that began on October 1, 2016 and ended on December 31, 2016, and we intend to continue to qualify to be taxed as a RIC under the Code. To continue to qualify as a RIC, we must, among other things,
(a) derive in each taxable year at least 90 percent of our gross income from dividends, interest (including
tax-exempt
interest), payments with respect to certain securities, loans, gains from the
sale or other disposition of stock, securities or foreign currencies, other income (including but not limited to gain from options, futures and forward contracts) derived with respect to our business of investing in stock, securities or currencies,
or net income derived from an interest in a qualified publicly traded partnership (a QPTP); and (b) diversify our holdings so that, at the end of each quarter of each taxable year (i) at least 50 percent of the
market value of our total assets is represented by cash and cash items, U.S. Government securities, the securities of other RICs and other securities, with other securities limited, in respect of any one issuer, to an amount not greater than five
percent of the value of our total assets and not more than 10 percent of the outstanding voting securities of such issuer (subject to the exception described below), and (ii) not more than 25 percent of the market value of our total
assets is invested in the securities (other than U.S. Government securities and the securities of other RICs) (A) of any issuer, (B) of any two or more issuers that we control and that are determined to be engaged in the same business or
similar or related trades or businesses, or (C) of one or more QPTPs. We may generate certain income that might not qualify as good income for purposes of the 90% annual gross income requirement described above. We will monitor our transactions
to endeavor to prevent our disqualification as a RIC.
If we fail to satisfy the 90% annual gross income requirement or the asset diversification requirements
discussed above in any taxable year, we may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements.
Additionally, relief is provided for certain de minimis failures of the asset diversification requirements where we correct the failure within a specified period. If the applicable relief provisions are not available or cannot be met, all of our
income would be subject to corporate-level U.S. federal income tax as described below. We cannot provide assurance that we would qualify for any such relief should we fail the 90% annual gross income requirement or the asset diversification
requirements discussed above.
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As a RIC, in any taxable year with respect to which we timely distribute at least 90% of the sum of:
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our investment company taxable income (which includes, among other items, dividends, interest and the excess of any net short-term capital gain over net long-term capital loss and other taxable income (other than any
net capital gain), reduced by deductible expenses) determined without regard to the deduction for dividends and distributions paid; and
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net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions) (the Annual Distribution Requirement).
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We (but not our stockholders) generally will not be subject to U.S. federal income tax on investment company taxable income and net capital gain (generally, net
long-term capital gain in excess of short-term capital loss) that we distribute to our stockholders. We intend to distribute annually all or substantially all of such income on a timely basis.
To the extent that we retain our net capital gain for investment or any investment company taxable income, we will be subject to U.S. federal income tax at the
regular corporate income tax rates. We may choose to retain our net capital gains for investment or any investment company taxable income, and pay the associated federal corporate income tax, including the federal excise tax described below.
Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible four percent U.S. federal excise
tax payable by us. To avoid this tax, we must distribute (or be deemed to have distributed) during each calendar year an amount equal to the sum of:
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at least 98% of our ordinary income (not taking into account any capital gains or losses) for the calendar year;
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at least 98.2% of the amount by which our capital gains exceed our capital losses (adjusted for certain ordinary losses) for a
one-year
period generally ending on October 31
of the calendar year (unless an election is made by us to use our taxable year); and
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certain undistributed amounts from previous years on which we paid no U.S. federal income tax.
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While we generally
intend to distribute any income and capital gains in the manner necessary to minimize imposition of the four percent federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the
imposition of the tax. For example, we may be required to recognize OID interest for U.S. federal income tax purposes, which may involve the recognition of distributable income without a corresponding receipt of cash (phantom income).
Our Board may determine that it is in our stockholders best interest for us to pay tax on such phantom income rather that borrow or liquidate portfolio positions to fund a cash distribution to stockholders of such amounts to avoid imposition
of the excise tax. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.
If, in any
particular taxable year, we do not satisfy the Annual Distribution Requirement or were to fail to qualify as a RIC (for example, because we fail the 90% annual gross income requirement described above), and relief is not available as discussed
above, all of our taxable income (including our net capital gains) will be subject to tax at regular corporate rates without any deduction for distributions to stockholders, and distributions generally will be taxable to the stockholders as ordinary
dividends to the extent of our current and accumulated earnings and profits.
We may decide to be taxed as a regular corporation even if we would otherwise
qualify as a RIC if we determine that treatment as a corporation for a particular year would be in our best interests.
If we realize a net capital loss, the
excess of our net short-term capital loss over our net long-term capital gain is treated as a short-term capital loss arising on the first day of our next taxable year and the excess of our net long-term capital loss over our net short-term capital
gain is treated as a long-term capital loss arising on the first day of our next taxable year. If future capital gain is offset by carried forward capital losses, such future capital gain is not subject to fund-level U.S. federal income tax,
regardless of whether they are distributed to stockholders. Accordingly, we do not expect to distribute any such offsetting capital gain. A RIC cannot carry back or carry forward any net operating losses.
Our Investments
Certain of our investment practices are subject
to special and complex U.S. federal income tax provisions that may, among other things:
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disallow, suspend or otherwise limit the allowance of certain losses or deductions, including the dividends received deduction;
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convert lower taxed long-term capital gain and qualified dividend income into higher taxed short-term capital gain or ordinary income;
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convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited);
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cause us to recognize income or gain without a corresponding receipt of cash;
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adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur;
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adversely alter the characterization of certain complex financial transactions; and
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produce income that will not qualify as good income for purposes of the 90% annual gross income requirement described above.
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We will monitor our transactions and may make certain tax elections and may be required to borrow money or dispose of securities (even if it is not advantageous to
dispose of such securities) to mitigate the effect of these rules and prevent disqualification of us as a RIC.
Investments we make in securities issued at a
discount or providing for deferred interest or PIK interest are subject to special tax rules that will affect the amount, timing and character of distributions to stockholders. For example, with respect to securities issued at a discount, we will
generally be required to accrue daily as income a portion of the discount and to distribute such income on a timely basis each year to maintain our qualification as a RIC and to avoid U.S. federal income and excise taxes. Since in certain
circumstances we may recognize income before or without receiving cash representing such income, we may have difficulty making distributions in the amounts necessary to satisfy the requirements for maintaining RIC status and for avoiding U.S.
federal income and excise taxes. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution
requirements. If we are not able to obtain cash from other sources, we may fail to qualify as a RIC and thereby be subject to corporate-level U.S. federal income tax.
Furthermore, a portfolio company in which we invest may face financial difficulty that requires us to work out, modify or otherwise restructure our investment in the
portfolio company. Any such restructuring may result in unusable capital losses and future
non-cash
income. Any such restructuring may also result in our recognition of a substantial amount of
non-qualifying
income for purposes of the 90% gross income requirement or our receiving assets that would not count toward the asset diversification requirements.
Gain or loss recognized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain
or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant.
If we invest in foreign securities, we
may be subject to withholding and other foreign taxes with respect to those securities. Stockholders will generally not be entitled to claim a U.S. foreign tax credit or deduction with respect to foreign taxes paid by us.
If we acquire shares in a passive foreign investment company (a PFIC), we may be subject to U.S. federal income tax on a portion of any
excess distribution or gain from the disposition of such shares even if such income is distributed as a taxable dividend by us to our stockholders. Additional charges in the nature of interest may be imposed on us in respect of deferred
taxes arising from such distributions or gains. If we invest in a PFIC and elect to treat the PFIC as a qualified electing fund under the Code (a QEF), in lieu of the foregoing requirements, we will be required to include in
income each year a portion of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed to us. Alternatively, we can elect to
mark-to-market
at the end of each taxable year our shares in a PFIC; in this case, we will recognize as ordinary income any increase in the value of such shares, and as
ordinary loss any decrease in such value to the extent it does not exceed prior increases included in income. Our ability to make either election will depend on factors beyond our control. Under either election, we may be required to recognize in a
year income in excess of our distributions from PFICs and our proceeds from dispositions of PFIC stock during that year, and such income will nevertheless be subject to the Annual Distribution Requirement and will be taken into account for purposes
of the 4% excise tax.
If we hold 10% or more of the shares in or the value of a foreign corporation that is treated as a controlled foreign corporation
(CFC), we may be required to include in our gross income our pro rata share of such CFCs subpart F income and global intangible
low-taxed
income whether or not the
corporation makes an actual distribution during such year. In general, a foreign corporation will be classified as a CFC if more than 50% of the shares of the corporation, measured by reference to combined voting power or value, is owned (directly,
indirectly or by attribution) by U.S.
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Stockholders. A U.S. Stockholder, for this purpose, is any U.S. person that possesses (actually or constructively) 10% or more of the combined voting power of all classes of shares of or 10% or
more of the value of a corporation. If we are treated as receiving a deemed distribution from a CFC, we will be required to include such distribution in our investment company taxable income regardless of whether we receive any actual distributions
from such CFC, and we must distribute such income to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement.
Although the Code
generally provides that income inclusions from QEFs and deemed distributions of subpart F income and global intangible
low-taxed
income from CFCs will be good income for purposes of the 90% gross
income requirement to the extent such income is distributed to a RIC in the year it is included in the RICs income, the Code does not specifically provide whether income inclusions from a QEF or deemed distributions from a CFC during the
RICs taxable year with respect to which no distribution is received would be good income for the 90% gross income requirement. The IRS has issued a series of private rulings in which it has concluded that all income inclusions from
a QEF and deemed distributions from a CFC included in a RICs income would constitute good income for purposes of the 90% gross income requirement. The Department of the Treasury, however, has proposed regulations that would treat
such income as not being good income for purposes of the 90% gross income requirement. In its explanation accompanying the proposed regulations, the Department of the Treasury takes the position that, notwithstanding prior private letter
rulings to the contrary, the current language of the Code would treat such income as not being good income for purposes of the 90% gross income requirement even in the absence of the proposed regulations. Accordingly, such income may not
be treated as good income if the proposed regulations are finalized or if the Department of the Treasurys interpretation of current law applies. In such a case, we may fail to qualify as a RIC if we realize a material amount of
such income.
Our functional currency is the U.S. dollar for U.S. federal income tax purposes. Under Section 988 of the Code, gains or losses attributable
to fluctuations in exchange rates between the time we accrue income, expenses or other liabilities denominated in a foreign currency and the time we actually collect such income or pay such expenses or liabilities are generally treated as ordinary
income or loss. Similarly, gains or losses on foreign currency forward contracts and the disposition of debt denominated in a foreign currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition
dates, are also treated as ordinary income or loss.
If we borrow money, we may be prevented by loan covenants from declaring and paying dividends in certain
circumstances. Limits on our payment of dividends may prevent us from meeting the Annual Distribution Requirement, and may, therefore, jeopardize our qualification for taxation as a RIC, or subject us to the 4% excise tax.
Even if we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements, under the Investment Company Act, we are not permitted to
make distributions to our stockholders while our debt obligations and senior securities are outstanding unless certain asset coverage tests are met. This may also jeopardize our qualification for taxation as a RIC or subject us to the 4%
excise tax.
Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and
(2) other requirements relating to our status as a RIC, including the asset diversification requirements. If we dispose of assets to meet the Annual Distribution Requirement, the asset diversification requirements, or the 4% excise tax, we may
make such dispositions at times that, from an investment standpoint, are not advantageous.
Some of the income that we might otherwise earn, such as lease
income, management fees, or income recognized in a
work-out
or restructuring of a portfolio investment, may not satisfy the 90% gross income requirement. To manage the risk that such income might disqualify us
as a RIC for a failure to satisfy the 90% gross income requirement, one or more of our subsidiaries treated as U.S. corporations for U.S. federal income tax purposes may be employed to earn such income. Such corporations will be required to pay U.S.
corporate income tax on their earnings, which ultimately will reduce the yield to our stockholders on such income and fees.
Failure to Qualify as a RIC
If we were unable to qualify for treatment as a RIC, and relief is not available as discussed above, we would be subject to tax on all of our taxable
income at regular corporate rates. We would not be able to deduct distributions to stockholders nor would we be required to make distributions for tax purposes. Distributions would generally be taxable to our stockholders as ordinary dividend income
eligible for reduced maximum rates for
non-corporate
stockholders to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate U.S. stockholders
would be eligible for the dividends received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholders tax basis, and any remaining
distributions would be treated as a capital gain. If we were to fail to meet the RIC requirements for
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more than two consecutive years and then to seek to requalify as a RIC, we would be required to recognize gain to the extent of any unrealized appreciation in our assets unless we made a special
election to pay corporate level tax on any such unrealized appreciation recognized during the succeeding five-year period.
Administration Agreement
Our Board approved the Administration Agreement on August 8, 2016. Pursuant to the Administration Agreement, GECM furnishes us with, or otherwise arranges for
the provision of, office facilities, equipment, clerical, bookkeeping, finance, accounting, compliance and record-keeping services at such office facilities and other such services as the Administrator. Under the Administration Agreement, GECM will,
from time to time, provide, or otherwise arrange for the provision of, other services GECM determines to be necessary or useful to perform its obligations under the Administration Agreement, including retaining the services of financial, compliance,
accounting and administrative personnel that perform services on our behalf, including personnel to serve as our Chief Financial Officer and Chief Compliance Officer. Under the Administration Agreement, GECM also performs, or oversees the
performance of, our required administrative services, which include, among other things, being responsible for the financial records that we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In
addition, GECM assists us in determining and publishing our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses
and the performance of administrative and professional services rendered to us by others. Payments made by us to GECM under the Administration Agreement are equal to an amount based upon our allocable portion of GECMs overhead in performing
its obligations under the Administration Agreement, including our allocable portion of the cost of our officers (including our Chief Compliance Officer, Chief Financial Officer, Secretary and Treasurer) and their respective staffs. Our Board reviews
the methodology employed in determining how the expenses are allocated to us. Our Board assesses the reasonableness of such reimbursements for expenses allocated to us based on the breadth, depth and quality of such services as compared to the
estimated cost to us of obtaining similar services from third-party service providers known to be available. In addition, our Board considers whether any third-party service provider would be capable of providing all such services at comparable cost
and quality. Finally, our Board compares the total amount paid to GECM for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs. The Administration Agreement may be terminated by either party without
penalty upon 60 days written notice to the other party.
We bear all costs and expenses that are incurred in our operation and transactions and not
specifically assumed by GECM pursuant to the Investment Management Agreement. To the extent that GECM outsources any of its functions, we will reimburse GECM for the fees associated with such functions without profit or benefit to GECM. GECM agreed
that the aggregate amount of expenses accrued for reimbursement that pertain to direct compensation costs of financial, compliance and accounting personnel that perform services for us, including the fees charged by any
sub-administrator
to provide such personnel to us for the twelve months ending November 4, 2017, when taken together with such expenses reimbursed or accrued for reimbursement by us pursuant to the
Administration Agreement during such period, shall not exceed 0.50% of our average net asset value during such period.
The Administration Agreement provides
that, to the fullest extent permitted by law, 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, its members and their respective
officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable
attorneys fees and amounts reasonably paid in settlement) arising from or otherwise based upon the rendering of GECMs services under the Administration Agreement or otherwise as our administrator.
Great Elm License Agreement
We entered into a license agreement with
GEC pursuant to which GEC granted us a
non-exclusive,
royalty-free license to use the name Great Elm Capital Corp. Under the license agreement, we have a right to use the Great Elm Capital Corp.
name and the Great Elm Capital logo for so long as GECM, or an affiliate thereof, remains our investment adviser. Other than with respect to this limited license, we have no legal right to the Great Elm Capital Corp. name. The license
agreement may also be terminated by either party without penalty upon 60 days written notice to the other.
Brokerage Allocation and Other Practices
GECM does not expect to execute our transactions through any particular broker or dealer, but it plans to seek to obtain the best net results for us taking
into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm and the firms risk and skill in positioning blocks of
securities. While GECM will generally seek reasonably competitive trade execution costs, we will
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not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, GECM may select a broker based partly upon brokerage or research services provided to
GECM, us or GECMs other clients. In return for such services, we may pay a higher commission than other brokers would charge if we or GECM determines in good faith that such commission is reasonable in relation to the services provided.
Properties
Our executive offices are located at 800 South Street,
Suite 230, Waltham, MA 02453, and are provided by GECM in accordance with the terms of the Administration Agreement.
Legal Proceedings
From time to time, we, our investment adviser or administrator may be a party to certain legal proceedings in the ordinary course of business, including proceedings
relating to the enforcement of our rights under contracts with our portfolio companies.
We are named as a defendant in a lawsuit captioned Intrepid Investments,
LLC v. London Bay Capital, which is pending in the Delaware Court of Chancery. This lawsuit was brought by a member of Selling Source, LLC, one of our portfolio investments, against various members of and lenders to Selling Source. The plaintiff
asserts claims of aiding and abetting, breaches of fiduciary duty, and tortious interference against us. As of March 31, 2018, we held $5.69 million in principal amount, or approximately 6%, of Selling Sources outstanding senior bank
debt. The lawsuit was filed on March 5, 2016 and the plaintiff immediately agreed to stay the action in light of an ongoing mediation among parties other than us. The plaintiff recently informed the court that it is optimistic that the
mediation efforts may make further litigation in this matter unnecessary and has requested that Delaware Court of Chancery allow the stay by agreement to remain in place. We intend to continue to monitor the matter and will assess the need to
defend the matter as that need should arise.
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, we, Full Circle, GEC, MAST Capital, certain directors of Full Circle and the 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 Circles stockholders. There can be no assurance that the settlement will be finalized or that the Circuit Court will approve the settlement.
In July 2016, Full Circle filed suit in the District Court of Caldwell County, Texas against, among others, Willis Pumphrey for breach of a guaranty agreement
arising from a loan transaction with Full Circle. Dr. Pumphrey, a personal guarantor of the loan made by Full Circle, our predecessor in interest, brought counterclaims in (i) the District Court of Caldwell County, Texas and (ii) the
District Court of Harris County, Texas against, among others, Justin Bonner, an employee of GECM, in each case, alleging breach of a confidentiality agreement and tortious interference with Dr. Pumphreys attempted sale of a business in
which he owned an interest. In August 2017, Dr. Pumphrey voluntarily withdrew his complaint against Mr. Bonner in the District Court of Harris County, Texas. In November 2016, Dr. Pumphrey voluntarily withdrew his complaint without
prejudice against Full Circle in the District Court of Caldwell County, Texas. On November 29, 2017, Mr. Pumphrey refiled his claims in the District Court of Harris County, Texas naming Full Circle, MAST Capital, GECC and GECM as
defendants. Dr. Pumphrey is seeking between $2 million and $6 million in damages. GECC believes Dr. Pumphreys claims to be frivolous and intends to vigorously defend them. Furthermore, we continue to pursue our initial
claims against Dr. Pumphrey in the District Court of Caldwell County, Texas, and the Caldwell County judge recently ruled in our favor in an amount of $4.1 million.
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Custodian and Transfer Agent
Our securities and a portion of our cash is held in safekeeping by State Street Bank and Trust Company located at 100 Huntington Avenue, Boston, MA 02116. American
Stock Transfer & Trust Company, LLC acts as our transfer agent, distribution paying agent and registrar. The principal business address of our transfer agent is 6201 15th Avenue, Brooklyn, NY 11219.
Our Common Stock
Our common stock is traded on Nasdaq under the symbol
GECC. The following table sets forth the range of high and low sales prices of our common stock as reported on Nasdaq, our net asset value per share for each fiscal quarter since our shares began trading in the public markets on
November 7, 2016 and the sales price as a premium (discount) to our net asset value per share as reported on Nasdaq. The last reported sales price of our common stock on May 17, 2018 was $9.25 per share. As of May 8, 2018, we had 12
stockholders of record.
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Price Range
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High Sales Price
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Low Sales Price
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NAV
(1)
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High
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Low
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Premium
(Discount) to
NAV
(2)
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Premium
(Discount) to
NAV
(2)
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Fiscal 2018
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Second quarter (through May 17, 2018)
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*
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$
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9.58
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$
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9.11
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*
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*
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First quarter
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$
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11.79
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$
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10.45
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$
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8.90
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(11
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)%
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(25
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)%
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Fiscal 2017
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Fourth quarter
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$
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12.42
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$
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10.48
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$
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8.76
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(15
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)%
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(29
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)%
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Third quarter
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$
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12.38
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$
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11.30
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$
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10.46
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(9
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)%
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(16
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)%
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Second quarter
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$
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13.29
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|
$
|
11.55
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$
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10.25
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7
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%
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(5
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)%
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First quarter
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$
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13.59
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$
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11.82
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$
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10.74
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(13
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)%
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(21
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)%
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Fiscal 2016
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Fourth quarter (beginning November 7, 2016)
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$
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13.52
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$
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11.90
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$
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10.35
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(12
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)%
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(23
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)%
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(1)
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Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices. The net asset values shown are
based on outstanding shares at the end of the relevant quarter.
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(2)
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Calculated by taking the respective high or low sales price, dividing it by net asset value (in each case, as of the end of the applicable quarter), and subtracting 1 from the result.
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*
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Net asset value has not been calculated for this period.
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Distributions
We offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we have any senior securities outstanding, we will
be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the Investment Company Act or if distributions are limited by the terms of any of our borrowings.
The following table lists the cash distributions, including dividends and returns of capital, if any, per share that we have declared since our formation on
April 22, 2016.
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Date Declared
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Record Date
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Payment Date
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Per Share Amount
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Fiscal 2018:
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November 2, 2017
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January 31, 2018
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February 15, 2018
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$
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0.083
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November 2, 2017
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February 28, 2018
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March 15, 2018
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0.083
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November 2, 2017
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March 30, 2018
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April 16, 2018
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0.083
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March 9, 2018
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April 30, 2018
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May 15, 2018
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0.083
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March 9, 2018
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May 31, 2018
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June 15, 2018
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0.083
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March 9, 2018
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June 29, 2018
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July 16, 2018
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0.083
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May 3, 2018
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July 31, 2018
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August 15, 2018
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0.083
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May 3, 2018
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August 31, 2018
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September 14, 2018
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0.083
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May 3, 2018
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September 28, 2018
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October 15, 2018
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0.083
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Total 2018
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$
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0.747
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74
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Fiscal 2017:
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December 22, 2016
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January 31, 2017
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February 16, 2017
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$
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0.083
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December 22, 2016
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February 28, 2017
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March 15, 2017
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0.083
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December 22, 2016
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March 31, 2017
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April 17, 2017
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0.083
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March 22, 2017
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April 28, 2017
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May 15, 2017
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0.083
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March 22, 2017
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May 31, 2017
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June 15, 2017
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0.083
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March 22, 2017
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June 30, 2017
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July 14, 2017
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0.083
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May 11, 2017
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July 31, 2017
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August 15, 2017
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0.083
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May 11, 2017
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August 31, 2017
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September 15, 2017
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0.083
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May 11, 2017
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September 29, 2017
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October 13, 2017
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0.083
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August 8, 2017
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October 31, 2017
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November 15, 2017
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0.083
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August 8, 2017
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November 30, 2017
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December 15, 2017
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0.083
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August 8, 2017
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December 29, 2017
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January 16, 2018
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0.083
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December 26, 2017
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December 29, 2017
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January 30, 2018
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0.200
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Total 2017
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$
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1.196
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Fiscal 2016:
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December 22, 2016
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December 30, 2016
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January 16, 2017
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$
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0.166
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Total 2016
|
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$
|
0.166
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To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those
distributions may be deemed a taxable return of capital to our stockholders. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our taxable ordinary income or capital gains.
Stockholders should read any written disclosure accompanying a dividend payment carefully and should not assume that the source of any distribution is our taxable ordinary income or capital gains.
During the year ended December 31, 2017, our distributions were made primarily from undistributed net investment income. We may not be able to achieve operating
results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements
applicable to us as a BDC under the Investment Company Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable RIC tax treatment.
Issuer Purchases of Shares
In the prospectus for the Merger, we
announced that we would initiate a stock buyback program in an aggregate amount of $15.0 million. Our Board has increased the overall size of the stock buyback program by a further $35.0 million. During the year ended December 31,
2017 we purchased 2,138,479 shares under our tender offer and our stock buyback program at a weighted average price of $11.20 per share. As of December 31, 2017, we had cumulatively purchased 2,236,651 shares under the tender offer and stock
buyback program at a weighted average price of $11.18 per share, resulting in $15.0 million of cumulative cash paid, under the program since November 4, 2016. Including the tender offer, we utilized $25.0 million under our stock
buyback and tender program for repurchasing shares.
75
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Month
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Total Number of
Shares Purchased
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Average Price Per
Share
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Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or
Program
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Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet
Be Purchased
Under the Plans or
Programs
(Amounts in dollars)
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January 2017
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132,434
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$
|
11.48
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132,434
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$
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12,425,611
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February 2017
|
|
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72,678
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$
|
11.26
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72,678
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|
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$
|
11,607,509
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March 2017
|
|
|
40,617
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$
|
11.09
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40,617
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$
|
11,157,069
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April 2017
|
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|
16,846
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$
|
11.38
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16,846
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$
|
10,965,351
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May 2017
(1)
|
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944,535
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$
|
11.44
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944,535
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$
|
10,158,772
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June 2017
|
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|
15,215
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$
|
10.42
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15,215
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|
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$
|
10,000,182
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July 2017
|
|
|
47,961
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|
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$
|
10.73
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|
47,961
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$
|
9,485,725
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August 2017
|
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|
37,666
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|
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$
|
10.78
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|
37,666
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|
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$
|
9,079,585
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September 2017
|
|
|
753,097
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|
$
|
11.00
|
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|
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753,097
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|
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$
|
792,735
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October 2017
|
|
|
65,945
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|
|
$
|
10.27
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|
|
65,945
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|
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$
|
115,277
|
|
November 2017
|
|
|
11,485
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|
|
$
|
10.04
|
|
|
|
11,485
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|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2017
|
|
|
2,138,479
|
|
|
$
|
11.20
|
|
|
|
2,138,479
|
|
|
|
|
|
|
|
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|
|
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
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,236,651
|
|
|
$
|
11.18
|
|
|
|
2,236,651
|
|
|
$
|
|
|
|
|
|
|
|
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|
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(1)
|
Share amounts in this line include the repurchase of 869,565 shares on May 12, 2017 in the $10.0 million tender offer we announced on March 30, 2017 that expired on May 5, 2017.
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76
MANAGEMENT
Board of Directors
Our Board is divided into three classes. Directors
are elected for staggered terms, with the term of office of only one of these three classes of directors expiring at each annual meeting of stockholders. Each director will hold office for the term to which he or she is elected and until his or her
successor is duly elected and qualifies. Our directors have been divided into two groups interested directors and independent directors. An interested director is an interested person as defined in Section 2(a)(19) of the
Investment Company Act.
The address for each of our directors is c/o Great Elm Capital Corp., 800 South Street, Suite 230, Waltham, MA 02453.
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Name, Address and
Age
|
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Position(s) Held
with GECC
|
|
Term of Office
(Length of Time
Served)
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Principal
Occupation(s)
During Past 5
Years
|
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Number of
Portfolios in Fund
Complex Overseen by
Director
(2)
|
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Other Directorships
Held by Director
During Past 5 Years
|
Peter A. Reed (38)
(1)
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Chairman of the Board of Directors, President and Chief Executive Officer
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Until 2019 (since inception)
|
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President and Chief Executive Officer GECC
Chief Investment Officer Great Elm Capital Management, Inc.
Chief Executive Officer Great Elm Capital Group, Inc. (GEC)
Partner and Portfolio Manager MAST Capital
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3
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|
GEC
GECM
GECC GP Corp.
Great Elm FM Acquisition, Inc.
Great Elm FM Holdings, Inc.
Avanti Communications Group PLC
International Wire Group Holdings Inc.
Nebraska Book Holdings, Inc
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Randall Revell Horsey (55)
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Director
|
|
Until 2021 (since 2017)
|
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Senior Vice President and Managing Director of North America MEGA International
Co-founder
and President HelloWallet
|
|
N/A
|
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Acquicore, Inc.
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John E. Stuart (52)
(3)
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Director
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|
Until 2021 (since 2016)
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Managing Director A.L. Stuart Financial Services LLC
Managing Member Full Circle Private Investments, LLC
Co-Chief
Executive Officer Full Circle Capital Corporation (Full Circle)
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N/A
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Full Circle
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Mark Kuperschmid (55)
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Director
|
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Until 2020 (since inception)
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Co-Head
of Technology Investment Banking- Bank of America Securities
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|
N/A
|
|
None.
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|
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Michael C. Speller (49)
|
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Director
|
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Until 2020 (since 2017)
|
|
Managing Director and Head of Debt Advisory, North America Rothschild & Co.
Managing Director in the Leveraged Finance Origination and Restructuring Group Credit
Suisse
|
|
N/A
|
|
None.
|
(1)
|
Peter A. Reed is an interested person as defined under 2(a)(19) of the Investment Company Act due to his position as Chief Investment Officer of GECM.
|
77
(2)
|
Mr. Reed is also a director of GECM. GECM is responsible for the
day-to-day
management of three separately managed amounts for an
institutional investor.
|
(3)
|
John E. Stuart is an interested person as defined under 2(a)(19) of the Investment Company Act due to his prior position as chief executive officer and directorship with Full Circle.
|
Peter A. Reed
has been our President and Chief Executive Officer since inception and is the current Chairman of our Board. Mr. Reed is Chief
Investment Officer of GECM, Chief Executive Officer of GEC and has served as one of GECs directors since May 2015. Mr. Reed is also currently a member of the board of directors of GECM, GECC GP Corp., Great Elm FM Acquisition, Inc., Great
Elm FM Holdings, Inc. and Avanti, a
UK-based
satellite services provider. Previously, Mr. Reed served as a director of International Wire Group Holdings Inc., a wire products manufacturing company, and
chairman of the board of Nebraska Book Holdings, Inc, a retailer in the college bookstore industry. Mr. Reed was also a Partner and Portfolio Manager of MAST Capital from 2004 to September 2017. Prior to joining MAST Capital in 2004,
Mr. Reed was an investment banking analyst at Brown, Gibbons, Lang & Company where he worked on mergers and acquisitions,
in-court
and
out-of-court
financial restructurings, and debt and equity private placements for middle-market companies. Mr. Reed is an interested person of GECC as defined in the Investment Company Act
due to his position as Chief Investment Officer of GECM, our investment adviser.
John E. Stuart
was Full Circles chairman through November
2016. Mr. Stuart served as Full Circles chief executive officer from Full Circles formation until November 2013, and Full Circles
co-chief
executive officer from November 2013 through
February 8, 2015. Since February 2017, Mr. Stuart has been a Managing Director of A.L. Stuart Financial Services LLC, the parent company of A.L. Stuart Investments, LLC, a registered investment advisor. In addition, Mr. Stuart is a
managing member of Full Circle Private Investments, LLC. Mr. Stuart
co-founded
Full Circle Funding, LP in 2005 and is a managing partner. Prior to founding Full Circle Funding, LP, from 2002 to 2004,
Mr. Stuart was managing member of Excess Capital LLC which provided financial advisory services and structured and funded equity and debt investments. Prior thereto he was
co-founder
and president of
Titan Outdoor Holdings, a New York-based outdoor advertising company, between 1999 and 2002, and was a director until its sale in 2005. Prior thereto, Mr. Stuart was a managing director in the Corporate Finance Department of Prudential
Securities Incorporated between 1996 and 1999. Mr. Stuart began his career at Oppenheimer & Co. Inc. where he was a member of the Mergers and Acquisitions Group and Corporate Finance Department from 1988 to 1996. Mr. Stuart is an
interested person of GECC as defined in the Investment Company Act due to his prior positions with Full Circle.
Michael C. Speller
is
a Managing Director and Head of Debt Advisory, North America for Rothschild & Co. Mr. Speller has over 20 years of investment banking and leveraged finance experience which has involved a wide range of debt capital markets products and
situations including leveraged loans, high yield bonds, acquisition finance commitments, exchange offers and restructuring. Before joining Rothschild in 2017, Mr. Speller was a Managing Director in the Leveraged Finance Origination and
Restructuring Group at Credit Suisse where, from 2008, he led the firms leveraged finance origination activities for the Global Industrials Group. From 2005 to 2008, Mr. Speller was involved in a broader range of industry leveraged
finance coverage, including the retail, real estate and media and telecom sectors. Prior to 2005, Mr. Speller was a member of the Media & Telecom investment banking groups at Credit Suisse First Boston and Donaldson, Lufkin &
Jenrette and previously held positions at the GulfStar Group and NationsBank Corp. Mr. Speller holds a Master of Business Administration degree from Columbia Business School and a Bachelor of Business Administration degree from the University
of Texas at Austin.
78
Randall Revell Horsey
has been Senior Vice President & Managing Director of North America for
MEGA International, a global software firm helping companies manage enterprise complexity by giving them an interactive view of their operations, since 2017. Mr. Horsey has been a member of the board of directors of Acquicore, Inc., a private
real-time energy and management software company since October 2014 and was its interim Chief Financial Officer until 2017. Previously, he was a
co-founder
and president of HelloWallet, a SaaS personal
financial management company that was subsequently acquired by Morningstar in 2014. Horsey was also an executive at Bank of America, where he ran the Technology Corporate and Investment banking practice and, prior to that, the Equity Capital Markets
group. He began his career with The First Boston Corporation and Alex, Brown & Sons.
Mark Kuperschmid
is our Lead Independent Director.
Mr. Kuperschmid has been a private investor/advisor during the past decade across a variety of industries, and has served in operating roles or provided strategic consulting services with respect to several investments. He previously served as
Co-Head
of Technology Investment Banking for Banc of America Securities and ran Trammell Crow Companys Northern California commercial real estate operation. He began his career as a financial analyst with
Morgan Stanley in New York.
Executive Officers
The address for
each executive officer is c/o Great Elm Capital Corp., 800 South Street, Suite 230, Waltham, MA 02453.
|
|
|
|
|
|
|
Name, Address and Age
|
|
Position(s) Held
with GECC
|
|
Term of Officer (Length of
Time
Served)
|
|
Principal Occupation(s)
During Past 5 Years
|
|
|
|
|
Peter A. Reed (38)
(1)
|
|
Chairman of the Board of Directors, President and Chief Executive Officer
|
|
Since inception
|
|
President and Chief Executive Officer GECC
Chief Investment Officer GECM
Chief Executive Officer GEC
Partner and Portfolio Manager MAST Capital
|
Michael J. Sell (40)
|
|
Chief Financial Officer and Treasurer
|
|
Since inception
|
|
Chief Financial Officer, Treasurer and Secretary Full Circle
|
Adam M. Kleinman (43)
|
|
Chief Compliance Officer and Secretary
|
|
Since
October 2017
|
|
Chief Operating Officer, Chief Compliance Officer and General Counsel GECM
President and Chief Operating Officer GEC
Partner, Chief Operating Officer and General Counsel MAST Capital
|
(1)
|
Peter A. Reed is an interested person as defined under 2(a)(19) of the Investment Company Act due to his position as Chief Investment Officer of GECM.
|
Peter A. Reed
See Board of Directors above.
Michael J. Sell
has been our Chief Financial Officer and Treasurer since inception. Prior to joining GECC, Mr. Sell was Full Circles Chief
Financial Officer, Treasurer and Secretary since September 2013. Mr. Sell initially joined Full Circle Funding, LP, an affiliate of Full Circle Advisors, as a vice president in June 2008. From August 2010 through September 2012, Mr. Sell
was employed by Full Circles
sub-administrator,
Conifer Financial Services, LLC, where he focused on BDC accounting and financial reporting. In September 2012, Mr. Sell rejoined Full Circle Service
Company and was appointed as Full Circles assistant secretary in December 2012. Prior to joining Full Circle Funding, LP, from January
79
2007 to May 2008, Mr. Sell was employed by Sky Bell Asset Management, LLC (Sky Bell) as its chief investment officer. From April 2006 through December 2006, Mr. Sell was an independent
consultant, providing services to Full Circle Funding, LP as well as to other clients, including Agile Group, LLC (Agile) and Sky Bell. From May 2004 through April 2006, Mr. Sell was employed by Agile in various roles, where he was actively
involved in operational and portfolio analysis for its hedge fund of funds. Mr. Sell began his career in September 2001 at PricewaterhouseCoopers, LLP as a senior assurance associate focused on the financial services industry, until departing
in April 2004.
Adam M. Kleinman
has been our Chief Compliance Officer since October 2017. Mr. Kleinman is GECs President and Chief
Operating Officer, and is GECMs Chief Operating Officer, Chief Compliance Officer and General Counsel. Mr. Kleinman was a Partner, Chief Operating Officer and General Counsel of MAST Capital from 2009 to September 2017. Prior to joining
MAST Capital, Mr. Kleinman was an associate in the Banking and Leverage Finance group at Bingham McCutchen LLP, where he represented financial institutions, hedge funds and corporate borrowers in a broad range of commercial finance
transactions.
Corporate Governance
Code of Ethics
We have adopted a code of ethics which applies to, among others, our senior officers, including our Chief Executive Officer and its Chief Financial
Officer. Our code of ethics can be accessed via our website at http://www.greatelmcc.com. We intend to disclose any amendments to or waivers of required provisions of the code by filing reports on Form
8-K.
Director Independence
In accordance with Nasdaqs
rules, our Board will annually determine each directors independence. We will not consider a director independent unless the Board has determined that he or she has no material relationship with us or GECM. We will monitor the relationships of
our directors and officers through a questionnaire each director will complete no less frequently than annually and update periodically as information provided in the most recent questionnaire changes.
In order to evaluate the materiality of any such relationship, the Board will use the definition in Nasdaqs Rule 5605(a)(2), which provides that a
director of a BDC shall be considered to be independent if he or she is not an interested person of the BDC, as defined in Section 2(a)(19) of the Investment Company Act.
Our Board determined that each of the directors is independent and has no relationship with us, except as a director and stockholder, with the exception of Messrs.
Reed and Stuart.
Additional Information About Our Board and Its Leadership Structure
Our Board monitors and performs an oversight role with respect to our business and affairs, including with respect to investment practices and performance, compliance
with regulatory requirements and the services, expenses and performance of service providers to us. Among other things, our Board considers the appointment of our investment manager, administrator and officers, and reviews and monitors the services
and activities performed by our investment manager, administrator and officers and approves the engagement, and reviews the performance of, our independent public accounting firm.
Our Board may designate a chairman to preside over the meetings of the Board and meetings of the stockholders and to perform such other duties as may be assigned to
her or him by the Board. We do not have a fixed policy as to whether the chairman of the Board should be an independent director. We maintain the flexibility to select the chairman and reorganize the leadership structure, from time to time, based on
the criteria that are in the best interests of GECC and our stockholders at such times.
The members of our Board believe that each directors experience,
qualifications, attributes or skills on an individual basis and in combination with those of the other directors lead to the conclusion that the directors possess the requisite experience, qualifications, attributes and skills to serve on the Board.
Our Board believes that Mr. Reeds history with MAST Capital, familiarity with our portfolio and GECMs investment platform, and extensive knowledge of the financial services industry and the investment valuation process in particular
qualify him to serve as the chairman of our Board.
Our Board does not have a formal diversity policy as it believes that a candidates overall experience
and professional background are the most important factors in determining whether such candidate has the right qualifications to serve on our Board. In considering each individual for election as director, our Board took into account a variety of
factors, including the candidates overall experience and professional background.
80
The Investment Company Act requires that at least a majority of the members of our Board be independent directors.
Currently, three of our five directors are independent directors. The Chairman of our Board is an interested person with respect to GECC. Mark Kuperschmid is currently serving as the Boards lead independent director. As Lead Independent
Director, Mr. Kuperschmid is responsible for coordinating the activities of the other independent directors and for such other duties as are assigned, from time to time, by our Board. Our Board has determined that its leadership structure, in
which over 80% of the directors are not affiliated with GECM, is appropriate in light of the services that GECM and its affiliates provide to us and the potential conflicts of interest that could arise from these relationships.
Our corporate governance policies include regular meetings of the independent directors in executive session without the presence of interested directors and
management, the establishment of audit, compensation, and nominating and corporate governance committees comprised solely of independent directors and the appointment of a Chief Compliance Officer, with whom the independent directors will meet
regularly without the presence of interested directors and other members of management, for administering our compliance policies and procedures
.
Our Boards Role In Risk Oversight
Our Board performs its
risk oversight function primarily through (1) its three standing committees, which report to the entire Board and are comprised solely of independent directors, (2) active monitoring of its Chief Compliance Officer and (3) our
compliance policies and procedures.
As described below in more detail under Committees of the Board of Directors, the audit committee, the
compensation committee and the nominating and corporate governance committee assist our Board in fulfilling its risk oversight responsibilities.
Our Board also
performs its risk oversight responsibilities with the assistance of the Chief Compliance Officer. Our Board will annually review a written report from our Chief Compliance Officer discussing the adequacy and effectiveness of our and our service
providers respective compliance policies and procedures. Our Chief Compliance Officers annual report will address, at a minimum:
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the operation of our and our service providers respective compliance policies and procedures since the last report;
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any material changes to such policies and procedures since the last report;
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any recommendations for material changes to such policies and procedures as a result of the Chief Compliance Officers annual review; and
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any compliance matter that has occurred since the date of the last report about which our Board would reasonably need to know to oversee our compliance activities and risks.
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In addition, our Chief Compliance Officer meets separately in executive session with the independent directors at least once each year.
Our Board believes its role in risk oversight is effective, and appropriate given the extensive regulation to which it is already subject as a BDC. As a BDC, we are
required to comply with regulatory requirements that control the levels of risk in our business and operations. For example, our ability to incur indebtedness is limited such that our asset coverage must equal at least 150% immediately after each
time we incur indebtedness, we generally have to invest at least 70% of our gross assets in qualifying assets and are not generally permitted to invest in any portfolio company in which one of our affiliates currently has an investment.
Committees of the Board of Directors
As of
December 31, 2017, GECC maintains an Audit Committee, a Nominating and Corporate Governance Committee and a Compensation Committee. All directors who were directors during the fiscal year ended December 31, 2017 attended 100% of the
aggregate number of meetings of our Board and of the respective committees on which they served. None of the members of the Board attended last years annual stockholders meeting.
We require each director to make a diligent effort to attend all Board and committee meetings, and encourage directors to attend the annual stockholders
meeting.
81
Audit Committee.
Our audit committee operates pursuant to a charter, available on our website, which sets forth
the responsibilities of the audit committee. Our audit committees responsibilities include establishing guidelines and making recommendations to our Board regarding the valuation of our loans and investments, selecting our independent
registered public accounting firm, reviewing with such independent registered public accounting firm the planning, scope and results of their audit of our financial statements,
pre-approving
the fees for
services performed, reviewing with the independent registered public accounting firm the adequacy of internal control systems, reviewing our annual financial statements and periodic filings and receiving our audit reports and financial statements.
Our audit committee is composed of Messrs. Horsey, Kuperschmid, and Speller; all of whom are considered independent under Nasdaqs rules and are not interested persons of GECC as that term is defined in Section 2(a)(19) of the
Investment Company Act. Mr. Horsey serves as chairman of our audit committee. Our Board has determined that Mr. Horsey is an audit committee financial expert as that term is defined under Item 407 of Regulation
S-K,
as promulgated under the Exchange Act. Each of Messrs. Horsey, Kuperschmid, and Speller meets the current independence and experience requirements of Rule
10A-3
under the
Exchange Act. For the fiscal year ended December 31, 2017, the Board held seven audit committee meetings.
Nominating and Corporate Governance
Committee.
Our nominating and corporate governance committee operates pursuant to a charter, available on our website. The members of our nominating and corporate governance committee are Messrs. Horsey, Kuperschmid, and Speller; all of whom are
considered independent under Nasdaqs rules and are not interested persons of GECC as that term is defined in Section 2(a)(19) of the Investment Company Act. The nominating and corporate governance committee is responsible for
selecting, researching and nominating directors for election by our stockholders, selecting nominees to fill vacancies on our Board or a committee thereof, developing and recommending to our Board a set of corporate governance principles and
overseeing the evaluation of our Board and management. Mr. Kuperschmid serves as chairman of the nominating and corporate governance committee. The nominating and corporate governance committee met three times during the fiscal year ended
December 31, 2017.
The nominating and corporate governance committee will consider stockholder recommendations for possible nominees for election as
directors when such recommendations are submitted in accordance with our bylaws, the nominating and corporate governance committee charter and any applicable law, rule or regulation regarding director nominations. Nominations should be sent to
Corporate Secretary, Great Elm Capital Corp., 800 South Street, Suite 230, Waltham, MA 02453. To have a candidate considered by our nominating and corporate governance committee, a stockholder must submit the recommendation in writing and must
include the following information:
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The name of the stockholder and evidence of the persons ownership of our stock, including the number of shares owned and the length of time of the ownership;
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The name of the candidate, the candidates resume or a listing of his or her qualifications to be a director and the persons consent to be named as a director if selected by the nominating and corporate
governance committee and nominated to our Board; and
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If requested by the nominating and corporate governance committee, a completed and signed directors and officers questionnaire in our customary form.
|
Criteria considered by the nominating and corporate governance committee in evaluating the qualifications of individuals for election as members of our Board
include, to the extent required, compliance with the independence and other applicable requirements of the federal securities laws, the listing standards of Nasdaq, and any other applicable laws, rules, or regulations; the ability to contribute to
the effective management of GECC, taking into account the ability to critically review, evaluate, question and discuss information provided to them, and to interact effectively with our management, service providers and counsel, in order to exercise
effective business judgment in the performance of their duties; educational background, business, professional training or practice (e.g., medicine, accounting or law), public service or academic positions, experience from service as a board member
(including our Board) or as an executive of investment funds, public companies or significant private or
not-for-profit
entities or other organizations, and/or other
life experiences; and personal and professional integrity, character, time availability in light of other commitments, dedication, conflicts of interest and such other relevant factors that the nominating and corporate governance committee considers
appropriate. Our Board also believes it is appropriate for members of our management to serve as a member of our Board. In addition, although our nominating and corporate governance committee not have a formal policy with regard to consideration of
diversity in identifying director candidates, our nominating and corporate governance committee may consider whether a potential candidates professional experience, education, skills and other individual qualities and attributes, including
gender, race or national origin, would provide beneficial diversity of skills, experience or perspective to our Boards membership and collective attributes. Such considerations will vary based on our Boards existing membership and other
factors, such as the strength of a potential nominees overall qualifications relative to diversity considerations.
82
Compensation Committee.
Our compensation committee operates pursuant to a charter, available on our website. The
charter sets forth the responsibilities of our compensation committee. Our compensation committee is responsible for annually reviewing and recommending for approval to our Board our Investment Management Agreement with our external manager. In
addition, although we do not directly compensate our executive officers currently, to the extent that we did so in the future, the compensation committee would also be responsible for reviewing and evaluating their compensation and making
recommendations to our Board regarding their compensation. Lastly, the compensation committee would produce a report on our executive compensation practices and policies for inclusion in our proxy statement if required by applicable proxy rules and
regulations and, if applicable, make recommendations to our Board on our executive compensation practices and policies. The compensation committee has the authority to engage compensation consultants and to delegate their duties and responsibilities
to a member or to a subcommittee of the compensation committee. Our compensation committee is comprised of Messrs. Horsey, Kuperschmid, and Speller; all of whom are considered independent under Nasdaqs rules and are not interested
persons of GECC as that term is defined in Section 2(a)(19) of the Investment Company Act. Mr. Speller serves as chairman of the compensation committee. The compensation committee met once during the fiscal year ended
December 31, 2017.
Compensation of Directors
The following
table sets forth compensation of our directors for the fiscal year ended December 31, 2017.
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Name
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Fees Earned or
Paid in Cash
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All Other
Compensation
(1)
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Total
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Interested Directors
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Peter A. Reed
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John E. Stuart
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Independent Directors
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Mark C. Biderman
(2)
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$
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29,007
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|
|
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$
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29,007
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Randall Revell Horsey
(3)
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$
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32,164
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|
|
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|
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$
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32,164
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Mark Kuperschmid
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$
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58,172
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$
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58,172
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Eugene I. Davis
(4)
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$
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7,863
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$
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7,863
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Michael C. Speller
(5)
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$
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10,329
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$
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10,329
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(1)
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In fiscal year 2017, we did not maintain a stock or option plan,
non-equity
incentive plan or pension plan for our directors.
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(2)
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Mr. Biderman retired from the Board on November 2, 2017.
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(3)
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Mr. Horsey became a director on May 30, 2017.
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(4)
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Mr. Davis resigned from the Board on March 24, 2017.
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(5)
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Mr. Speller became a director on November 2, 2017.
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No compensation is paid by us to directors who are
interested persons. Our independent directors each receive an annual fee of $45,000. They also receive reimbursement of reasonable
out-of-pocket
expenses
incurred in connection with attending each board meeting and each committee meeting. In addition, the chairman of each of our Boards standing committees receives an annual fee of $10,000 for his or her additional services in these capacities.
Each member of these committees receives a $5,000 annual fee for serving on these committees. In addition, we purchased directors and officers liability insurance on behalf of our directors and officers. Independent directors also have
the option to receive their directors fees paid in shares of our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment.
83
Compensation of Executive Officers
We do not provide direct compensation to our officers. Mr. Reed is indirectly entitled to a portion of any investment advisory fees paid by us to GECM under the
Investment Management Agreement through his financial interests in affiliates of GECM. Mr. Sell, who serves as our Chief Financial Officer and Treasurer, and Mr. Kleinman, our Chief Compliance Officer, are paid by GECM, subject to
reimbursement by us of our allocable portion of such compensation under the Administration Agreement.
Our Portfolio Managers
GECM manages our portfolio. We consider Mr. Reed, who serves as our Chief Executive Officer, John Ehlinger, a portfolio manager at GECM, and Adam Yates, a
portfolio manager at GECM, jointly to be our portfolio managers. Messrs. Reed, Ehlinger and Yates comprise a majority of GECMs investment committee. GECMs investment team does not receive any direct compensation from us in connection
with the management of our portfolio. Mr. Reed, along with members of GECMs investment team, through their financial interests in affiliates of GECM, are entitled to a portion of amounts received by GECM under the Investment Management
Agreement, less expenses incurred by GECM in performing its services under the Investment Management Agreement. GECMs investment personnel may be compensated through: (1) annual base salary; (2) cash bonuses; (3) equity in GEC
and (4) profit sharing by virtue of ownership of debt or equity securities of affiliates of GECM.
John S. Ehlinger, 49 years old, is a Portfolio Manager of
GECC and a Member of GECMs Investment Committee. Prior to joining GECM, Mr. Ehlinger was the Chief Operating Officer and Chief Financial Officer of a medical device
start-up
doing business as
Wellsense Technologies. Before joining Wellsense, Mr. Ehlinger was a Partner at MAST Capital from 2006 to 2011, focusing on distressed and special situations investments. Prior to joining MAST Capital, Mr. Ehlinger worked as a senior
analyst and assistant high yield portfolio manager at DDJ Capital Management, LLC, a distressed and high yield debt-focused hedge fund. Before DDJ, Mr. Ehlinger worked as a senior credit analyst for AIG Global Investment Corporation and as an
investment banker at Donaldson, Lufkin & Jenrette in Los Angeles. Mr. Ehlinger started his career in Morgan Stanleys IT and Equity Research departments. Mr. Ehlinger is currently a member of the Board of Trustees and
Treasurer of the Charles River School in Dover, MA. Mr. Ehlinger currently serves on the Board of Managers of PEFS.
Adam W. Yates, 35 years old, is a
Portfolio Manager of GECC and a Member of GECMs Investment Committee. Mr. Yates was a Partner and the Head Trader at MAST Capital until 2017. Mr. Yates managed MAST Capitals trading responsibilities and, as a member of the
Investment Committee, worked closely with the senior investment team in security selection and portfolio construction. Mr. Yates was also a member of MAST Capitals Risk Committee and Best Execution Committee. Prior to joining MAST Capital
in 2007, Mr. Yates was a New Business Coordinator at Appleton Partners, Inc. Mr. Yates currently serves on the Board of Managers of PEFS and the Board of Directors of Great Elm FM Holdings, Inc.
Compensation Committee Interlocks and Insider Participation
Currently,
none of our executive officers are compensated by us, and as such, our Compensation Committee is not required to produce a report on executive officer compensation for inclusion herein.
During fiscal year 2017, Mr. Reed served on the board of directors (or a compensation committee thereof or other board committee performing equivalent
functions) of an entity that had one or more executive officers serve on the compensation committee or on our Board. No current or past executive officers or employees of ours or our affiliates serve on our compensation committee.
Other Accounts Managed
As of May 17, 2018, GECM is
primarily responsible for the
day-to-day
management of three separately managed accounts for an institutional investor.
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Name of Investment
Committee Voting
Member
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Type of Accounts
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Total No. of
Other Accounts
Managed
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Total Other
Assets (in
millions)
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No. of Other
Accounts
where
Advisory Fee
is Based
on
Performance
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Total Assets
in Other
Accounts
where
Advisory Fee
is Based
on
Performance
(in millions)
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Peter A. Reed
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Registered Investment Companies:
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none
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none
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none
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none
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Other Pooled Investment Vehicles:
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3
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$
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33
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3
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$
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33
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Other Accounts:
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none
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none
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none
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none
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84
Portfolio Managers Material Conflicts of Interest
Certain of our executive officers and directors, and the members of the investment committee of GECM, serve or may serve as officers, directors or principals of
entities that operate in the same or related lines of business as GECC or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities that may require them to devote time to services for other
entities, which could interfere with the time available to provide services to us. Further, we may not be given the opportunity to participate in certain investments made by investment funds managed by advisers affiliated with GECM and any advisers
that may in the future become affiliated with GEC.
Although funds managed by GECM may have different primary investment objectives than we do, they may from
time to time invest in asset classes similar to those targeted by us. GECM is not restricted from raising an investment fund with investment objectives similar to ours. Any such funds may also, from time to time, invest in asset classes similar to
those targeted by us. It is possible that we may not be given the opportunity to participate in certain investments made by investment funds managed by investment managers affiliated with GECM.
We will pay management and incentive fees to GECM, and will reimburse GECM for certain expenses it incurs. In addition, investors in our common stock will invest on
a gross basis and receive distributions on a net basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct investments.
GECMs management fee is based on a percentage of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) and
GECM may have conflicts of interest in connection with decisions that could affect our total assets, such as decisions as to whether to incur indebtedness.
The
part of the incentive fee payable by us that relates to our
pre-incentive
fee net investment income is computed and paid on income that may include interest that is accrued but not yet received in cash. If a
portfolio company defaults on a loan or note that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible.
The Investment Management Agreement renews for successive annual periods if approved by our Board or by the affirmative vote of the holders of a majority of our
outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. However, both we and GECM have the right to terminate the agreement without penalty upon 60 days written notice
to the other party. Moreover, conflicts of interest may arise if GECM seeks to change the terms of the Investment Management Agreement, including, for example, the terms for compensation.
Pursuant to the Administration Agreement, we will pay GECM our allocable portion of overhead and other expenses incurred by GECM in performing its obligations under
the Administration Agreement, including our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs.
As a result of the arrangements described above, there may be times when our management team has interests that differ from those of our stockholders, giving rise to
a conflict.
Ownership of Securities
As of
December 31, 2017, the dollar range of our equity securities beneficially owned by Mr. Reed was $10,001 - $50,000, the dollar range of our equity securities beneficially owned by Mr. Ehlinger
was
$50,001 - $100,000 and
Mr
.
Yates owned none.
85
RELATED PARTY TRANSACTIONS AND CERTAIN RELATIONSHIPS
We are a party to the Investment Management Agreement and the Administration Agreement with GECM, which is wholly-owned by GEC. GECM initially hired all of the
employees of MAST Capital, certain of whom for a time continued to be employees of MAST Capital. As of the date of this prospectus, GECM and MAST Capital do not share any employees.
Funds managed by MAST Capital own approximately 8% of GEC. Mr. Reed serves as Chief Executive Officer and a member of the board of directors of GEC, in addition
to being our Chief Executive Officer and Chief Investment Officer of GECM. Mr. Kleinman serves as President and Chief Operating Officer of GEC, in addition to being our Chief Compliance Officer. GEC owns approximately 18% of our outstanding
common stock. Mr. Reed, Mr. Kleinman and certain of GECMs initial employees were employees of MAST Capital where they managed private investment funds, with investment objectives similar to ours.
Funds managed by MAST Capital own in excess of 10% of the outstanding common stock of Avanti. In addition, certain of our executive officers and directors and the
members of GECMs investment committee serve or may serve as officers, directors or principals of entities that operate in the same or related lines of business as GECC or of investment funds managed by our affiliates. Accordingly, we may not
be given the opportunity to participate in certain investments made by investment funds managed by advisers affiliated with GECM and any advisers that may in the future become affiliated with GEC.
GECM entered into a consulting contract with FS Services LLC that retained Gregg Felton, Full Circles former chief executive officer, and John Stuart, Full
Circles former chairman and a member of our Board.
We and GEC entered into the license agreement described in this prospectus.
We have established a written policy to govern the review of potential related party transactions. GECM, our Chief Compliance Officer, and any other officers
designated by us are required to review the facts and circumstances of transactions with certain affiliates, and to screen any such transactions, for potential compliance issues under Section 57(h) of the Investment Company Act.
86
CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS
The following table lists, as of May 17, 2018, the beneficial ownership of each of our directors, executive officers, each person known to us to beneficially
own 5% or more of the outstanding shares of our common stock, and our executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the
securities. Ownership information for those persons who beneficially own 5% or more of our shares of common stock is based upon Schedule 13G and Schedule 13D filings by such persons with the SEC and other information obtained from such persons, if
available. Unless otherwise indicated, we believe that each beneficial owner set forth in the table has sole voting and investment power and has the same address: Great Elm Capital Management, Inc., 800 South Street, Suite 230, Waltham, MA 02453.
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Beneficial Owner
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Shares
Beneficially
Owned
(1)
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Percent
of
Class
(2)
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Interested Directors
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Peter A. Reed
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4,007
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|
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|
*
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John E. Stuart
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16,545
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|
|
|
|
*
|
Independent Directors
|
|
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|
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Michael C. Speller
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|
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5,000
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|
|
|
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*
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Randall Revell Horsey
|
|
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|
|
|
|
|
*
|
Mark Kuperschmid
|
|
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1,000
|
|
|
|
|
*
|
Executive Officers
|
|
|
|
|
|
|
|
|
Michael J. Sell
|
|
|
1,700
|
|
|
|
|
*
|
Adam M. Kleinman
|
|
|
|
|
|
|
|
*
|
Directors and executive officers as a group
|
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28,252
|
|
|
|
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*
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5% Beneficial Owners
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Great Elm Capital Group, Inc.
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1,966,667
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18.46
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%
|
Entities affiliated with MAST Capital Management,
LLC
(3)
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5,033,601
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47.25
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%
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*
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Represents less than one percent
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(1)
|
Beneficial ownership has been determined in accordance with Rule
13d-3
under the Exchange Act.
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(2)
|
Based on a total of 10.7 million shares of our common stock issued and outstanding on May 17, 2018.
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(3)
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The principal address for MAST Capital is 31 St. James Street, 6th Floor, Boston, Massachusetts 02116. Represents shares held by the following for which MAST Capital reports that it has sole power to dispose:
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|
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Mast Credit Opportunities I Master Fund Limited, for which MAST Capital is the investment manager, holds 2,297,018 shares of our common stock. David J. Steinberg reports the shares held indirectly by MAST Capital
because, as the principal of MAST Capital at the time of purchase, he reports that he controlled the disposition and voting of the securities. MAST Capital reports that it has the right to an asset-based fee relating the above fund.
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Mast Select Opportunities Master Fund, L.P., for which MAST Capital is the investment manager, holds 2,566,592 shares of our common stock. David J. Steinberg reports the shares held indirectly by MAST Capital
because, as the principal of MAST Capital at the time of purchase, he reports that he controlled the disposition and voting of the securities. MAST Capital reports that it has the right to an asset-based fee relating the above fund.
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Mast Admiral Master Fund, L.P., for which MAST Capital is the investment manager, holds 155,905 shares of our common stock. David J. Steinberg reports the shares held indirectly by MAST Capital because, as the
principal of MAST Capital at the time of purchase, he reports that he controlled the disposition and voting of the securities. MAST Capital reports that it has the right to an asset-based fee relating the above fund.
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Mast Select Opportunities, L.P., for which MAST Capital is the investment manager, holds 14,086 shares of our common stock. David J. Steinberg reports the shares held indirectly by MAST Capital because, as the
principal of MAST Capital at the time of purchase, he reports that he controlled the disposition and voting of the securities. MAST Capital reports that it has the right to an asset-based fee relating the above fund.
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87
Set forth below is the dollar range of equity securities beneficially owned by each of our directors as of
December 31, 2017. We are not part of a family of investment companies, as that term is defined in the Investment Company Act.
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Name
|
|
Dollar Range of
Equity
Securities
Beneficially
Owned
(1)(2)
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Interested Directors
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|
Peter A. Reed
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$10,001 $50,000
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John E. Stuart
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|
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Over $100,000
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Independent Directors
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Michael C. Speller
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$10,001 $50,000
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Randall Revell Horsey
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None
|
|
Mark Kuperschmid
|
|
|
$1 $10,000
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|
(1)
|
Dollar ranges are as follows: None, $1 $10,000, $10,001 $50,000, $50,001 $100,000, or Over $100,000.
|
(2)
|
The dollar range of equity securities beneficially owned is based on the closing price for our common stock of $9.84 on December 31, 2017 on Nasdaq. Beneficial ownership has been determined in accordance with Rule
16a-1(a)(2)
under the Exchange Act.
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88
DETERMINATION OF NET ASSET VALUE
We determine the net asset value of the Company each quarter by subtracting our total liabilities from the fair value of our gross assets.
We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our Board. 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 us; (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. We
generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker-dealers or market makers. However, 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 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 our valuation policy that has been reviewed and approved by our Board, who also approves 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 our
investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that we 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 our investments than on the fair values of our investments for which market quotations are not readily available.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements will express the uncertainty with respect
to the possible effect of such valuations, and any change in such valuations, on our financial statements.
Determinations in Connection with Offerings
Absent the approval by a majority of our common stockholders to allow us to issue common stock at a price below net asset value, our Board or an authorized
committee thereof will be required to make the determination that we are not selling shares of our common stock at a price below the then current net asset value of our common stock at the time of any offering of our shares. Our Board or an
authorized committee thereof consider the following factors, among others, in making such determination:
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|
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the net asset value of our common stock disclosed in the most recent periodic report that we filed with the SEC;
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|
our managements assessment of whether any material change in the net asset value of our common stock has occurred (including through the realization of gains on the sale of our portfolio securities) during the
period beginning on the date of the most recently disclosed net asset value of our common stock and ending two days prior to the date of the sale of our common stock; and
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|
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the magnitude of the difference between (1) a value that our Board or an authorized committee thereof has determined reflects the current net asset value of our common stock, which is generally based upon the net
asset value of our common stock disclosed in the most recent periodic report that we filed with the SEC, as adjusted to reflect our managements assessment of any material change in the net asset value of our common stock since the date of the
most recently disclosed net asset value of our common stock, and (2) the offering price of the shares of our common stock in the proposed offering.
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These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneously with all determinations described in this
section and these records will be maintained with other records that we are required to maintain under the Investment Company Act.
89
DIVIDEND REINVESTMENT PLAN
We have adopted a dividend reinvestment plan that provides for reinvestment of our dividends and other distributions on behalf of our stockholders, unless a
stockholder elects to receive cash as provided below. As a result, if our Board authorizes, and we declare, a cash distribution, our stockholders who have not opted out of our dividend reinvestment plan will have their cash distributions (net of any
applicable withholding tax) automatically reinvested in additional shares of our common stock, rather than receiving the cash distributions.
No action will be
required on the part of a registered stockholder to have his cash distribution reinvested in shares of our common stock. A registered stockholder may elect to receive an entire distribution in cash by notifying American Stock Transfer &
Trust Company, LLC, the plan administrator and our transfer agent and registrar, in writing so that such notice is received by the plan administrator no later than the record date for distributions to stockholders. The plan administrator will set up
an account for shares acquired through the plan for each stockholder who has not elected to receive distributions in cash and hold such shares in
non-certificated
form. Upon request by a stockholder
participating in the plan, received in writing not less than 10 days prior to each applicable record date, the plan administrator will, instead of crediting shares to the participants account, issue a certificate registered in the
participants name for the number of whole shares of our common stock and a check for any fractional share.
Those stockholders whose shares are held by a
broker or other financial intermediary may receive distributions in cash by notifying their broker or other financial intermediary of their election.
We intend
to use primarily newly issued shares to implement the plan to the extent our shares are trading at a premium to net asset value per share of the common stock. In the case that such newly issues shares of common stock are used to implement the plan,
the number of shares to be issued to a stockholder is determined by dividing the total dollar amount of the distribution payable to such stockholder by 95% of the market price per share of our common stock at the close of trading on the date fixed
by the Board for such purposes. Market price per share on that date will be the closing price for such shares on the national securities exchange on which our shares are then listed or, if no sale is reported for such day, at the average of their
electronically reported bid and asked prices. Notwithstanding the foregoing, we reserve the right to instruct the plan administrator to purchase shares of our common stock in the open market in connection with our implementation of the plan. Shares
purchased in open market transactions by the plan administrator will be allocated to each stockholder who has not so elected to receive cash distributions in cash in the manner set forth above for issuance of new shares, substituting where
applicable the average purchase price, excluding any brokerage charges or other charges, of all shares of common stock purchased in the open market in lieu of the market price per share. The number of shares of our common stock to be outstanding
after giving effect to payment of the distribution cannot be established until the value per share at which additional shares will be issued has been determined and elections of our stockholders have been tabulated.
The plan administrators fees under the plan will be paid by us. If a participant elects by written notice to the plan administrator to have the plan
administrator sell part or all of the shares held by the plan administrator in the participants account and remit the proceeds to the participant, the plan administrator is authorized to deduct a transaction fee of $15 plus a per share
brokerage commission from the proceeds.
Stockholders who receive distributions in the form of stock are subject to the same federal, state and local tax
consequences as are stockholders who elect to receive their distributions in cash. A stockholders basis for determining gain or loss upon the sale of stock received in a distribution from us will be equal to the total dollar amount of the
distribution payable to the stockholder. Any stock received in a distribution will have a new holding period for tax purposes commencing on the day following the day on which the shares are credited to the U.S. stockholders account.
We may terminate the plan upon notice in writing mailed to each participant at least 30 days prior to any record date for the payment of any distribution by us. All
correspondence concerning the plan should be directed to the plan administrator by mail at 6201 15th Avenue, Brooklyn, NY 11219 or by phone at (800)
937-5449.
90
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain U.S. federal income tax considerations relevant to a stockholder who purchases our common stock pursuant to a future offering.
This summary is subject to differing interpretation or change by legislative or administrative action, and any such differing interpretation or change may be retroactive. The discussion does not purport to deal with all of the U.S. federal income
tax consequences applicable to us, or which may be important to particular stockholders in light of their individual investment circumstances or to some types of stockholders subject to special tax rules, including stockholders subject to the
alternative minimum tax, financial institutions, broker-dealers, insurance companies,
tax-exempt
organizations, partnerships or other pass-through entities, persons holding our common stock in connection with
a hedging, straddle, conversion or other integrated transaction, persons engaged in a trade or business in the United States or persons who have ceased to be U.S. citizens or to be taxed as resident aliens or stockholders who contribute assets to us
in exchange for our shares. This discussion assumes that the stockholders hold their common stock as capital assets for U.S. federal income tax purposes (generally, assets held for investment). No attempt is made to present a detailed explanation of
all U.S. federal income tax aspects affecting us and our stockholders, and the discussion set forth herein does not constitute tax advice. No ruling has been or will be sought from the IRS, regarding any matter discussed herein. Tax counsel has not
rendered any legal opinion regarding any tax consequences relating to us or our stockholders. Stockholders are urged to consult their tax advisors to determine the U.S. federal, state, local and foreign tax consequences to them of investing in our
shares.
The discussion set forth herein does not constitute tax advice and potential investors are urged to consult their tax advisors to determine the
specific U.S. federal, state, local and foreign tax consequences to them of investing in us, including the tax consequences resulting from the recently enacted comprehensive U.S. tax reform legislation known as the Tax Cuts and JOBS Act.
Taxation of GECC
A discussion of taxation of GECC is included under
The CompanyCertain U.S. Federal Income Tax Considerations.
Taxation of U.S. stockholders
For purposes of this discussion, a U.S. stockholder (or in this section, a stockholder) is a holder or a beneficial holder of shares which is
for U.S. federal income tax purposes (1) a person who is a citizen or resident of the United States, (2) a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the
laws of the United States, any State thereof, or the District of Columbia, (3) an estate whose income is subject to U.S. federal income tax regardless of its source, or (4) a trust if (a) a U.S. court is able to exercise primary
supervision over the trusts administration and one or more U.S. persons are authorized to control all substantial decisions of the trust or (b) the trust has in effect a valid election to be treated as a domestic trust for U.S. federal
income tax purposes. If a partnership or other entity or arrangement classified as a partnership for U.S. tax purposes holds the shares, the tax treatment of the partnership and each partner generally will depend on the activities of the partnership
and the activities of the partner. Partnerships acquiring shares, and partners in such partnerships, should consult their tax advisors.
Prospective investors that are not U.S. stockholders should refer to the section
Non-U.S.
Stockholders below and are urged to consult their tax advisors with respect to the U.S. federal income tax consequences of an investment in our shares, including the potential application of
U.S. withholding taxes.
Distributions we pay to you from our ordinary income or from an excess of net short-term capital gain over net long-term capital
loss (together referred to hereinafter as ordinary income dividends) are generally taxable to you as ordinary income to the extent of our earnings and profits. Due to our expected investments, in general, distributions will not be
eligible for the dividends received deduction allowed to corporate stockholders and will not qualify for the reduced rates of tax for qualified dividend income allowed to individuals. Distributions made to you from an excess of net long-term capital
gain over net short-term capital loss (capital gain dividends), including capital gain dividends credited to you but retained by us, are taxable to you as long-term capital gain if they have been properly designated by us, regardless of
the length of time you have owned our shares. For
non-corporate
stockholders, capital gains dividends are currently taxed at preferential rates. Generally, you will be provided with a written notice
designating the amount of any (i) ordinary income dividends no later than 30 days after the close of the taxable year, and (ii) capital gain dividends or other distributions no later than 60 days after the close of the taxable year.
Distributions in excess of our earnings and profits will first reduce the adjusted tax basis of your shares and, after the adjusted tax basis is reduced to zero, will constitute capital gain to you (assuming the shares are held as a capital asset).
If we retain any net capital gain, we may designate the retained amounts as undistributed capital gain in a notice to our stockholders. If a designation is
made, stockholders would include in income, as long-term capital gain, their
91
proportionate share of the undistributed amounts, but would be allowed a credit or refund, as the case may be, for their proportionate share of the corporate tax paid by us. A stockholder that is
not subject to U.S. federal income tax or otherwise is not required to file a U.S. federal income tax return would be required to file a U.S. federal income tax return on the appropriate form in order to claim a refund for the taxes we
paid. In addition, the tax basis of shares owned by a stockholder would be increased by an amount equal to the difference between (i) the amount included in the stockholders income as long-term capital gain and (ii) the
stockholders proportionate share of the corporate tax paid by us.
Dividends and other taxable distributions are taxable to you even though they are
reinvested in additional shares of our common stock. We have the ability to declare a large portion of a dividend in shares of our stock. In August of 2017, the IRS promulgated guidance stating that as long as 20% of the dividend is paid in cash and
certain requirements are met, the entire distribution will be treated as a dividend for U.S. federal income tax purposes. As a result, our stockholders will be taxed on 100% of the dividend in the same manner as a cash dividend, even though most of
the dividend was paid in shares of our stock.
If we pay you a dividend in January which was declared in the previous October, November or December to
stockholders of record on a specified date in one of these months, then the dividend will be treated for tax purposes as being paid by us and received by you on December 31 of the year in which the dividend was declared.
A stockholder will recognize gain or loss on the sale or exchange of our common stock in an amount equal to the difference between the stockholders adjusted
basis in the shares sold or exchanged and the amount realized on their disposition. Generally, gain recognized by a stockholder on the sale or other disposition of our common stock will result in capital gain or loss to you, and will be a long-term
capital gain or loss if the shares have been held for more than one year at the time of sale. Any loss upon the sale or exchange of our shares held for six months or less will be treated as a long-term capital loss to the extent of any capital gain
dividends received (including amounts credited as an undistributed capital gain dividend) by you. A loss realized on a sale or exchange of our shares will be disallowed if other substantially identical shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a
61-day
period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In this case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Present law taxes both long-term and short-term capital gains of corporations at the rates applicable to ordinary income.
Non-corporate
stockholders with income in excess of certain thresholds are, in general, subject to an additional tax on their
net investment income, which ordinarily includes taxable distributions from us and taxable gain on the disposition of our common stock.
We may be
required to withhold U.S. federal income tax (backup withholding), from all taxable distributions to any
non-corporate
stockholder (1) who fails to furnish us with a correct taxpayer
identification number or a certificate that such stockholder is exempt from backup withholding or (2) with respect to whom the IRS notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS
and to respond to notices to that effect. An individuals taxpayer identification number is his or her social security number. Any amount withheld under backup withholding is allowed as a credit against the stockholders U.S. federal
income tax liability and may entitle such stockholder to a refund, provided that proper information is timely provided to the IRS.
Withholding at a rate of 30%
is required on dividends in respect of, and after December 31, 2018, withholding at a rate of 30% will be required on gross proceeds from the sale of shares of our common stock held by or through foreign accounts or foreign intermediaries if
certain disclosure requirements related to U.S. accounts or ownership are not satisfied. We will not pay any additional amounts in respect to any amounts withheld.
Under U.S. Treasury regulations, if a stockholder recognizes a loss with respect to shares of $2 million or more for a
non-corporate
stockholder or $10 million or more for a corporate stockholder in any single taxable year (or a greater loss over a combination of years), the stockholder must file with the IRS a disclosure
statement on Form 8886. Direct stockholders of portfolio securities in many cases are excepted from this reporting requirement, but under current guidance, stockholders of a RIC are not excepted. Future guidance may extend the current exception from
this reporting requirement to stockholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayers treatment of the loss is proper. Significant monetary
penalties apply to a failure to comply with this reporting requirement. States may also have a similar reporting requirement. Stockholders should consult their tax advisors to determine the applicability of these regulations in light of their
individual circumstances.
Stockholders should consult their tax advisors with respect to the U.S. federal income tax and withholding tax, and state, local and
foreign tax consequences of an investment in our shares.
92
Taxation of
non-U.S.
stockholders
The following discussion only applies to
non-U.S.
stockholders. A
non-U.S.
stockholder is a holder, other than a partnership (or other entity or arrangement treated as a partnership for U.S. federal income tax purposes), that is not a U.S. stockholder for U.S. federal income tax purposes. Whether an investment in the
shares is appropriate for a
non-U.S.
stockholder will depend upon that stockholders particular circumstances. An investment in the shares by a
non-U.S.
stockholder
may have adverse tax consequences.
Non-U.S.
stockholders should consult their tax advisors before investing in our shares.
Distributions of ordinary income dividends to
non-U.S.
stockholders, subject to the discussion below, will generally be
subject to withholding of U.S. federal tax at a 30% rate (or lower rate provided by an applicable treaty) to the extent of our current and accumulated earnings and profits. Different tax consequences may result if the
non-U.S.
stockholder is engaged in a trade or business in the United States or, in the case of an individual, is present in the United States for 183 days or more during a taxable year and certain other
conditions are met. Special certification requirements apply to a
non-U.S.
stockholder that is a foreign partnership or a foreign trust, and such entities are urged to consult their tax advisors.
Actual or deemed distributions of our net capital gain to a
non-U.S.
stockholder, and gain recognized by a
non-U.S.
stockholder upon the sale of our common stock, generally will not be subject to U.S. federal withholding tax and will not be subject to U.S. federal income tax unless the distributions or gain, as the case
may be, are effectively connected with a U.S. trade or business of the
non-U.S.
stockholder (and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the
non-U.S.
stockholder in the United States) or, in the case of an individual, is present in the United States for 183 days or more during a taxable year.
Under certain legislation, no U.S. source withholding taxes will be imposed on dividends paid by RICs to
non-U.S.
stockholders to the extent the dividends are designated as interest-related dividends or short-term capital gain dividends. Under this exemption, interest-related dividends and short-term capital gain dividends generally
represent distributions of interest or short-term capital gain that would not have been subject to U.S. withholding tax at the source if they had been received directly by a
non-U.S.
stockholder, and that
satisfy certain other requirements. No assurance can be given that we will distribute any interest-related or short-term capital gain dividends.
If we
distribute our net capital gains in the form of deemed rather than actual distributions (which we may do in the future), a
non-U.S.
stockholder will be entitled to a U.S. federal income tax credit or tax
refund equal to the stockholders allocable share of the tax we pay on the capital gains deemed to have been distributed. In order to obtain the refund, the
non-U.S.
stockholder must obtain a U.S.
taxpayer identification number and file a federal income tax return even if the
non-U.S.
stockholder is not otherwise required to obtain a U.S. taxpayer identification number or file a federal income tax
return. For a corporate
non-U.S.
stockholder, distributions (both actual and deemed), and gains realized upon the sale of our common stock that are effectively connected with a U.S. trade or business (or,
where an applicable treaty applies, are attributable to a permanent establishment in the United States) may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate (or at a lower rate if provided for by
an applicable tax treaty). Accordingly, investment in the shares may not be appropriate for certain
non-U.S.
stockholders.
Certain provisions of the Code referred to as FATCA require withholding at a rate of 30% on dividends in respect of, and, after December 31, 2018,
gross proceeds from the sale of, our common stock held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Treasury to report, on an annual basis, information
with respect to interests in, and accounts maintained by, the institution to the extent such interests or accounts are held by certain U.S. persons and by certain
non-U.S.
entities that are wholly or partially
owned by U.S. persons and to withhold on certain payments. Accordingly, the entity through which our common stock is held will affect the determination of whether such withholding is required. Similarly, dividends in respect of, and, after
December 31, 2018, gross proceeds from the sale of, our common stock held by an investor that is a
non-financial
non-U.S.
entity that does not qualify under certain
exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies to us that such entity does not have any substantial United States owners or (ii) provides certain information regarding the
entitys substantial United States owners, which we will in turn provide to the Secretary of the Treasury. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations or
other guidance, may modify these requirements. We will not pay any additional amounts to stockholders in respect of any amounts withheld. Stockholders are encouraged to consult their tax advisors regarding the possible implications of the
legislation on their investment in our common stock.
A
non-U.S.
stockholder who is a
non-resident
alien individual, and who is otherwise subject to withholding of federal income tax, may be subject to backup withholding of federal income tax on dividends unless the
non-U.S.
stockholder
93
provides us or the dividend paying agent with an IRS Form
W-8BEN
or IRS Form
W-8BEN-E
(or an acceptable substitute form) or otherwise meets documentary evidence requirements for establishing that it is a
non-U.S.
stockholder or otherwise establishes an exemption from backup withholding. Backup withholding is not an additional tax. Any amounts withheld from payments made to you may be refunded or credited
against your U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS.
Non-U.S.
stockholders may also be subject to information reporting.
Failure to Qualify as a RIC
If we were unable to qualify for treatment
as a RIC, and relief is not available as discussed above, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders nor would we be required to make distributions
for tax purposes. Distributions would generally be taxable to our stockholders as ordinary dividend income eligible for reduced maximum rates for
non-corporate
stockholders to the extent of our current and
accumulated earnings and profits. Subject to certain limitations under the Code, corporate U.S. stockholders would be eligible for the dividends received deduction. Distributions in excess of our current and accumulated earnings and profits would be
treated first as a return of capital to the extent of the stockholders tax basis, and any remaining distributions would be treated as a capital gain. If we were to fail to meet the RIC requirements for more than two consecutive years and then
to seek to requalify as a RIC, we would be required to recognize gain to the extent of any unrealized appreciation in our assets unless we made a special election to pay corporate level tax on any such unrealized appreciation recognized during the
succeeding five-year period.
94
SENIOR SECURITIES
Information about our senior securities is shown in the following table. Dollar amounts are presented in thousands.
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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 2022 Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
$
|
32,631
|
|
|
$
|
2.55
|
|
|
$
|
N/A
|
|
|
$
|
1.009
|
|
December 31, 2017
|
|
$
|
32,631
|
|
|
$
|
5.01
|
|
|
$
|
N/A
|
|
|
$
|
1.017
|
|
|
|
|
|
|
Unsecured Debt 2025 Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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March 31, 2018
|
|
$
|
46,398
|
|
|
$
|
2.55
|
|
|
$
|
N/A
|
|
|
$
|
0.980
|
|
|
|
|
|
|
Unsecured Debt 2020 Notes
|
|
|
|
|
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|
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|
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December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
$
|
33,646
|
|
|
$
|
6.17
|
|
|
|
N/A
|
|
|
$
|
1.016
|
|
(1)
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Total amount of each class of senior securities outstanding at the end of the period presented.
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(2)
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Asset coverage ratio per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities
representing indebtedness. Asset coverage ratio per unit is expressed in terms of dollar amounts per $1 of indebtedness.
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(3)
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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.
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(4)
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The average market value per unit for the notes is based on the average daily prices of such notes and is expressed per $1 of indebtedness for each period, and since November 4, 2016 for the period ended
December 31, 2016.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are subject to financial market risks, including changes in interest rates. As of March 31, 2018, nine debt investments in our portfolio bore interest at a
fixed rate, and the remaining 21 debt investments were at variable rates, representing approximately $88.7 million and $105.8 million in debt at fair value, respectively. The variable rates are based upon LIBOR.
To illustrate the potential impact of a change in the underlying interest rate on our net investment income, we have assumed a 1%, 2%, and 3% increase and 1%, 2%,
and 3% decrease in the underlying LIBOR, and no other change in our portfolio as of March 31, 2018. We have also assumed that we have no outstanding floating rate borrowings. The below table illustrates the effect such assumed rate changes
would have on an annual basis.
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|
|
|
|
LIBOR Increase (Decrease)
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|
Increase (decrease) of Net Investment
Income
(in thousands)
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|
3.00%
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|
$
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2,901
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|
2.00%
|
|
$
|
1,859
|
|
1.00%
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|
$
|
817
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|
-1.00%
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|
$
|
(1,172
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)
|
-2.00%
|
|
$
|
(1,489
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)
|
-3.00%
|
|
$
|
(1,489
|
)
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Although we believe that this analysis is indicative of our existing interest rate sensitivity at March 31, 2018, it does not
adjust for changes in the credit quality, size and composition of our portfolio, and other business developments, including borrowing under a credit facility, that could affect the net increase in net assets resulting from operations. Accordingly,
no assurances can be given that actual results would not differ materially from the results under this hypothetical analysis.
We may in the future hedge against
interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in
the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.
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DESCRIPTION OF OUR COMMON STOCK
The following description is based on relevant portions of the Maryland General Corporation Law and our charter and bylaws. This summary is not necessarily
complete, and we refer you to the Maryland General Corporation Law and our charter and bylaws for a more detailed description of the provisions summarized below.
Our authorized stock consists of 100,000,000 shares of stock, par value $0.01 per share, all of which are initially designated as common stock. Our common stock is
listed on Nasdaq under the ticker symbol GECC. There are no outstanding options or warrants to purchase shares of our common stock. No common stock has been authorized for issuance under any equity compensation plans. Our fiscal
year-end
is December 31. Under Maryland law, our stockholders generally are not personally liable for our debts or obligations.
The following are our outstanding classes of securities as of May 17, 2018:
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|
|
|
|
|
|
|
|
|
|
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|
Title of Class
|
|
Amount Authorized
|
|
|
Amount Held by
GECC or for GECCs
Account
|
|
|
Amount Outstanding
Exclusive of Amounts
Shown in the
Adjacent
Column
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|
Common Stock
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|
|
100,000,000
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|
|
|
|
|
|
|
10,652,401
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|
2022 Notes
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|
|
|
|
|
|
|
|
|
$
|
32.6 million
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|
2025 Notes
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|
|
|
|
|
|
|
|
|
$
|
46.4 million
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|
Under our charter, our Board is authorized to classify and reclassify any unissued shares of stock into other classes or series of
stock without obtaining stockholder approval. As permitted by the Maryland General Corporation Law, our charter provides that a majority of the entire Board, without any action by our stockholders, may amend the charter from time to time to increase
or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue.
Common Stock
All shares of our common stock have equal rights as to earnings, assets, voting, and dividends and, when they are issued, will be duly authorized, validly
issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our Board and declared by us out of assets legally available therefor. Shares of our common stock have no preemptive,
conversion, redemption or appraisal rights and are freely transferable, except where their transfer is restricted by federal and state securities laws or by contract. In the event of our liquidation, dissolution or winding up, each share of our
common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred
stock is outstanding at such time. Each share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock,
the holders of shares of our common stock will possess exclusive voting power. There is no cumulative voting in the election of directors, which means that holders of a majority of the outstanding shares of common stock can elect all of our
directors, and holders of less than a majority of such shares will be unable to elect any director.
Preferred Stock
Our charter authorizes our Board to classify and reclassify any unissued shares of stock into other classes or series of stock, including preferred stock. The cost of
any such reclassification would be borne by our existing common stockholders. Under the terms of our charter, our Board is authorized to issue shares of preferred stock in one or more classes or series without stockholder approval. Prior to issuance
of shares of each class or series, the Board is required by Maryland law and by our charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption for each class or series. Thus, the Board could authorize the issuance of shares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a
change in control that might involve a premium price for holders of shares of our common stock or otherwise be in their best interest. You should note, however, that any issuance of preferred stock must comply with the requirements of the Investment
Company Act. The Investment Company Act requires, among other things, that (1) immediately after issuance and before any dividend or other distribution is made with respect to our common stock and before any purchase of our common stock is
made, the aggregate involuntary liquidation preference of such preferred stock together with the aggregate involuntary liquidation preference or aggregate value of all other senior securities must not exceed an amount equal to 50% of our gross
assets after deducting the amount of such dividend, distribution or purchase price, as the case may be, and (2) the holders of
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shares of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if distributions on such preferred stock are
in arrears by two full years or more. Certain matters under the Investment Company Act require the separate vote of the holders of any issued and outstanding preferred stock. For example, holders of preferred stock would vote as a separate class
from the holders of common stock on a proposal to cease operations as a BDC. We believe that the availability for issuance of preferred stock will provide us with increased flexibility in structuring future financings and acquisitions. However, we
do not currently have any plans to issue preferred stock. Our Board has the authority to amend, alter, or repeal the bylaws of the corporation.
Limitation on
Liability of Directors and Officers; Indemnification and Advance of Expenses
Maryland law permits a Maryland corporation to include in its charter a
provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services
or (b) active and deliberate dishonesty established by a final judgment and that is material to the cause of action. Our charter contains such a provision which eliminates directors and officers liability to the maximum extent
permitted by Maryland law, subject to the requirements of the Investment Company Act.
Our charter authorizes us, and our bylaws obligate us, to the maximum
extent permitted by Maryland law and subject to the requirements of the Investment Company Act, to indemnify any present or former director or officer of GECC or any individual who, while a director or officer of GECC and at our request, serves or
has served another corporation, real estate investment trust, partnership, joint venture, limited liability company, trust, employee benefit plan or other enterprise as a director, officer, partner, member, manager or trustee, who is made, or
threatened to be made, a party to, or witness in, a proceeding by reason of his or her service in such capacity from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her
status as such and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding. Our charter and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of ours in any of the
capacities described above and any of our employees or agents or any employees or agents of our predecessor. In accordance with the Investment Company Act, we will not indemnify any person for any liability to which such person would be subject by
reason of such persons willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
Maryland law requires a corporation (unless its charter requires otherwise, which ours does not) to indemnify a director or officer who has been successful, on the
merits or otherwise, in the defense of any proceeding to which he or she is made or threatened to be made a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to or in which they may be made, or threatened to be made, a party or witness by reason of
their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the
result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. Under Maryland law, a Maryland corporation may not indemnify a director or officer in a suit by the corporation or in its right in which the director or officer was adjudged liable to the
corporation or in a suit in which the director or officer was adjudged liable on the basis that a personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and reasonably
entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit was improperly received. However, indemnification for an adverse judgment in a
suit by the corporation or in its right, or for a judgment of liability on the basis that a personal benefit was improperly received, is limited to expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a
director or officer upon the corporations receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and
(b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.
Our insurance policy does not currently provide coverage for claims, liabilities and expenses that may arise out of activities that our present or former directors
or officers have performed for another entity at our request. There is no assurance that such entities will in fact carry such insurance. However, in the event that our present or former directors or officers serve another entity as a director,
officer, partner or trustee, we expect to obtain insurance providing coverage for such persons for any claims, liabilities or expenses that may arise out of their activities while serving in such capacities.
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Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws
The Maryland General Corporation Law and our charter and bylaws contain provisions that could make it more difficult for a potential acquirer to acquire us by means
of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our Board.
We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.
Classified Board of Directors
Our Board is divided into three
classes of directors serving staggered three-year terms. Upon expiration of their terms, directors of each class will be elected to serve for a term ending at the third annual meeting of stockholders following his or her election and until their
successors are duly elected and qualify and each year one class of directors will be elected by the stockholders. A classified board may render a change in control of us or removal of our incumbent management more difficult. We believe, however,
that the longer time required to elect a majority of a classified Board will help to ensure the continuity and stability of our management and policies.
Election of Directors
Our charter and bylaws provide that the
affirmative vote of the holders of a plurality of the outstanding shares of stock entitled to vote in the election of directors cast at a meeting of stockholders duly called and at which a quorum is present will be required to elect a director. Our
Board has the exclusive right to amend the bylaws to alter the vote required to elect directors.
Number of Directors; Vacancies; Removal
Our charter provides that the number of directors will be set only by the Board in accordance with our bylaws. Our bylaws provide that a majority of our entire Board
may at any time increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than one nor more than nine. We have elected to be subject to the provision of Subtitle 8 of Title 3 of
the Maryland General Corporation Law regarding the filling of vacancies on the Board. Accordingly, except as may be provided by our Board in setting the terms of any class or series of preferred stock, any and all vacancies on our Board may be
filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the
directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the Investment Company Act.
Our charter provides that, subject to the rights of holders of preferred stock, a director may be removed only for cause, as defined in our charter, and then only by
the affirmative vote of at least a
two-thirds
of the votes entitled to be cast generally in the election of directors.
Action by Stockholders
Under the Maryland General Corporation Law,
unless a corporations charter provides otherwise (which our charter does not), stockholder action can be taken only at an annual or special meeting of stockholders or by unanimous written consent in lieu of a meeting. These provisions,
combined with the requirements of our bylaws regarding the calling of a stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
Our bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to our Board and the proposal of business to be
considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by our Board or (3) by a stockholder who was a stockholder of record at the record date set by our Board for the purpose of determining
stockholders entitled to vote at the meeting, at the time of giving notice as provided for in our bylaws and at the time of the meeting (and any postponement or adjournment thereof), who is entitled to vote at the meeting in the election of each
individual so nominated or on such other business and who has complied with the advance notice procedures of our bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before
the meeting. Nominations of persons for election to the Board at a
99
special meeting may be made only (1) by our Board or (2) provided that the Board has determined that directors will be elected at the meeting, by a stockholder who was a stockholder of
record at the record date set by our Board for the purpose of determining stockholders entitled to vote at the meeting, at the time of giving notice as provided for in our bylaws and at the time of the meeting (and any postponement or adjournment
thereof), who is entitled to vote at the meeting in the election of each individual so nominated and who has complied with the advance notice provisions of the bylaws. The purpose of requiring stockholders to give us advance notice of nominations
and other business is to afford our Board a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our Board, to inform
stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our Board any power to disapprove stockholder
nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed.
They may also have had the effect of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to us and our stockholders.
Calling of Special Meetings of Stockholders
Our bylaws provide that special meetings of stockholders may be called by our Board and certain of our officers. Additionally, our bylaws provide that, subject to the
satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders will be called by the secretary of the corporation upon the written request of stockholders entitled to
cast not less than a majority of all the votes entitled to be cast at such meeting.
Approval of Extraordinary Corporate Action; Amendment of Charter and
Bylaws
Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, convert to another form of entity, sell all or
substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by the affirmative vote of stockholders entitled to cast at least
two-thirds
of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all
of the votes entitled to be cast on the matter. Our charter generally provides for approval of charter amendments and extraordinary transactions by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter.
However, our charter provides that approval of the following matters requires the affirmative vote of stockholders entitled to cast at least 80% of the votes
entitled to be cast on the matter:
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amendments to the provisions of our charter relating to the classification of our Board, the power of our Board to fix the number of directors and to fill vacancies on our Board, the vote required to elect or remove a
director, the vote required to approve our dissolution, amendments to our charter and extraordinary transactions and our Board exclusive power to amend our bylaws;
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charter amendments that would convert us from a
closed-end
company to an
open-end
company or make our common stock a redeemable security
(within the meaning of the Investment Company Act);
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our liquidation or dissolution or any amendment to our charter to effect any such liquidation or dissolution;
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any merger, consolidation, conversion, share exchange or sale or exchange of all or substantially all of our assets that the Maryland General Corporation Law requires be approved by our stockholders; or
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any transaction between us, on the one hand, and any person or group of persons acting together that is entitled to exercise or direct the exercise, or acquire the right to exercise or direct the exercise, directly or
indirectly (other than solely by virtue of a revocable proxy), of
one-tenth
or more of the voting power in the election of our directors generally, or any person controlling, controlled by or under common
control with, employed by or acting as an agent of, any such person or member of such group, or collectively, Transacting Persons, on the other hand.
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However, if such amendment, proposal or transaction is approved by a majority of our continuing directors (in addition to approval by our Board), such amendment,
proposal or transaction may be approved by a majority of the votes entitled to be cast on such a matter, except that any transaction including Transacting Persons that would not otherwise require stockholder approval under the Maryland General
Corporation Law would not require further stockholder approval unless another provision of our charter requires such approval. In either event, in accordance with the
100
requirements of the Investment Company Act, any such amendment, proposal or transaction that would have the effect of changing the nature of our business so as to cause us to cease to be, or to
withdraw our election as, a BDC would be required to be approved by a majority of our outstanding voting securities, as defined under the Investment Company Act. The continuing directors are defined in our charter as (1) certain of
our current directors named therein, (2) those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of our current directors then on the Board or (3) any
successor directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of continuing directors or the successor continuing directors then in office.
Our charter and bylaws provide that the Board will have the exclusive power to make, alter, amend or repeal any provision of our bylaws.
No Appraisal Rights
Except with respect to appraisal rights
arising in connection with the Maryland Control Acquisition Share Act discussed below, as permitted by the Maryland General Corporation Law, our charter provides that stockholders will not be entitled to exercise appraisal rights unless a majority
of our entire Board determines that such rights shall apply.
Control Share Acquisitions
The Maryland Control Share Acquisition Act provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except
to the extent approved by the affirmative vote of stockholders entitled to cast
two-thirds
of the votes entitled to be cast on the matter. Shares owned by the acquirer, by officers or by directors who are
employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer is able to
exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:
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one-tenth
or more but less than
one-third;
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one-third
or more but less than a majority; or
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a majority or more of all voting power.
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The requisite stockholder approval must be obtained each time an acquirer
crosses one of the thresholds of voting power set forth above. Control shares do not include shares that the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means
the acquisition of issued and outstanding control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition
may compel the Board of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of
certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the
corporation may redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to redeem control shares is subject to certain conditions and limitations,
including, as provided in our bylaws, compliance with the Investment Company Act. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer
or, if a meeting of stockholders at which the voting rights of the shares are considered and not approved is held, as of the date of such meeting. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes
entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by
the acquirer in the control share acquisition.
The Maryland Control Share Acquisition Act does not apply (a) to shares acquired in a merger, consolidation
or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act
any and all acquisitions by any person of our shares of stock. There can be no assurance that such provision will not be amended or eliminated at any time in the future. However, we will amend our bylaws to be subject to the Maryland
101
Control Share Acquisition Act only if our Board determines that it would be in our best interests and if the SEC staff does not object to our determination that GECCs being subject to the
Maryland Control Share Acquisition Act does not conflict with the Investment Company Act.
Business Combinations
Under Maryland law, the Maryland Business Combination Act provides that certain business combinations between a Maryland corporation and an interested
stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation,
share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
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any person who beneficially owns 10% or more of the voting power of the corporations outstanding voting stock; or
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an affiliate or associate of the corporation who, at any time within the
two-year
period prior to the date in question, was the beneficial owner of 10% or more of the voting power
of the then outstanding voting stock of the corporation.
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A person is not an interested stockholder under this statute if the Board approved in
advance the transaction by which the stockholder otherwise would have become an interested stockholder. However, in approving a transaction, the Board may provide that its approval is subject to compliance, at or after the time of approval, with any
terms and conditions determined by the Board.
After the five-year prohibition, any business combination between the Maryland corporation and an interested
stockholder generally must be recommended by the Board of the corporation and approved by the affirmative vote of at least:
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80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
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two-thirds
of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate
the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
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These super-majority vote
requirements do not apply if the corporations common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested
stockholder for its shares.
The Maryland Business Combination Act permits various exemptions from its provisions, including business combinations that are
exempted by the Board before the time that the interested stockholder becomes an interested stockholder. Our Board has adopted a resolution that any business combination between us and any other person is exempted from the provisions of the Business
Combination Act, provided that the business combination is first approved by the Board, including a majority of the directors who are not interested persons as defined in the Investment Company Act. This resolution may be altered or repealed in
whole or in part at any time; however, our Board will adopt resolutions so as to make us subject to the provisions of the Maryland Business Combination Act only if our Board determines that it would be in our best interests and if the SEC staff does
not object to our determination that GECC being subject to the Business Combination Act does not conflict with the Investment Company Act. If this resolution is repealed, or the Board does not otherwise approve a business combination, the statute
may discourage others from trying to acquire control of GECC and increase the difficulty of consummating any offer.
Forum Selection Clause
Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (a) any derivative action or
proceeding brought on our behalf, (b) any action asserting a claim of breach of any duty owed by any of our directors or officers or other employees to us or to our stockholders, (c) any action asserting a claim against us or any of our
directors or officers or other employees arising pursuant to any provision of the Maryland General Corporation Law or our charter or bylaws or (d) any action asserting a claim against us or any of our directors or officers or other employees
that is governed by the internal affairs doctrine shall be, in each case, the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore
Division. By accepting shares of our common stock in connection with the Merger, you are agreeing to be bound by these provisions.
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Waiver of Corporate Opportunity Doctrine
Our charter provides that, we, by resolution of our Board, may renounce any interest or expectancy of ours in (or in being offered an opportunity to participate in)
business opportunities that are presented to us or developed by or presented to one of more of our directors or officers.
Conflict with Investment Company
Act
Our bylaws provide that, if and to the extent that any provision of the Maryland General Corporation Law, including the Control Share Acquisition Act
(if we amend our bylaws to be subject to such Act) and the Business Combination Act, or any provision of our charter or bylaws conflicts with any provision of the Investment Company Act, the applicable provision of the Investment Company Act will
control.
Privacy Principles
We are committed to maintaining the
privacy of our stockholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we
may share information with select other parties.
Generally, we do not receive any nonpublic personal information relating to our stockholders, although certain
nonpublic personal information of our stockholders may become available to us. We do not disclose any nonpublic personal information about our stockholders or former stockholders to anyone, except as permitted by law or as is necessary in order to
service stockholder accounts (for example, to a transfer agent or third-party administrator).
We restrict access to nonpublic personal information about our
stockholders to employees of GECM and its affiliates with a legitimate business need for the information. We intend to maintain physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our
stockholders.
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PLAN OF DISTRIBUTION
The Secondary Shares covered by this prospectus may be offered and sold from time to time by the Selling Stockholders. The term Selling Stockholders
includes pledgees, donees, assignees, transferees or other
successors-in-interest
selling shares received after the date of this prospectus from any of the Selling
Stockholders as a gift, pledge, partnership distribution or other
non-sale
related transfer. Each Selling Stockholder will act independently of us in making decisions with respect to the timing, manner and
size of each sale. Such sales may be made on one or more exchanges or in the
over-the-counter
market or otherwise, at prices and under terms then prevailing or at prices
related to the then-current market price or in negotiated transactions. Each Selling Stockholder may sell its shares by one or more of, or a combination of, the following methods:
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an underwritten offering;
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purchases by a broker-dealer as principal and resale by such broker-dealer for its own account pursuant to this prospectus;
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ordinary brokerage transactions and transactions in which the broker solicits purchasers;
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block trades in which the broker-dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
|
|
|
|
an
over-the-counter
distribution in accordance with the rules of Nasdaq;
|
|
|
|
in privately negotiated transactions;
|
|
|
|
in options transactions; and
|
|
|
|
any other method permitted by applicable law.
|
In addition, any shares that qualify for sale pursuant to Rule 144
under the Securities Act may be sold under Rule 144 rather than pursuant to this prospectus. If the Selling Stockholder uses one or more underwriters in the sale, such underwriter(s) will acquire the shares of our common stock covered by this
prospectus for their own account. The underwriter(s) may resell the shares of our common stock in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale.
To the extent required, this prospectus may be amended or supplemented from time to time to describe a specific plan of distribution, including the names of any
underwriters, the purchase price and the proceeds a Selling Stockholder will receive from the sale, any underwriting discounts and other items constituting underwriters compensation, any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers, and any other information we believe to be material.
In connection with distributions of the shares or
otherwise, one or more Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions. In connection with such transactions, broker-dealers or other financial institutions may engage in short sales of
the common stock in the course of hedging the positions they assume with the applicable Selling Stockholder. A Selling Stockholder may also sell the common stock short and redeliver the shares to close out such short positions. A Selling Stockholder
may also enter into option or other transactions with broker-dealers or other financial institutions which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction). A Selling Stockholder may also pledge shares to a broker-dealer or other financial institution, and, upon a
default, such broker-dealer or other financial institution may effect sales of the pledged shares pursuant to this prospectus (as supplemented or amended to reflect such transaction).
In effecting sales, broker-dealers or agents engaged by one or more Selling Stockholders may arrange for other broker-dealers to participate. Broker-dealers or
agents may receive commissions, discounts or concessions from the Selling Stockholder in amounts to be negotiated immediately prior to the sale. In offering the shares covered by this prospectus, any broker-dealers who execute sales for the Selling
Stockholder may be deemed to be underwriters within the meaning of the Securities Act in connection with such sales. The compensation of any broker-dealer may be deemed to be underwriting discounts and commissions. The specific terms of
the
lock-up
provisions, if any, in respect of any given offering will be described in the applicable prospectus supplement.
In order to comply with the securities laws of certain states, if applicable, the shares must be sold in such jurisdictions only through registered or licensed
brokers or dealers. In addition, in certain states the shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is
complied with.
104
We advised the Selling Stockholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to
sales of shares in the market and to the activities of such Selling Stockholder and its affiliates. In addition, we will make copies of this prospectus available to the Selling Stockholder for the purpose of satisfying the prospectus delivery
requirements of the Securities Act. A Selling Stockholder may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.
At the time a particular offer of shares is made, if required, a prospectus supplement will be distributed that will set forth the number of shares being offered,
the method of distribution and the terms of the offering, including the name or names of any underwriters, dealers or agents, the purchase price paid by any underwriter, any discount, commission and other item constituting compensation, any
discount, commission or concession allowed or reallowed or paid to any dealer, and the proposed selling price to the public.
We agreed to indemnify the Selling
Stockholders against certain liabilities, including certain liabilities under the Securities Act.
The Selling Stockholders have advised us that they have not
entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their shares pursuant to the registration statement of which this prospectus forms a part. Upon our notification by the Selling
Stockholders that any material arrangement has been entered into with an underwriter or broker-dealer for the sale of shares through a block trade, special offering, exchange distribution, secondary distribution or a purchase by an underwriter or
broker-dealer pursuant to the registration statement of which this prospectus forms a part, we will file a supplement to this prospectus, if required, pursuant to Rule 497 under the Securities Act, disclosing certain material information, including:
|
|
|
the name of the Selling Stockholder;
|
|
|
|
the number of shares being offered;
|
|
|
|
the terms of the offering;
|
|
|
|
the names of the participating underwriters, broker-dealers or agents;
|
|
|
|
any discounts, commissions or other compensation paid to underwriters or broker-dealers and any discounts, commissions or concessions allowed or reallowed or paid by any underwriters to dealers;
|
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|
|
the public offering price; and
|
|
|
|
other material terms of the offering.
|
In addition, upon being notified by the Selling Stockholders that a donee,
pledgee, transferee, or other
successor-in-interest
intends to sell shares, we will, to the extent required, promptly file a supplement to this prospectus to name
specifically such person as a Selling Stockholder.
If underwriters are used in a firm commitment underwriting, the Selling Stockholders will execute an
underwriting agreement with those underwriters relating to the shares of common stock that the Selling Stockholders will offer. Unless otherwise set forth in a prospectus supplement, the obligations of the underwriters to purchase the shares of
common stock will be subject to conditions. The underwriters, if any, will purchase such shares on a firm commitment basis and will be obligated to purchase all of such shares.
The shares of common stock subject to the underwriting agreement will be acquired by the underwriters for their own account and may be resold by them from time to
time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. Underwriters may be deemed to have received compensation from the Selling Stockholders in the
form of underwriting discounts or commissions and may also receive commissions from the purchasers of these shares of common stock for whom they may act as agent. Underwriters may sell these shares to or through dealers. These dealers may receive
compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agent. Any public offering price and any discounts or concessions allowed or reallowed or paid to
dealers may be changed from time to time.
The Selling Stockholders may authorize underwriters to solicit offers by institutions to purchase the shares of common
stock subject to the underwriting agreement from the Selling Stockholders at the public offering price stated in a
105
prospectus supplement pursuant to delayed delivery contracts providing for payment and delivery on a specified date in the future. If the Selling Stockholders sell shares of common stock pursuant
to these delayed delivery contracts, the prospectus supplement will state that as well as the conditions to which these delayed delivery contracts will be subject and the commissions payable for that solicitation.
The applicable prospectus supplement will set forth whether or not underwriters may over-allot or effect transactions that stabilize, maintain or otherwise affect
the market price of the shares of common stock at levels above those that might otherwise prevail in the open market, including, for example, by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids.
Underwriters are not required to engage in any of these activities, or to continue such activities if commenced.
The Selling Stockholders may also enter into
hedging transactions with broker-dealers. In connection with such transactions, broker-dealers of other financial institutions may engage in short sales of our common stock in the course of hedging the positions they assume with the Selling
Stockholders. The Selling Stockholders may also enter into options or other transactions with broker-dealers or other financial institutions which require the delivery to such broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction). The Selling Stockholders and any underwriters, dealers or agents
participating in a distribution of the shares may be deemed to be underwriters within the meaning of the Securities Act, and any profit on the sale of the shares by the Selling Stockholders and any commissions received by broker-dealers
may be deemed to be underwriting commissions under the Securities Act.
In the ordinary course of their business activities, any underwriter, broker-dealer or
agent and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the
accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve our securities and other instruments. Any underwriter, broker-dealer or agent and
their respective affiliates may also engage in transactions with or perform services for us or provide other types of financing to us in the ordinary course of their business.
The Selling Stockholders will pay all fees and expenses incurred in connection with the registration and offering of the Secondary Shares pursuant to the
Registration Rights Agreement, including all registration and filing fees, any other regulatory fees, printing and delivery expenses, listing fees and expenses, fees and expenses of counsel, independent certified public accountants, any special
experts retained by us, and any underwriting discounts and commissions and transfer taxes. We estimate that the Selling Stockholders expenses for the registration in this prospectus of our common stock held by them are approximately $600,000.
We and the Selling Stockholders each may agree to indemnify an underwriter, broker-dealer or agent against certain liabilities related to the sale by the
Selling Stockholders of our common stock, including liabilities arising under the Securities Act.
To the extent required, this prospectus may be amended and/or
supplemented from time to time to describe a specific plan of distribution. Instead of selling the Secondary Shares under this prospectus, the Selling Stockholders may sell Secondary Shares in compliance with Rule 144 under the Securities Act, if
available, or pursuant to other available exemptions from the registration requirements of the Securities Act.
To comply with applicable state securities laws,
the Secondary Shares will be sold, if necessary, in such jurisdictions only through registered or licensed brokers or dealers. In addition, the Secondary Shares may not be sold in some states absent registration or pursuant to an exemption from
applicable state securities laws.
106
CUSTODIAN, TRANSFER AND DISTRIBUTION PAYING AGENT AND REGISTRAR
Our securities and cash are held in safekeeping by State Street Bank and Trust Company located at 100 Huntington Avenue, Boston, MA 02116. American Stock
Transfer & Trust Company, LLC acts as our transfer agent, distribution paying agent and registrar. The principal business address of our transfer agent is 6201 15th Avenue, Brooklyn, NY 11219.
LEGAL MATTERS
Certain legal
matters regarding the securities offered by this prospectus will be passed upon for us by Venable LLP, Baltimore, MD.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Our consolidated statement of assets and liabilities as of December 31, 2017 and December 31, 2016, and our related consolidated statement of operations,
changes in net assets, cash flows and financial highlights for the year ended December 31, 2017 and for the period from April 22, 2016 (inception) to December 31, 2016, have been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their report appearing herein and elsewhere in the registration statement. Such financial statements are included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing. The principal business address of Deloitte & Touche LLP is 30 Rockefeller Plaza, 41st Floor, New York, NY 10112-0015.
The consolidated statements of assets and liabilities, including the consolidated schedules of investments, of Full Circle and subsidiaries as of June 30, 2016
and 2015, and the related consolidated statements of operations, changes in net assets and cash flows for each of the two years in the period ended June 30, 2016 have been audited by RSM US LLP, an independent registered public accounting firm,
as stated in their report appearing herein and elsewhere in the registration statement.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form
N-2,
together with all amendments and related exhibits,
under the Securities Act, with respect to our shares of common stock offered by this prospectus. The registration statement contains additional information about us and our shares of common stock being offered by this prospectus.
We are subject to the informational requirements of the Exchange Act. Accordingly, we must also file with or submit to the SEC annual, quarterly and current reports,
proxy statements and other information meeting the informational requirements of the Exchange Act. You can review and copy such information at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and the SECs
Northeast Regional Office at 3 World Financial Center, Suite 400, New York, NY 10281. Such information is also available from the EDGAR database on the SECs web site at http://www.sec.gov. You also can obtain copies of such information, after
paying a duplicating fee, by sending a request by
e-mail
to publicinfo@sec.gov or by writing the SECs Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20549. You may obtain information on the operation of the SECs Public Reference Room by calling the SEC at
(800) SEC-0330.
We maintain a website at http://www.greatelmcc.com and make all of our annual, quarterly and current reports, proxy statements and other information available, free
of charge, on or through our website. Information on our website is not incorporated into or part of this prospectus or any prospectus supplement and should not be relied upon as such. You may also obtain such information free of charge by
contacting us in writing at 800 South Street, Suite 230, Waltham, MA 02453.
107
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Page
|
|
GREAT ELM CAPITAL CORP.
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|
|
|
|
Consolidated Statements of Assets and Liabilities as of March
31, 2018 and December 31, 2017 (unaudited)
|
|
|
F-2
|
|
Consolidated Statements of Operations for the three months ended March
31, 2018 and March 31, 2017 (unaudited)
|
|
|
F-3
|
|
Consolidated Statements of Changes in Net Assets for the three months ended March 31,
2018 and March 31, 2017 (unaudited)
|
|
|
F-4
|
|
Consolidated Statements of Cash Flows for the three months ended March
31, 2018 and March 31, 2017 (unaudited)
|
|
|
F-5
|
|
Consolidated Schedules of Investments as of March
31, 2018 (unaudited) and December 31, 2017
|
|
|
F-6
|
|
Notes to Consolidated Financial Statements (unaudited)
|
|
|
F-16
|
|
|
|
Report of Independent Registered Public Accounting
Firm
|
|
|
F-35
|
|
Consolidated Statements of Assets and Liabilities as of December
31, 2017 and December 31, 2016
|
|
|
F-36
|
|
Consolidated Statements of Operations for the year ended December
31, 2017 and the period from inception (April 22, 2016) through December 31, 2016
|
|
|
F-37
|
|
Consolidated Statements of Changes in Net Assets for the year ended December
31, 2017 and the period from inception (April 22, 2016) through December 31, 2016
|
|
|
F-38
|
|
Consolidated Statements of Cash Flows for the year ended December
31, 2017 and the period from inception (April 22, 2016) through December 31, 2016
|
|
|
F-39
|
|
Consolidated Schedules of Investments as of December
31, 2017 and December 31, 2016
|
|
|
F-40
|
|
Notes to Consolidated Financial Statements
|
|
|
F-50
|
|
|
|
|
|
Page
|
|
FULL CIRCLE CAPITAL CORPORATION
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-73
|
|
Consolidated Statements of Assets and Liabilities as of June
30, 2016 and June 30, 2015
|
|
|
F-75
|
|
Consolidated Statements of Operations for the years ended June
30, 2016 and June 30, 2015
|
|
|
F-76
|
|
Consolidated Statements of Changes in Net Assets for the years ended June
30, 2016 and June 30, 2015
|
|
|
F-77
|
|
Consolidated Statements of Cash Flows for the years ended June
30, 2016 and June 30, 2015
|
|
|
F-78
|
|
Consolidated Schedules of Investments as of June 30, 2016 and June
30, 2015
|
|
|
F-80
|
|
Notes to Consolidated Financial Statements
|
|
|
F-92
|
|
F-1
GREAT ELM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
Dollar amounts in
thousands (except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
(unaudited)
|
|
|
December 31, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Non-affiliated,
non-controlled
investments, at fair value (amortized cost of $215,505 and $179,558, respectively)
|
|
$
|
177,166
|
|
|
$
|
144,996
|
|
Non-affiliated,
non-controlled
short term investments, at fair value (amortized cost of $48,770 and $65,892, respectively)
|
|
|
48,767
|
|
|
|
65,890
|
|
Affiliated investments, at fair value (amortized cost of $4,240 and $4,240, respectively)
|
|
|
287
|
|
|
|
1,770
|
|
Controlled investments, at fair value (amortized cost of $17,961 and $18,487, respectively)
|
|
|
17,297
|
|
|
|
18,104
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
243,517
|
|
|
|
230,760
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
6,030
|
|
|
|
2,916
|
|
Receivable for investments sold
|
|
|
1,559
|
|
|
|
12
|
|
Interest receivable
|
|
|
4,747
|
|
|
|
5,027
|
|
Due from portfolio company
|
|
|
329
|
|
|
|
204
|
|
Due from affiliates
|
|
|
804
|
|
|
|
692
|
|
Prepaid expenses and other assets
|
|
|
128
|
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
257,114
|
|
|
$
|
239,913
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Notes payable 6.50% due September 18, 2022 (including unamortized discount of $1,363 and $1,435 at
March 31, 2018 and December 31, 2017, respectively)
|
|
$
|
31,268
|
|
|
$
|
31,196
|
|
Notes payable 6.75% due January 31, 2025 (including unamortized discount of $1,895 and $0 at
March 31, 2018 and December 31, 2017, respectively)
|
|
|
44,503
|
|
|
|
|
|
Payable for investments purchased
|
|
|
46,379
|
|
|
|
66,165
|
|
Interest payable
|
|
|
354
|
|
|
|
354
|
|
Distributions payable
|
|
|
884
|
|
|
|
3,015
|
|
Due to affiliates
|
|
|
7,216
|
|
|
|
6,193
|
|
Accrued expenses and other liabilities
|
|
|
914
|
|
|
|
703
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
131,518
|
|
|
$
|
107,626
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share (100,000,000 shares authorized, 10,652,401 and 10,652,401shares
issued and outstanding at March 31, 2018 and December 31, 2017, respectively)
|
|
$
|
107
|
|
|
$
|
107
|
|
Additional
paid-in
capital
|
|
|
198,426
|
|
|
|
198,426
|
|
Accumulated net realized losses
|
|
|
(33,011
|
)
|
|
|
(33,328
|
)
|
Undistributed net investment income
|
|
|
5,713
|
|
|
|
4,499
|
|
Net unrealized depreciation on investments
|
|
|
(45,639
|
)
|
|
|
(37,417
|
)
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
$
|
125,596
|
|
|
$
|
132,287
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and net assets
|
|
$
|
257,114
|
|
|
$
|
239,913
|
|
|
|
|
|
|
|
|
|
|
Net asset value per share
|
|
$
|
11.79
|
|
|
$
|
12.42
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-2
GREAT ELM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Dollar amounts in
thousands (except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
March 31,
2018
|
|
|
For the Three
Months Ended
March 31,
2017
|
|
Investment Income:
|
|
|
|
|
|
|
|
|
Interest income from:
|
|
|
|
|
|
|
|
|
Non-affiliated,
non-controlled
investments
|
|
$
|
6,709
|
|
|
$
|
5,339
|
|
Non-affiliated,
non-controlled
investments (PIK)
|
|
|
|
|
|
|
1,142
|
|
Affiliated investments
|
|
|
|
|
|
|
138
|
|
Controlled investments
|
|
|
432
|
|
|
|
207
|
|
Controlled investments (PIK)
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
7,365
|
|
|
|
6,826
|
|
|
|
|
|
|
|
|
|
|
Dividend income from
non-affiliated,
non-controlled
investments
|
|
|
106
|
|
|
|
46
|
|
Other income from:
|
|
|
|
|
|
|
|
|
Non-affiliated,
non-controlled
investments
|
|
|
17
|
|
|
|
443
|
|
Controlled investments
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
27
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
7,498
|
|
|
|
7,315
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Management fees
|
|
|
693
|
|
|
|
593
|
|
Incentive fees
|
|
|
966
|
|
|
|
1,023
|
|
Administration fees
|
|
|
310
|
|
|
|
495
|
|
Custody fees
|
|
|
14
|
|
|
|
13
|
|
Directors fees
|
|
|
49
|
|
|
|
27
|
|
Professional services
|
|
|
171
|
|
|
|
331
|
|
Interest expense
|
|
|
1,275
|
|
|
|
631
|
|
Other expenses
|
|
|
154
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,632
|
|
|
|
3,226
|
|
Accrued administration fee waiver
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Net expenses
|
|
|
3,632
|
|
|
|
3,221
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
3,866
|
|
|
|
4,094
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains (losses) on investment transactions:
|
|
|
|
|
|
|
|
|
Net realized gain (loss) from:
|
|
|
|
|
|
|
|
|
Non-affiliated,
non-controlled
investments
|
|
|
107
|
|
|
|
1,980
|
|
Affiliated investments
|
|
|
|
|
|
|
|
|
Controlled investments
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized gain (loss)
|
|
|
317
|
|
|
|
1,980
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation (depreciation) from:
|
|
|
|
|
|
|
|
|
Non-affiliated,
non-controlled
investments
|
|
|
(6,459
|
)
|
|
|
(743
|
)
|
Affiliated investments
|
|
|
(1,483
|
)
|
|
|
(1,591
|
)
|
Controlled investments
|
|
|
(280
|
)
|
|
|
(361
|
)
|
|
|
|
|
|
|
|
|
|
Total net change in unrealized appreciation (depreciation)
|
|
|
(8,222
|
)
|
|
|
(2,695
|
)
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains (losses)
|
|
|
(7,905
|
)
|
|
|
(715
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(4,039
|
)
|
|
$
|
3,379
|
|
|
|
|
|
|
|
|
|
|
Net investment income per share (basic and diluted):
|
|
$
|
0.36
|
|
|
$
|
0.32
|
|
Earnings per share (basic and diluted):
|
|
$
|
(0.38
|
)
|
|
$
|
0.27
|
|
Weighted average shares outstanding:
|
|
|
10,652,401
|
|
|
|
12,636,477
|
|
The accompanying notes are an integral part of these financial statements.
F-3
GREAT ELM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)
Dollar
amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
March 31,
2018
|
|
|
For the Three
Months Ended
March 31,
2017
|
|
Increase (decrease) in net assets resulting from operations:
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
3,866
|
|
|
$
|
4,094
|
|
Net realized gain (loss) on investments
|
|
|
317
|
|
|
|
1,980
|
|
Net change in unrealized appreciation (depreciation) on investments
|
|
|
(8,222
|
)
|
|
|
(2,695
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
|
(4,039
|
)
|
|
|
3,379
|
|
|
|
|
|
|
|
|
|
|
Distributions to stockholders from:
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(2,652
|
)
|
|
|
(3,137
|
)
|
|
|
|
|
|
|
|
|
|
Total distributions to stockholders
|
|
|
(2,652
|
)
|
|
|
(3,137
|
)
|
|
|
|
|
|
|
|
|
|
Capital transactions:
|
|
|
|
|
|
|
|
|
Purchases of common stock
|
|
|
|
|
|
|
(2,789
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from capital transactions
|
|
|
|
|
|
|
(2,789
|
)
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in net assets
|
|
|
(6,691
|
)
|
|
|
(2,547
|
)
|
|
|
|
|
|
|
|
|
|
Net assets at beginning of period
|
|
$
|
132,287
|
|
|
$
|
172,984
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
125,596
|
|
|
$
|
170,437
|
|
|
|
|
|
|
|
|
|
|
Undistributed net investment income
|
|
$
|
5,713
|
|
|
$
|
2,292
|
|
|
|
|
Capital share activity
|
|
|
|
|
|
|
|
|
Shares outstanding at the beginning of the period
|
|
|
10,652,401
|
|
|
|
12,790,880
|
|
Shares purchased
|
|
|
|
|
|
|
(245,729
|
)
|
|
|
|
|
|
|
|
|
|
Shares outstanding at the end of the period
|
|
|
10,652,401
|
|
|
|
12,545,151
|
|
The accompanying notes are an integral part of these financial statements.
F-4
GREAT ELM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Dollar amounts in
thousands
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
March 31,
2018
|
|
|
For the Three
Months Ended
March 31,
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(4,039
|
)
|
|
$
|
3,379
|
|
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash
provided by (used for) operating activities:
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(62,976
|
)
|
|
|
(74,710
|
)
|
Increase (decrease) in payable for investments purchased
|
|
|
(19,786
|
)
|
|
|
(6,844
|
)
|
Net change in short-term investments
|
|
|
17,120
|
|
|
|
|
|
Payment-in-kind
income
|
|
|
(244
|
)
|
|
|
(1,142
|
)
|
Proceeds from sales of investments
|
|
|
24,218
|
|
|
|
37,278
|
|
(Increase) decrease in receivable for investments sold
|
|
|
(1,547
|
)
|
|
|
7,642
|
|
Proceeds from principal payments
|
|
|
4,851
|
|
|
|
41,480
|
|
Net realized (gain) loss on investments
|
|
|
(317
|
)
|
|
|
(1,980
|
)
|
Net change in unrealized (appreciation) depreciation on investments
|
|
|
8,222
|
|
|
|
2,695
|
|
Amortization of premium and accretion of discount, net
|
|
|
(951
|
)
|
|
|
(1,178
|
)
|
Amortization of discount (premium) on long term debt
|
|
|
127
|
|
|
|
(63
|
)
|
Increase (decrease) in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in principal receivable
|
|
|
|
|
|
|
786
|
|
(Increase) decrease in interest receivable
|
|
|
(2,400
|
)
|
|
|
77
|
|
(Increase) decrease in deposit at broker
|
|
|
|
|
|
|
(7
|
)
|
(Increase) decrease in due from portfolio company
|
|
|
(125
|
)
|
|
|
124
|
|
(Increase) decrease in due from affiliates
|
|
|
(112
|
)
|
|
|
5
|
|
(Increase) decrease in prepaid expenses and other assets
|
|
|
174
|
|
|
|
19
|
|
Increase (decrease) in due to affiliates
|
|
|
1,023
|
|
|
|
326
|
|
Increase (decrease) in accrued expenses and other liabilities
|
|
|
211
|
|
|
|
(898
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities
|
|
|
(36,551
|
)
|
|
|
6,989
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Purchases of common stock
|
|
|
|
|
|
|
(2,789
|
)
|
Issuance of GECCM Notes payable
|
|
|
44,448
|
|
|
|
|
|
Distributions paid
|
|
|
(4,783
|
)
|
|
|
(4,219
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
39,665
|
|
|
|
(7,008
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
3,114
|
|
|
|
(19
|
)
|
Cash, beginning of period
|
|
|
2,916
|
|
|
|
66,782
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
6,030
|
|
|
$
|
66,763
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of
non-cash
financing
activities:
|
|
|
|
|
|
|
|
|
Dividends declared, not yet paid
|
|
$
|
884
|
|
|
$
|
1,041
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for excise tax
|
|
$
|
120
|
|
|
$
|
|
|
Cash paid for interest
|
|
$
|
1,148
|
|
|
$
|
568
|
|
The accompanying notes are an integral part of these financial statements.
F-5
GREAT ELM CAPITAL CORP.
CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited)
MARCH 31, 2018
Dollar amounts in thousand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Security
|
|
Industry
|
|
Interest
(1)
|
|
Maturity
|
|
|
Par
Amount/Quantity
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
% of
NAV
|
|
Investments at Fair Value - 174.43% of Net Assets
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlled Investments - 13.77% of Net Assets
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PE Facility Solutions, LLC
|
|
1st Lien, Senior Secured Revolver
(5,15)
|
|
Building Cleaning
and Maintenance Services
|
|
10.88% (L + 9.00%)
(6)
|
|
|
02/27/2022
|
|
|
|
2,348
|
|
|
$
|
2,348
|
|
|
$
|
2,348
|
|
|
|
1.87
|
%
|
San Diego, CA
|
|
1st Lien, Senior Secured
Revolver - Unfunded
(5,15)
|
|
|
|
10.88% (L + 9.00%)
(6)
|
|
|
02/27/2022
|
|
|
|
3,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Lien, Senior Secured Loan A
(5,15)
|
|
|
|
12.88% (L + 11.00%)
(6)
|
|
|
02/27/2022
|
|
|
|
9,900
|
|
|
|
9,900
|
|
|
|
9,900
|
|
|
|
7.88
|
%
|
|
|
1st Lien, Senior Secured Loan B
(5,15)
|
|
|
|
15.88% (L + 14.00%)
(6,7)
|
|
|
02/27/2022
|
|
|
|
6,000
|
|
|
|
5,713
|
|
|
|
5,049
|
|
|
|
4.02
|
%
|
|
|
Common Equity
(5,8,15)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,961
|
|
|
|
17,297
|
|
|
|
13.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Controlled Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,961
|
|
|
|
17,297
|
|
|
|
13.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments - 0.23% of Net Assets
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPS Acquisitions Limited and Ocean Protection Services Limited
|
|
1st Lien, Senior Secured Loan
(5,10,16)
|
|
Maritime Security Services
|
|
16.88% (L + 12.00%, 12.50% Floor)
(6,9)
|
|
|
06/01/2018
|
|
|
|
4,903
|
|
|
|
4,240
|
|
|
|
287
|
|
|
|
0.23
|
%
|
London, UK
|
|
Common Equity
(5,8,10,16)
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,240
|
|
|
|
287
|
|
|
|
0.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,240
|
|
|
|
287
|
|
|
|
0.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control,
Non-Affiliate
Investments - 141.05% of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Almonde, Inc.
|
|
2nd Lien, Senior Secured Loan
(5,10,17)
|
|
Software Services
|
|
9.56% (L + 7.25%, 8.25% floor)
(13)
|
|
|
06/13/2025
|
|
|
|
10,000
|
|
|
|
9,953
|
|
|
|
9,885
|
|
|
|
7.87
|
%
|
Philadelphia, PA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aptean Holdings, Inc.
|
|
2nd Lien, Senior Secured Loan
(5,29)
|
|
Software Services
|
|
11.81% (L + 9.50%, 10.50% Floor)
(13)
|
|
|
12/02/2023
|
|
|
|
2,189
|
|
|
|
2,216
|
|
|
|
2,203
|
|
|
|
1.75
|
%
|
Alpharetta, GA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avanti Communications Group PLC
|
|
2nd Lien, Senior Secured Bond
(10,11)
|
|
Wireless Telecommunications Services
|
|
12.50%
|
|
|
10/01/2021
|
|
|
|
34,917
|
|
|
|
30,633
|
|
|
|
27,934
|
|
|
|
22.24
|
%
|
London, UK
|
|
3rd Lien, Senior Secured Bond
(10,11)
|
|
|
|
14.50% (20.00% if PIK election is made)
(7)
|
|
|
10/01/2023
|
|
|
|
54,113
|
|
|
|
45,226
|
|
|
|
12,446
|
|
|
|
9.91
|
%
|
|
|
Common Equity
(8,10)
|
|
|
|
|
|
|
|
|
|
|
1,829,496
|
|
|
|
23
|
|
|
|
305
|
|
|
|
0.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,882
|
|
|
|
40,685
|
|
|
|
32.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Barge Line Company
|
|
1st Lien, Senior Secured Loan
(5,18)
|
|
Water Transport
|
|
10.63% (L + 8.75%, 9.75% Floor)
(6)
|
|
|
11/12/2020
|
|
|
|
9,127
|
|
|
|
7,543
|
|
|
|
5,387
|
|
|
|
4.29
|
%
|
Jeffersonville, IN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Security
|
|
Industry
|
|
Interest
(2)
|
|
Maturity
|
|
|
Par
Amount/Quantity
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
% of
NAV
|
|
Davidzon Radio, Inc.
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Radio Broadcasting
|
|
14.88% (L + 10.00%, 11.00% Floor)
(6,12)
|
|
|
03/31/2020
|
|
|
|
9,572
|
|
|
|
9,090
|
|
|
|
8,898
|
|
|
|
7.08
|
%
|
Brooklyn, NY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foresight Energy LP
|
|
1st Lien Senior Secured Loan
(5,27)
|
|
Oil, Gas & Coal
|
|
7.63% (L + 5.75%, 6.75% floor)
(6)
|
|
|
03/28/2022
|
|
|
|
5,000
|
|
|
|
4,941
|
|
|
|
4,935
|
|
|
|
3.93
|
%
|
Saint Louis, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full House Resorts, Inc.
|
|
1st Lien Senior Secured Note
(5,25)
|
|
Gaming, Lodging & Restaurants
|
|
9.31% (L + 7.00%, 8.00% floor)
(13)
|
|
|
02/02/2024
|
|
|
|
9,975
|
|
|
|
9,780
|
|
|
|
9,820
|
|
|
|
7.82
|
%
|
Las Vegas, NV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geo Specialty Chemicals, Inc.
|
|
1st Lien, Senior Secured Revolver
(5,19)
|
|
Chemicals
|
|
6.63% (L + 4.75%, 5.75% Floor)
(6)
|
|
|
04/30/2019
|
|
|
|
3,719
|
|
|
|
3,573
|
|
|
|
3,596
|
|
|
|
2.85
|
%
|
Lafayette, Indiana
|
|
1st Lien, Senior Secured
Revolver - Unfunded
(5,19)
|
|
|
|
6.63% (L + 4.75%, 5.75% Floor)
(6)
|
|
|
04/30/2019
|
|
|
|
656
|
|
|
|
(26
|
)
|
|
|
(22
|
)
|
|
|
(0.02
|
)%
|
|
|
1st Lien, Senior Secured Loan
(5,19)
|
|
|
|
6.63% (L + 4.75%, 5.75% Floor)
(6)
|
|
|
04/30/2019
|
|
|
|
6,234
|
|
|
|
5,990
|
|
|
|
6,029
|
|
|
|
4.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,537
|
|
|
|
9,603
|
|
|
|
7.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Wire Group Inc
|
|
2nd Lien, Senior Secured Bond
(11)
|
|
Manufacturing
|
|
10.75%
|
|
|
08/01/2021
|
|
|
|
17,500
|
|
|
|
16,409
|
|
|
|
16,538
|
|
|
|
13.17
|
%
|
Camden, NY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luling Lodging, LLC
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Hotel Operator
|
|
18.38% (L + 12.00%,12.25% Floor)
(6,8,9,12)
|
|
|
12/18/2017
|
|
|
|
2,715
|
|
|
|
1,300
|
|
|
|
2,501
|
|
|
|
1.99
|
%
|
Luling, TX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Baker International, LLC
|
|
2nd Lien, Senior Secured Bond
(11)
|
|
Industrial Conglomerates
|
|
8.75%
|
|
|
03/01/2023
|
|
|
|
9,500
|
|
|
|
9,279
|
|
|
|
9,120
|
|
|
|
7.26
|
%
|
Pittsburgh, PA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NANA Development Corp.
|
|
1st Lien, Senior Secured Bond
(11)
|
|
Industrial Other
|
|
9.50%
|
|
|
03/15/2019
|
|
|
|
3,519
|
|
|
|
3,445
|
|
|
|
3,481
|
|
|
|
2.77
|
%
|
Anchorage, AK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PEAKS Trust
2009-1
|
|
1st Lien, Senior Secured Loan
(5,10,16)
|
|
Consumer Finance
|
|
7.50% (L + 5.50%, 7.50% Floor)
(6)
|
|
|
01/27/2020
|
|
|
|
1,361
|
|
|
|
990
|
|
|
|
848
|
|
|
|
0.69
|
%
|
Carmel, IN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PR Wireless, Inc.
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Wireless Communications
|
|
7.56% (L + 5.25%)
(13)
|
|
|
06/29/2020
|
|
|
|
9,727
|
|
|
|
8,959
|
|
|
|
9,752
|
|
|
|
7.76
|
%
|
Guaynabo, PR
|
|
1st Lien, Senior Secured Delayed Draw Loan
(5,20)
|
|
|
|
7.56% (L + 5.25%)
(13)
|
|
|
06/29/2020
|
|
|
|
274
|
|
|
|
274
|
|
|
|
275
|
|
|
|
0.22
|
%
|
|
|
1st Lien, Senior Secured Unfunded Delayed Draw Loan
(5,20)
|
|
|
|
7.56% (L + 5.25%)
(13)
|
|
|
06/29/2020
|
|
|
|
1,098
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,233
|
|
|
|
10,025
|
|
|
|
7.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RiceBran Technologies Corporation
|
|
Warrants
(5,8,16)
|
|
Grain Mill Products
|
|
$1.60 Strike Price
|
|
|
05/12/2020
|
|
|
|
300,000
|
|
|
|
145
|
|
|
|
137
|
|
|
|
0.11
|
%
|
Scottsdale, AZ
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SESAC Holdco II LLC
|
|
2nd Lien, Senior Secured Loan
(5,21)
|
|
Business Services
|
|
9.13% (L + 7.25%)
(6)
|
|
|
02/24/2025
|
|
|
|
6,795
|
|
|
|
6,744
|
|
|
|
6,744
|
|
|
|
5.37
|
%
|
Nashville, TN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Security
|
|
Industry
|
|
Interest
(2)
|
|
Maturity
|
|
|
Par
Amount/Quantity
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
% of
NAV
|
|
Sungard Availability Services Capital, Inc.
|
|
1st Lien, Senior Secured Loan
(5,22)
|
|
Technology Services
|
|
11.88% (L+10.00%, 11.00% Floor)
(6)
|
|
|
10/01/2022
|
|
|
|
6,000
|
|
|
|
5,711
|
|
|
|
5,736
|
|
|
|
4.57
|
%
|
Wayne, PA
|
|
1st Lien, Senior Secured Loan
(5,24)
|
|
|
|
8.88% (L+7.00%, 8.00% Floor)
(6)
|
|
|
9/30/2021
|
|
|
|
5,000
|
|
|
|
4,637
|
|
|
|
4,645
|
|
|
|
3.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,348
|
|
|
|
10,381
|
|
|
|
8.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tallage Davis, LLC
|
|
1st Lien, Senior Secured Loan
(5,26)
|
|
Real Estate Services
|
|
11.00%
|
|
|
01/26/2023
|
|
|
|
250
|
|
|
|
250
|
|
|
|
249
|
|
|
|
0.20
|
%
|
Boston, MA
|
|
1st Lien, Senior Secured Loan - Unfunded
(5,26)
|
|
|
|
11.00%
|
|
|
01/26/2023
|
|
|
|
14,750
|
|
|
|
|
|
|
|
(89
|
)
|
|
|
(0.07
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
160
|
|
|
|
0.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tallage Lincoln, LLC
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Real Estate Services
|
|
12.31% (L + 10.00%, 11.00% Floor)
(13)
|
|
|
12/31/2019
|
|
|
|
4,998
|
|
|
|
4,999
|
|
|
|
4,973
|
|
|
|
3.96
|
%
|
Boston, MA
|
|
1st Lien, Senior Secured
Loan - Unfunded
(5,16)
|
|
|
|
12.31% (L + 10.00%, 11.00% Floor)
(13)
|
|
|
12/31/2019
|
|
|
|
2,250
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
(0.01
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,999
|
|
|
|
4,962
|
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Finance Company
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Consumer Finance
|
|
18.88% (L + 14.00%, 14.75% Floor)
(6,12)
|
|
|
03/31/2018
|
|
|
|
2,191
|
|
|
|
2,191
|
|
|
|
1,963
|
|
|
|
1.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Silver Springs, MD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Selling Source, LLC
|
|
1st Lien, Senior Secured Loan
(5,16,23)
|
|
Information and Data Services
|
|
17.00% (9.00% PIK, 8.00% Cash)
(7,9)
|
|
|
12/31/2017
|
|
|
|
5,689
|
|
|
|
4,202
|
|
|
|
4,807
|
|
|
|
3.83
|
%
|
Las Vegas, NV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tru Taj, LLC
|
|
1st Lien, Senior Secured Bond
(11)
|
|
Retail
|
|
12.00%
|
|
|
08/15/2021
|
|
|
|
16,000
|
|
|
|
15,304
|
|
|
|
12,360
|
|
|
|
9.84
|
%
|
Wayne, NJ
|
|
1st Lien, Debtor in Possession Note
(5,28)
|
|
|
|
11.00%
|
|
|
01/22/2019
|
|
|
|
1,655
|
|
|
|
1,724
|
|
|
|
1,723
|
|
|
|
1.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,028
|
|
|
|
14,083
|
|
|
|
11.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Control,
Non- Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215,505
|
|
|
|
177,166
|
|
|
|
141.05
|
%
|
Short-Term Investments - 38.82% of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Street Institutional Treasury Money Market Fund
|
|
Money Market Mutual Fund
|
|
|
|
|
|
|
|
|
|
|
23,868,201
|
|
|
|
23,869
|
|
|
|
23,869
|
|
|
|
19.00
|
%
|
United States Treasury
|
|
Treasury Bill
|
|
|
|
1.69%
|
|
|
6/28/2018
|
|
|
|
25,000
|
|
|
|
24,901
|
|
|
|
24,898
|
|
|
|
19.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Short-Term Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,770
|
|
|
|
48,767
|
|
|
|
38.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENTS
(14)
193.88% of Net
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
286,476
|
|
|
$
|
243,517
|
|
|
|
193.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities in Excess of Assets - (93.88)% of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(117,921
|
)
|
|
|
(93.88
|
)%
|
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
125,596
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
A majority of the Companys variable rate debt investments bear interest at a rate that is determined by reference to LIBOR (London Interbank Offered Rate) or the U.S. prime rate, and which
is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of March 31, 2018. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the
minimum rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate.
|
F-8
(2)
|
The Companys investments are generally acquired in private transactions exempt from registration under the Securities Act of 1933 and, therefore, are generally subject to limitations on resale, and may be deemed
to be restricted securities under the Securities Act of 1933.
|
(3)
|
Controlled Investments are investments in those companies that are Controlled Investments of the Company, as defined in the Investment Company Act. A company is deemed to
be a Controlled Investment of the Company if the Company owns more than 25% of the voting securities of such company.
|
(4)
|
Affiliate Investments are investments in those companies that are Affiliated Companies of the Company, a defined in the Investment Company Act, which are not
Controlled Investments. A company is deemed to be an Affiliate of the Company if the Company owns 5% or more, but less than 25%, of the voting securities of such company.
|
(5)
|
Investments classified as Level 3 whereby fair value was determined by the Companys board of directors.
|
(6)
|
The interest rate on these loans may be subject to the greater of a LIBOR floor, if any, or 1 month LIBOR plus a base rate. The 1 month LIBOR as of March 31, 2018 was 1.88%.
|
(7)
|
Security pays, or has the option to pay, all of its interest in kind.
|
(8)
|
Non-income
producing security.
|
(9)
|
Investment was on
non-accrual
status as of March 31, 2018.
|
(10)
|
Indicates assets that the Company believes do not represent qualifying assets under Section 55(a) of the Investment Company Act. Qualifying assets must represent at least 70% of the
Companys total assets at the time of acquisition of any additional
non-qualifying
assets. Of the Companys total assets, 20.12% were
non-qualifying
assets as
of March 31, 2018.
|
(11)
|
Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933. Such security may be sold in certain transactions (normally to qualified institutional buyers) and remain exempt from
registration.
|
(12)
|
The interest rate on these loans includes a default interest rate.
|
(13)
|
The interest rate on these loans is subject to the greater of a LIBOR floor or 3 month LIBOR plus a base rate. The 3 month LIBOR as of March 31, 2018 was 2.31%.
|
(14)
|
As of March 31, 2018, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $2,245; the aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value was $46,284; the net unrealized depreciation was $44,039; the aggregate cost of securities for Federal income tax purposes was $287,553.
|
(15)
|
Restricted security initially obtained on February 28, 2017.
|
(16)
|
Restricted security initially obtained on November 3, 2016.
|
(17)
|
Restricted security initially obtained on December 14, 2017.
|
(18)
|
Restricted security initially obtained on May 17, 2017.
|
(19)
|
Restricted security initially obtained on September 28, 2017.
|
(20)
|
Restricted security initially obtained on November 15, 2017.
|
(21)
|
Restricted security initially obtained on December 13, 2017.
|
(22)
|
Restricted security initially obtained on December 20, 2017.
|
(23)
|
Loan defaulted on January 1, 2018.
|
(24)
|
Restricted security initially obtained on January 24, 2018.
|
(25)
|
Restricted security initially obtained on February 2, 2018.
|
(26)
|
Restricted security initially obtained on March 20, 2018.
|
(27)
|
Restricted security initially obtained on March 22, 2018.
|
(28)
|
Restricted security initially obtained on March 26, 2018.
|
(29)
|
Restricted security initially obtained on March 27, 2018.
|
L = LIBOR
F-9
As of March 31, 2018, the Companys investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
Investment Type
|
|
Cost
|
|
|
Fair Value
|
|
1st Lien/Senior Secured Debt
|
|
$
|
237,538
|
|
|
$
|
194,308
|
|
Equity/Other
|
|
|
168
|
|
|
|
442
|
|
|
|
|
|
|
|
|
|
|
Total Long Term Investments
|
|
$
|
237,706
|
|
|
$
|
194,750
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018, the industry composition of the Companys portfolio at fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
Investments at Fair Value
|
|
|
Percentage of Total
Investment
Portfolio
|
|
Wireless Telecommunications Services
|
|
$
|
40,685
|
|
|
|
20.9
|
%
|
Building Cleaning and Maintenance Services
|
|
|
17,297
|
|
|
|
8.9
|
%
|
Manufacturing
|
|
|
16,538
|
|
|
|
8.5
|
%
|
Retail
|
|
|
14,083
|
|
|
|
7.2
|
%
|
Software Services
|
|
|
12,088
|
|
|
|
6.2
|
%
|
Technology Services
|
|
|
10,381
|
|
|
|
5.3
|
%
|
Wireless Communications
|
|
|
10,025
|
|
|
|
5.1
|
%
|
Gaming, Lodging & Restaurants
|
|
|
9,820
|
|
|
|
5.0
|
%
|
Chemicals
|
|
|
9,603
|
|
|
|
4.9
|
%
|
Industrial Conglomerates
|
|
|
9,120
|
|
|
|
4.7
|
%
|
Radio Broadcasting
|
|
|
8,898
|
|
|
|
4.6
|
%
|
Business Services
|
|
|
6,744
|
|
|
|
3.5
|
%
|
Water Transport
|
|
|
5,387
|
|
|
|
2.8
|
%
|
Real Estate Services
|
|
|
5,122
|
|
|
|
2.6
|
%
|
Oil, Gas & Coal
|
|
|
4,935
|
|
|
|
2.5
|
%
|
Information and Data Services
|
|
|
4,807
|
|
|
|
2.5
|
%
|
Industrial Other
|
|
|
3,481
|
|
|
|
1.8
|
%
|
Consumer Finance
|
|
|
2,811
|
|
|
|
1.4
|
%
|
Hotel Operator
|
|
|
2,501
|
|
|
|
1.3
|
%
|
Maritime Security Services
|
|
|
287
|
|
|
|
0.1
|
%
|
Grain Mill Products
|
|
|
137
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
194,750
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018, the geographic composition of the Companys portfolio at fair value was as follows:
|
|
|
|
|
Geographic
|
|
March 31, 2018
|
|
United States
|
|
|
79.0
|
%
|
United Kingdom
|
|
|
21.0
|
%
|
|
|
|
|
|
Total percentage of net assets
|
|
|
100.0
|
%
|
|
|
|
|
|
F-10
GREAT ELM CAPITAL CORP.
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2017
Dollar amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Security
|
|
Industry
|
|
Interest
(2)
|
|
Maturity
|
|
|
Par
Amount/Quantity
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
% of
NAV
|
|
Investments at Fair Value - 174.43% of Net Assets
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlled Investments - 13.68% of Net Assets
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PE Facility Solutions, LLC
|
|
1st Lien, Senior Secured Revolver
(5,15)
|
|
Building Cleaning and Maintenance Services
|
|
11.38% (L + 10.00%)
(6)
|
|
|
02/27/2022
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
San Diego, CA
|
|
1st Lien, Senior Secured
Revolver -
Unfunded
(5,15)
|
|
|
|
11.38% (L + 10.00%)
(6)
|
|
|
02/27/2022
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Lien, Senior Secured Loan A
(5,15)
|
|
|
|
12.38% (L + 11.00%)
(6)
|
|
|
02/27/2022
|
|
|
|
9,900
|
|
|
|
9,900
|
|
|
|
9,900
|
|
|
|
7.48
|
%
|
|
|
1st Lien, Senior Secured Loan B
(5,15)
|
|
|
|
15.38% (L + 14.00%)
(6,7)
|
|
|
02/27/2022
|
|
|
|
9,105
|
|
|
|
8,587
|
|
|
|
8,204
|
|
|
|
6.20
|
%
|
|
|
Common Equity
(5,8,15)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,487
|
|
|
|
18,104
|
|
|
|
13.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Controlled Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,487
|
|
|
|
18,104
|
|
|
|
13.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments - 1.34% of Net Assets
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPS Acquisitions Limited and Ocean Protection Services Limited
|
|
1st Lien, Senior Secured Loan
(5,10,16)
|
|
Maritime Security Services
|
|
16.38% (L + 12.00%, 12.50% Floor)
(6,7,9)
|
|
|
06/01/2018
|
|
|
|
4,903
|
|
|
|
4,240
|
|
|
|
1,770
|
|
|
|
1.34
|
%
|
London, UK
|
|
Common Equity
(5,8,10,16)
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,240
|
|
|
|
1,770
|
|
|
|
1.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,240
|
|
|
|
1,770
|
|
|
|
1.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control,
Non-Affiliate
Investments - 109.60% of
Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Almonde, Inc.
|
|
2nd Lien, Senior Secured Loan
(5,10,17)
|
|
Software Services
|
|
8.94% (L + 7.25%, 8.25% floor)
(13)
|
|
|
06/13/2025
|
|
|
|
5,000
|
|
|
|
5,037
|
|
|
|
5,005
|
|
|
|
3.78
|
%
|
Philadelphia, PA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avanti Communications Group PLC
|
|
2nd Lien, Senior Secured Bond
(10,11)
|
|
Wireless Telecommunications Services
|
|
12.50%
|
|
|
10/01/2021
|
|
|
|
34,917
|
|
|
|
30,427
|
|
|
|
28,807
|
|
|
|
21.78
|
%
|
London, UK
|
|
3rd Lien, Senior Secured Bond
(10,11)
|
|
|
|
14.50% (20.00% if PIK election is made)
(7)
|
|
|
10/01/2023
|
|
|
|
54,113
|
|
|
|
45,011
|
|
|
|
13,257
|
|
|
|
10.02
|
%
|
|
|
Common Equity
(8,10)
|
|
|
|
|
|
|
|
|
|
|
1,829,496
|
|
|
|
23
|
|
|
|
213
|
|
|
|
0.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,461
|
|
|
|
42,277
|
|
|
|
31.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Security
|
|
Industry
|
|
Interest
(2)
|
|
Maturity
|
|
|
Par
Amount/Quantity
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
% of
NAV
|
|
Commercial Barge Line Company
|
|
1st Lien, Senior Secured Loan
(5,18)
|
|
Water Transport
|
|
10.32% (L + 8.75%, 9.75% Floor)
(6)
|
|
|
11/12/2020
|
|
|
|
9,254
|
|
|
|
7,551
|
|
|
|
5,279
|
|
|
|
3.99
|
%
|
Jeffersonville, IN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Davidzon Radio, Inc.
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Radio Broadcasting
|
|
14.38% (L + 10.00%, 11.00% Floor)
(6,14)
|
|
|
03/31/2020
|
|
|
|
9,685
|
|
|
|
9,144
|
|
|
|
8,876
|
|
|
|
6.71
|
%
|
Brooklyn, NY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geo Specialty Chemicals, Inc.
|
|
1st Lien, Senior Secured Revolver
(5,19)
|
|
Chemicals
|
|
6.28% (L + 4.75%, 5.75% Floor)
(6)
|
|
|
04/30/2019
|
|
|
|
3,646
|
|
|
|
3,465
|
|
|
|
3,500
|
|
|
|
2.64
|
%
|
Lafayette, Indiana
|
|
1st Lien, Senior Secured Revolver - Unfunded
(5,19)
|
|
|
|
6.28% (L + 4.75%, 5.75% Floor)
(6)
|
|
|
04/30/2019
|
|
|
|
729
|
|
|
|
(29
|
)
|
|
|
(29
|
)
|
|
|
(0.02
|
)%
|
|
|
1st Lien, Senior Secured Loan
(5,19)
|
|
|
|
6.28% (L + 4.75%, 5.75% Floor)
(6)
|
|
|
04/30/2019
|
|
|
|
6,563
|
|
|
|
6,248
|
|
|
|
6,300
|
|
|
|
4.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,684
|
|
|
|
9,771
|
|
|
|
7.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Wire Group Inc
|
|
2nd Lien, Senior Secured Bond
(11)
|
|
Manufacturing
|
|
10.75%
|
|
|
08/01/2021
|
|
|
|
13,000
|
|
|
|
12,071
|
|
|
|
11,960
|
|
|
|
9.04
|
%
|
Camden, NY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luling Lodging, LLC
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Hotel Operator
|
|
18.38% (L + 12.00%,12.25% Floor)
(6,9,12)
|
|
|
12/18/2017
|
|
|
|
2,715
|
|
|
|
1,300
|
|
|
|
1,605
|
|
|
|
1.21
|
%
|
Luling, TX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Baker International, LLC
|
|
2nd Lien, Senior Secured Bond
(11)
|
|
Industrial Conglomerates
|
|
8.75%
|
|
|
03/01/2023
|
|
|
|
5,000
|
|
|
|
4,876
|
|
|
|
4,838
|
|
|
|
3.66
|
%
|
Pittsburgh, PA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NANA Development Corp.
|
|
1st Lien, Senior Secured Bond
(11)
|
|
Industrial Other
|
|
9.50%
|
|
|
03/15/2019
|
|
|
|
7,000
|
|
|
|
6,902
|
|
|
|
7,070
|
|
|
|
5.34
|
%
|
Anchorage, AK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PEAKS Trust
2009-1
|
|
1st Lien, Senior Secured Loan
(5,10,16)
|
|
Consumer Finance
|
|
7.50% (L + 5.50%, 7.50% Floor)
(6)
|
|
|
01/27/2020
|
|
|
|
1,462
|
|
|
|
1,020
|
|
|
|
878
|
|
|
|
0.67
|
%
|
Carmel, IN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PR Wireless, Inc.
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Wireless Communications
|
|
6.94% (L + 5.25%)
(13)
|
|
|
06/29/2020
|
|
|
|
9,754
|
|
|
|
8,908
|
|
|
|
9,749
|
|
|
|
7.37
|
%
|
Guaynabo, PR
|
|
1st Lien, Senior Secured Delayed Draw Loan
(5,20)
|
|
|
|
8.75% (Prime Rate + 4.25%)
(13)
|
|
|
06/29/2020
|
|
|
|
274
|
|
|
|
274
|
|
|
|
274
|
|
|
|
0.21
|
%
|
|
|
1st Lien, Senior Secured Unfunded Delayed Draw Loan
(5,20)
|
|
|
|
8.75% (Prime Rate + 4.25%)
(13)
|
|
|
06/29/2020
|
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,182
|
|
|
|
10,023
|
|
|
|
7.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Security
|
|
Industry
|
|
Interest
(2)
|
|
Maturity
|
|
|
Par
Amount/Quantity
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
% of
NAV
|
|
RiceBran Technologies Corporation
|
|
Warrants
(5,8,16)
|
|
Grain Mill Products
|
|
$1.60 Strike Price
|
|
|
05/12/2020
|
|
|
|
300,000
|
|
|
|
145
|
|
|
|
136
|
|
|
|
0.10
|
%
|
Scottsdale, AZ
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SESAC Holdco II LLC
|
|
2nd Lien, Senior Secured Loan
(5,21)
|
|
Business Services
|
|
8.94% (L+7.25%)
(13)
|
|
|
02/24/2025
|
|
|
|
4,150
|
|
|
|
4,103
|
|
|
|
4,156
|
|
|
|
3.14
|
%
|
Nashville, TN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sungard Availability Services Capital, Inc.
|
|
1st Lien, Senior Secured Loan
(5,22)
|
|
Technology Services
|
|
11.69% (L+10.00%)
(13)
|
|
|
10/01/2022
|
|
|
|
6,000
|
|
|
|
5,700
|
|
|
|
5,952
|
|
|
|
4.50
|
%
|
Wayne, PA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tallage Lincoln, LLC.
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Real Estate Services
|
|
11.69% (L + 10.00%, 11.00% Floor)
(13)
|
|
|
12/31/2019
|
|
|
|
5,723
|
|
|
|
5,725
|
|
|
|
5,718
|
|
|
|
4.32
|
%
|
Boston, MA
|
|
1st Lien, Senior Secured Loan -Unfunded
(5,16)
|
|
|
|
11.69% (L + 10.00%, 11.00% Floor)
(13)
|
|
|
12/31/2019
|
|
|
|
2,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,725
|
|
|
|
5,718
|
|
|
|
4.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Finance Company
|
|
1st Lien, Senior Secured Loan
(5,16)
|
|
Consumer Finance
|
|
17.88% (L + 13.50%, 14.00% Floor)
(6,12)
|
|
|
03/31/2018
|
|
|
|
2,191
|
|
|
|
2,191
|
|
|
|
1,993
|
|
|
|
1.51
|
%
|
Silver Springs, MD
|
|
1st Lien, Senior Secured Unfunded Loan
(5,16)
|
|
|
|
17.88% (L + 13.50%, 14.00% Floor)
(6,12)
|
|
|
03/31/2018
|
|
|
|
709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,191
|
|
|
|
1,993
|
|
|
|
1.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Selling Source, LLC
|
|
1st Lien, Senior Secured Loan
(5,16,23)
|
|
Information and Data Services
|
|
17.00% (9.00% PIK, 8.00% Cash)
(7,9)
|
|
|
12/31/2017
|
|
|
|
5,689
|
|
|
|
4,202
|
|
|
|
4,659
|
|
|
|
3.52
|
%
|
Las Vegas, NV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tru Taj, LLC
|
|
1st Lien, Senior Secured Bond
(11)
|
|
Retail
|
|
12.00%
|
|
|
08/15/2021
|
|
|
|
16,000
|
|
|
|
15,264
|
|
|
|
14,800
|
|
|
|
11.19
|
%
|
Wayne, NJ
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control, Non-Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179,558
|
|
|
|
144,996
|
|
|
|
109.60
|
%
|
Short-Term Investments - 49.81% of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Street Institutional Treasury Money Market Fund
|
|
Money Market Mutual Fund
|
|
|
|
|
|
|
|
|
|
|
16,052,817
|
|
|
|
16,053
|
|
|
|
16,053
|
|
|
|
12.13
|
%
|
United States Treasury
|
|
Treasury Bill
|
|
|
|
|
|
|
3/29/2018
|
|
|
|
50,000
|
|
|
|
49,839
|
|
|
|
49,837
|
|
|
|
37.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Short-Term Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,892
|
|
|
|
65,890
|
|
|
|
49.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENTS
(14)
174.43% of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
268,177
|
|
|
$
|
230,760
|
|
|
|
174.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities in Excess of Assets - (74.43)% of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(98,473
|
)
|
|
|
(74.43
|
)%
|
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
132,287
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Companys investments are generally acquired in private transactions exempt from registration under the Securities Act of 1933 and, therefore, are generally subject to limitations on resale, and may be deemed
to be restricted securities under the Securities Act of 1933.
|
(2)
|
A majority of the Companys variable rate debt investments bear interest at a rate that is determined by reference to LIBOR (London Interbank Offered Rate) or the U.S. prime rate, and which
is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of March 31, 2018. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the
minimum rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate.
|
(3)
|
Controlled Investments are investments in those companies that are Controlled Investments of the Company, as defined in the Investment Company Act. A company is deemed to
be a Controlled Investment of the Company if the Company owns more than 25% of the voting securities of such company.
|
(4)
|
Affiliate Investments are investments in those companies that are Affiliated Companies of the Company, a defined in the Investment Company Act, which are not
Controlled Investments. A company is deemed to be an Affiliate of the Company if the Company owns 5% or more, but less than 25%, of the voting securities of such company.
|
(5)
|
Investments classified as Level 3 whereby fair value was determined by the Companys board of directors.
|
(6)
|
The interest rate on these loans may be subject to the greater of a LIBOR floor, if any, or 1 month LIBOR plus a base rate. The 1 month LIBOR as of December 31, 2017 was 1.56%.
|
(7)
|
Security pays, or has the option to pay, all of its interest in kind.
|
(8)
|
Non-income
producing security.
|
F-13
(9)
|
Investment was on
non-accrual
status as of December 31, 2017.
|
(10)
|
Indicates assets that the Company believes do not represent qualifying assets under Section 55(a) of the Investment Company Act. Qualifying assets must represent at least 70% of the
Companys total assets at the time of acquisition of any additional
non-qualifying
assets. Of the Companys total assets, 20.82% were
non-qualifying
assets as
of December 31, 2017.
|
(11)
|
Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933. Such security may be sold in certain transactions (normally to qualified institutional buyers) and remain exempt from
registration.
|
(12)
|
The interest rate on these loans includes a default interest rate.
|
(13)
|
The interest rate on these loans is subject to the greater of a LIBOR floor or 3 month LIBOR plus a base rate. The 3 month LIBOR as of December 31, 2017 was 1.69%.
|
(14)
|
As of December 31, 2017, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $2,353; the aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value was $25,103; the net unrealized depreciation was $22,750; the aggregate cost of securities for Federal income tax purposes was $253,510.
|
(15)
|
Restricted security initially obtained on February 28, 2017.
|
(16)
|
Restricted security initially obtained on November 3, 2016.
|
(17)
|
Restricted security initially obtained on December 14, 2017.
|
(18)
|
Restricted security initially obtained on May 17, 2017.
|
(19)
|
Restricted security initially obtained on September 28, 2017.
|
(20)
|
Restricted security initially obtained on November 15, 2017.
|
(21)
|
Restricted security initially obtained on December 13, 2017.
|
(22)
|
Restricted security initially obtained on December 20, 2017.
|
(23)
|
Loan defaulted on January 1, 2018.
|
L = LIBOR
As of December 31, 2017 the Companys investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Investment Type
|
|
Cost
|
|
|
Fair Value
|
|
1st Lien/Senior Secured Debt
|
|
$
|
202,117
|
|
|
$
|
164,521
|
|
Equity/Other
|
|
|
168
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
Total Long Term Investments
|
|
$
|
202,285
|
|
|
$
|
164,870
|
|
|
|
|
|
|
|
|
|
|
F-14
As of December 31, 2017 the industry composition of the Companys portfolio at fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Investments at Fair
Value
|
|
|
Percentage of
Total
Investment
Portfolio
|
|
Wireless Telecommunications Services
|
|
$
|
42,277
|
|
|
|
25.6
|
%
|
Building Cleaning and Maintenance Services
|
|
|
18,104
|
|
|
|
11.0
|
%
|
Retail
|
|
|
14,800
|
|
|
|
9.0
|
%
|
Manufacturing
|
|
|
11,960
|
|
|
|
7.3
|
%
|
Wireless Communications
|
|
|
10,023
|
|
|
|
6.1
|
%
|
Chemicals
|
|
|
9,771
|
|
|
|
5.9
|
%
|
Radio Broadcasting
|
|
|
8,876
|
|
|
|
5.4
|
%
|
Industrial Other
|
|
|
7,070
|
|
|
|
4.3
|
%
|
Technology Services
|
|
|
5,952
|
|
|
|
3.6
|
%
|
Real Estate Services
|
|
|
5,718
|
|
|
|
3.5
|
%
|
Water Transport
|
|
|
5,279
|
|
|
|
3.2
|
%
|
Software Services
|
|
|
5,005
|
|
|
|
3.0
|
%
|
Industrial Conglomerates
|
|
|
4,838
|
|
|
|
2.9
|
%
|
Information and Data Services
|
|
|
4,659
|
|
|
|
2.8
|
%
|
Business Services
|
|
|
4,156
|
|
|
|
2.5
|
%
|
Consumer Finance
|
|
|
2,871
|
|
|
|
1.7
|
%
|
Maritime Security Services
|
|
|
1,770
|
|
|
|
1.1
|
%
|
Hotel Operator
|
|
|
1,605
|
|
|
|
1.0
|
%
|
Grain Mill Products
|
|
|
136
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
164,870
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017 the geographic composition of the Companys portfolio at fair value was as follows:
|
|
|
|
|
Geographic
|
|
December 31, 2017
|
|
United States
|
|
|
73.3
|
%
|
United Kingdom
|
|
|
26.7
|
%
|
|
|
|
|
|
Total percentage of net assets
|
|
|
100.0
|
%
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-15
GREAT ELM CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the
year ended December 31, 2017 and
Dollar amounts in thousands, except share and 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 Circles 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 Companys 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
.
The Companys previous consolidated financial statements were reclassified in order to be consistent with the
format used for the March 31, 2018 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 Companys accounts and the accounts of the
Companys wholly-owned, or previously wholly-owned, subsidiaries PE Facility Solutions, LLC and Double Deuce Lodging LLC. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
. The preparation of the consolidated 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 consolidated 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.
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, 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.
F-16
Interest Income received as
paid-in-kind
(PIK) is reported separately in the Statements of Operations. Income is included as PIK if the instrument solely provides for settlement in kind. In the event that the borrower can settle in kind or via cash payment, the income is not
included as PIK until the borrower elects to pay in kind and the payment is received by the Company. In the event there is a lesser cash rate in a PIK toggle instrument, income is accrued at the lesser cash rate until the coupon is paid in kind and
such larger payment is received by the Company.
Certain of the Companys 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 instruments 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.
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 Companys 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 Companys 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 Companys documented 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 Companys investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ 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 Companys investments than on the fair values 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 purchaser, or the market for a particular security
cause current market quotations to not reflect the fair value of the security.
F-17
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:
|
|
|
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;
|
|
|
|
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;
|
|
|
|
The fair value of investments comprising in the aggregate less than 5% of the Companys total capitalization may be determined by GECM in good faith in accordance with the Companys valuation policy without
the employment of an independent valuation firm.
|
The Companys audit committee recommends, and the Board of Directors approves, the fair
value of the investments in the Companys 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 companys 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 has elected to be taxed as a regulated investment company (RIC) under
subchapter M of the Code for the partial taxable period 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 carryover ICTI must be distributed prior to the 15th day 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 Companys stockholders and will not be reflected in the consolidated
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 $124 of excise tax expense in fiscal 2017 and has accrued $0 for fiscal 2018.
F-18
At December 31, 2017, the Company, for federal income tax purposes, had capital loss carryforwards of $46,984 which
will reduce its taxable income arising from future net realized gains on investment transactions, if any, to the extent permitted by the Internal Revenue 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 tax. On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the Modernization Act) was signed by the President. The Modernization Act
changed the capital loss carryforward rules as they relate to regulated investment companies. Capital losses generated in tax years beginning after the date of enactment may now be carried forward indefinitely, and retain the character of the
original loss. Of the capital loss carryforwards at December 31, 2017, $46,984 are limited losses and available for use subject to annual limitation under Section 382. Of the capital losses at December 31, 2017, $16,815 are short-term
and $30,169 are long 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 Companys 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.
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 GECMs 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 Companys 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 Companys 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 months ended March 31, 2017 and the three months ended March 31,
2018, management fees amounted to $593 and $693, respectively. As of December 31, 2017 and March 31, 2018, $612 and $693 remained payable, respectively.
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 Companys
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 Companys 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 Companys net assets at the end of the immediately preceding calendar quarter, in any calendar quarter, GECM will receive 20.0% of the Companys
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.
F-19
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
December 31, 2017 was $20,168. Accrued Unpaid Income as of December 31, 2017 includes PIK income of $11,709 earned during the year ended December 31, 2017 and $1,962 of accrued interest income that is expected to PIK under PIK toggle
elections. Accrued Unpaid Income as of March 31, 2018 was $23,677. Accrued Unpaid Income includes PIK income of $244 earned during the three months ended March 31, 2018 and $1,962 of accrued interest income that is expected to PIK under
PIK toggle elections.
Any income incentive fee otherwise payable with respect to Accrued Unpaid Income (collectively, the Accrued Unpaid Income Incentive
Fees) is 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 Companys
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 Companys
pre-incentive
fee net investment income, realized gains and losses and unrealized appreciation and depreciation from and after November 4, 2016.
For the three months ended March 31, 2017 and the three months ended March 31, 2018, the Company incurred Incentive Fees based on income of $1,023 and
$966, respectively. As of December 31, 2017 and March 31, 2018, $5,257 and $6,224 remained payable of which $5,257 of the payable at December 31, 2017 and $4,735 of the payable at March 31, 2018 was Accrued Unpaid Income
Incentive Fees and $0 was immediately payable after calculating the total return requirement. For the year ended December 31, 2017 and the three months ended March 31, 2018, 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 GECMs services under the Investment Management Agreement or otherwise as an investment
adviser of the Company.
The Companys chief executive officer is also the chief investment officer of GECM, and the chief executive officer and a member of
the board of directors of GEC. The Companys chief compliance officer is also the chief operating officer, chief compliance officer and general counsel of GECM, and the president and chief operating officer of GEC.
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 Companys average net asset value during such period. GECMs
expense cap was calculated retrospectively for the year ending November 4, 2017 and the cap on costs was determined to be $0 and $70 of the $80 accrued at December 31, 2016 was reversed for the year ended December 31, 2017 with $10
due from our
sub-administrator
remaining waived.
F-20
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 GECMs services under the Administration
Agreement or otherwise as administrator for the Company.
For the three months ended March 31, 2017 and the three months ended March 31, 2018, the
Company incurred expenses under the Administration Agreement of $495 and $310, respectively. As of December 31, 2017 and March 31, 2018, $257 and $310 remained payable, respectively.
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.
A financial instruments 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
|
|
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.
|
|
|
|
|
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.
|
F-21
Level 3 Instruments Valuation Techniques and Significant Inputs
|
|
|
Bank Loans, Corporate Debt, and Other Debt Obligations
|
|
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.
|
|
|
Equity
|
|
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.
|
As noted above, the income and market approaches were used in the determination of fair value of certain Level 3 assets as of
December 31, 2017 and March 31, 2018. The significant unobservable inputs used in the income approach are the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying
investment, which include 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 Companys investment assets categorized within the fair value hierarchy as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Secured and Unsecured Debt
|
|
$
|
|
|
|
$
|
80,732
|
|
|
$
|
83,789
|
|
|
$
|
164,521
|
|
Equity/Other
|
|
|
213
|
|
|
|
|
|
|
|
136
|
|
|
|
349
|
|
Short Term Investments
|
|
|
65,890
|
|
|
|
|
|
|
|
|
|
|
|
65,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment assets
|
|
$
|
66,103
|
|
|
$
|
80,732
|
|
|
$
|
83,925
|
|
|
$
|
230,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Companys investment assets categorized within the fair value hierarchy as of March 31,
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Secured and Unsecured Debt
|
|
$
|
|
|
|
$
|
81,879
|
|
|
$
|
112,429
|
|
|
$
|
194,308
|
|
Equity/Other
|
|
|
305
|
|
|
|
|
|
|
|
137
|
|
|
|
442
|
|
Short Term Investments
|
|
|
48,767
|
|
|
|
|
|
|
|
|
|
|
|
48,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment assets
|
|
$
|
49,072
|
|
|
$
|
81,879
|
|
|
$
|
112,566
|
|
|
$
|
243,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of Level 3 assets
for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
March 31, 2017
|
|
Senior Secured and Unsecured
Debt
|
|
$
|
83,979
|
|
|
$
|
57,979
|
|
|
$
|
1,227
|
|
|
$
|
654
|
|
|
$
|
(62,973
|
)
|
|
$
|
554
|
|
|
$
|
81,420
|
|
Equity/Other
|
|
|
501
|
|
|
|
2,138
|
|
|
|
|
|
|
|
(303
|
)
|
|
|
|
|
|
|
|
|
|
|
2,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment assets
|
|
$
|
84,480
|
|
|
$
|
60,117
|
|
|
$
|
1,227
|
|
|
$
|
351
|
|
|
$
|
(62,973
|
)
|
|
$
|
554
|
|
|
$
|
83,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
The following is a reconciliation of Level 3 assets for the year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
Beginning
Balance
as of
January 1, 2017
|
|
|
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,
2017
|
|
Senior Secured and Unsecured Debt
|
|
$
|
83,979
|
|
|
$
|
139,859
|
|
|
$
|
2,053
|
|
|
$
|
(2,854
|
)
|
|
$
|
(142,824
|
)
|
|
$
|
3,576
|
|
|
$
|
83,789
|
|
Equity/Other
|
|
|
501
|
|
|
|
2,137
|
|
|
|
(321
|
)
|
|
|
17
|
|
|
|
(2,198
|
)
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment assets
|
|
$
|
84,480
|
|
|
$
|
141,996
|
|
|
$
|
1,732
|
|
|
$
|
(2,837
|
)
|
|
$
|
(145,022
|
)
|
|
$
|
3,576
|
|
|
$
|
83,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of Level 3 assets for the three months ended March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
Beginning
Balance
as of
January 1, 2018
|
|
|
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
March 31,
2018
|
|
Senior Secured and Unsecured Debt
|
|
$
|
83,789
|
|
|
$
|
54,538
|
|
|
$
|
252
|
|
|
$
|
(1,034
|
)
|
|
$
|
(25,534
|
)
|
|
$
|
418
|
|
|
$
|
112,429
|
|
Equity/Other
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment assets
|
|
$
|
83,925
|
|
|
$
|
54,538
|
|
|
$
|
252
|
|
|
$
|
(1,033
|
)
|
|
$
|
(25,534
|
)
|
|
$
|
418
|
|
|
$
|
112,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
(2)
|
Change in unrealized appreciation (depreciation) relating to assets still held at March 31, 2017 totaled $(704) consisting of the following: Senior Secured and Unsecured Debt $(401) and Equity/Other $(303). Change
in unrealized appreciation (depreciation) relating to assets still held at December 31, 2017 totaled $(3,315) consisting of the following: Senior Secured and Unsecured Debt $(3,332) and Equity/Other $17. Change in unrealized appreciation
(depreciation) relating to assets still held at March 31, 2018 totaled $(1,033) consisting of the following: Senior Secured and Unsecured Debt $(1,034) and Equity/Other $1.
|
No securities were transferred into the Level 3 hierarchy and no securities were transferred out of the Level 3 hierarchy during the three months ended
March 31, 2017, the year ended December 31, 2017 or for the three months ended March 31, 2018. Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur.
The tables below present the ranges of significant unobservable inputs used to value the Companys Level 3 assets as of December 31, 2017 and
March 31, 2018, 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 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 Companys Level 3 assets.
December 31, 2017
|
|
|
|
|
|
|
Level 3 Instruments
|
|
Level 3 Assets as of December 31,
2017
|
|
Significant Unobservable
Inputs by Valuation
Techniques
1
|
|
Range
2
of
Significant Unobservable
Inputs (Weighted Average
3
) as of
December 31,
2017
|
Bank Loans, Corporate Debt, and Other Debt Obligations
|
|
1st Lien/Senior Secured and Unsecured Debt
$83,789
|
|
Discounted cash flows:
Discount Rate
Comparable multiples:
EV/EBITDA
4
Liquidation/Waterfall analysis:
EV/EBITDA
4
|
|
7.69% - 38.75% (11.30%)
4.25 - 13.75 (6.68)
|
|
|
|
|
Equity
|
|
Common Stock, LLC Units and Warrants on private stock $0
|
|
Liquidation Value
|
|
N/A
|
|
|
|
|
Equity
|
|
Warrants on publicly traded stock $136
|
|
Volatility:
|
|
67.99% - 67.99% (67.99%)
|
F-23
March 31, 2018
|
|
|
|
|
|
|
Level 3 Instruments
|
|
Level 3 Assets as of
March 31, 2018
|
|
Significant Unobservable
Inputs by Valuation
Techniques
1
|
|
Range
2
of
Significant Unobservable
Inputs (Weighted Average
3
) as of
March 31, 2018
|
Bank Loans, Corporate Debt, and Other Debt Obligations
|
|
1st Lien/Senior Secured and Unsecured Debt
$112,429
|
|
Discounted cash flows:
Discount Rate
Comparable multiples:
EV/EBITDA
4
Liquidation/Waterfall analysis:
EV/EBITDA
4
|
|
7.97% - 32.50% (11.17%)
4.25 - 13.75 (7.83)
|
|
|
|
|
Equity
|
|
Common Stock, LLC Units and Warrants on private stock
$0
|
|
Liquidation Value
|
|
N/A
|
|
|
|
|
Equity
|
|
Warrants on publicly traded stock $137
|
|
Volatility:
|
|
64.19% - 64.19% (64.19%)
|
(1)
|
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.
|
(2)
|
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.
|
(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.
|
5. DEBT
On November 3, 2016, the Company assumed $33,646 of Full
Circle 8.25% Senior Notes due 2020 (the 2020 Notes) in connection with the Merger by executing the second supplemental indenture dated November 3, 2016. The 2020 Notes had a maturity date of June 30, 2020 and on
October 20, 2017 we redeemed them completely at their par value plus accrued and unpaid interest.
On September 13, 2017, we offered $28,375 in
aggregate principal amount of 6.50% notes due 2022 (the GECCL Notes). On September 29, 2017, we sold to several underwriters an additional $4,256 of the GECCL Notes upon full exercise of the underwriters over-allotment option.
As a result of the issuance of these additional GECCL Notes, the aggregate principal balance of GECCL Notes outstanding is $32,631.
The GECCL Notes are our
unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCL Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and
structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the GECCL Notes on January 31, April 30, July 31 and October 31 of each year. The GECCL Notes will mature on
September 18, 2022 and can be called on, or after, September 18, 2019. Holders of the GECCL Notes do not have the option to have the GECCL Notes repaid prior to the stated maturity date. The GECCL Notes were issued in minimum denominations
of $25 and integral multiples of $25 in excess thereof.
On January 11, 2018, we offered $43,000 in aggregate principal amount of 6.75% notes due 2025 (the
GECCM Notes). On January 19, 2018 and February 9, 2018, we sold an additional $1,898 and $1,500 of the GECCM Notes upon partial exercise of the underwriters over-allotment option. As a result of the issuance of these
additional GECCM Notes, the aggregate principal balance of GECCM Notes outstanding is $46,398.
The GECCM Notes are our unsecured obligations and rank equal with
all of our outstanding and future unsecured unsubordinated indebtedness. The GECCM Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future
indebtedness and other obligations of our subsidiaries. We pay interest on the GECCM Notes on March 31, June 30, September 30 and December 31 of each year. The GECCM Notes will mature on January 31, 2025 and can be called
on, or after, January 31, 2021. Holders of the GECCM Notes do not have the option to have the GECCM Notes repaid prior to the stated maturity date. The GECCM Notes were issued in minimum denominations of $25 and integral multiples of $25 in
excess thereof.
F-24
As part of the offerings, the Company incurred fees and costs, which are treated as a reduction of the carrying amount
of the debt on our Statements of Assets and Liabilities. These deferred financing costs presented as a reduction to the Notes payable balance are being amortized into interest expense over the term of the Notes.
The Investment Company Act limits, with certain exceptions, the Companys 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 March 31, 2018, the Companys outstanding borrowings were $79,029, and the Companys asset coverage ratio was 3 to 1.
Information about the Companys senior securities (including debt securities and other indebtedness) is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 - GECCL Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
$
|
32,631
|
|
|
$
|
5.01
|
|
|
$
|
N/A
|
|
|
$
|
1.017
|
|
March 31, 2018
|
|
$
|
32,631
|
|
|
$
|
2.55
|
|
|
$
|
N/A
|
|
|
$
|
1.009
|
|
|
|
|
|
|
Unsecured Debt - GECCM Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
$
|
46,398
|
|
|
$
|
2.55
|
|
|
$
|
N/A
|
|
|
$
|
0.980
|
|
|
|
|
|
|
Unsecured Debt - 2020 Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
$
|
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 Great Elms 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)
|
Not applicable for senior securities that are not registered for public trading. The average market value per unit for the Notes is based on the average daily prices of such notes and is expressed per $1 of indebtedness
for each period and since November 4, 2016 for the period ended December 31, 2016.
|
The indentures 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. As of March 31, 2018, the Company had not repurchased any of the Notes. As of December 31, 2017 and
March 31, 2018 the Company was in compliance with all covenants under the indentures.
The summary information of the 2020 Notes for the year ended
December 31, 2017, is as follows:
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2017
(1)
|
|
Borrowing interest expense
|
|
$
|
2,236
|
|
Amortization of acquisition premium
|
|
|
(888
|
)
|
|
|
|
|
|
Total
|
|
$
|
1,348
|
|
|
|
|
|
|
Weighted average interest rate
|
|
|
4.99
|
%
|
Average outstanding balance
|
|
$
|
33,646
|
|
(1)
|
The information presented for the 2020 Notes is for the period from January 1, 2017 through October 20, 2017, which represents the date the 2020 Notes were redeemed in full.
|
F-25
The summary information of the GECCL Notes for the year ended December 31, 2017, is as follows:
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2017
(2)
|
|
Borrowing interest expense
|
|
$
|
607
|
|
Amortization of acquisition premium
|
|
|
84
|
|
|
|
|
|
|
Total
|
|
$
|
691
|
|
|
|
|
|
|
Weighted average interest rate
|
|
|
7.36
|
%
|
Average outstanding balance
|
|
$
|
32,631
|
|
(2)
|
The information presented for the GECCL Notes is for the period from September 19, 2017, which represents the date the GECCL Notes were issued, through December 31, 2017.
|
The fair value of the Companys Notes are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a
liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Companys Notes is determined by utilizing market quotations at the measurement date as they are
Level 1 securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Facility
|
|
Commitments
|
|
|
Borrowings
Outstanding
|
|
|
Fair
Value
|
|
Unsecured Debt - GECCL Notes
|
|
$
|
32,631
|
|
|
$
|
32,631
|
|
|
$
|
33,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,631
|
|
|
$
|
32,631
|
|
|
$
|
33,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary information of the GECCL and GECCM Notes for the three months ended March 31, 2018, is as follows:
GECCL
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
Borrowing interest expense
|
|
$
|
530
|
|
Amortization of acquisition premium
|
|
|
72
|
|
|
|
|
|
|
Total
|
|
$
|
602
|
|
|
|
|
|
|
Weighted average interest rate
|
|
|
7.48
|
%
|
Average outstanding balance
|
|
$
|
32,631
|
|
GECCM
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2018
(3)
|
|
Borrowing interest expense
|
|
$
|
618
|
|
Amortization of acquisition premium
|
|
|
55
|
|
|
|
|
|
|
Total
|
|
$
|
673
|
|
|
|
|
|
|
Weighted average interest rate
|
|
|
7.46
|
%
|
Average outstanding balance
|
|
$
|
46,398
|
|
(3)
|
The information presented for the GECCM Notes is for the period from January 19, 2018, which represents the date the GECCM Notes were issued, through March 31, 2018.
|
F-26
The fair value of the Companys Notes are determined in accordance with ASC 820, which defines fair value in terms
of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Companys Notes is determined by utilizing market
quotations at the measurement date as they are Level 1 securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
Facility
|
|
Commitments
|
|
|
Borrowings
Outstanding
|
|
|
Fair
Value
|
|
Unsecured Debt - GECCL Notes
|
|
$
|
32,631
|
|
|
$
|
32,631
|
|
|
$
|
33,153
|
|
Unsecured Debt - GECCM Notes
|
|
|
46,398
|
|
|
|
46,398
|
|
|
|
45,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,029
|
|
|
$
|
79,029
|
|
|
$
|
78,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2018, the Company had
approximately $22,406 in unfunded loan commitments, subject to the Companys approval in certain instances, to provide debt financing to certain of its portfolio companies. To the degree applicable, unrealized gains or losses on these
commitments as of March 31, 2018 are included in the Companys Statement of Assets and Liabilities and the corresponding Schedule of Investments. The Company believes that it had sufficient cash and other liquid assets on its balance sheet
to satisfy the unfunded commitments.
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 Circles stockholders. There can be no assurance that the settlement will be finalized or that the Circuit Court will approve the
settlement.
7. INDEMNIFICATION
Under the Companys
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 Companys maximum exposure under these agreements cannot be known; however, the Company expects any risk of loss to be remote.
8. CAPITAL TRANSACTIONS
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 Company 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.
F-27
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, and the total is included in the accompanying consolidated statement of changes as Shares issued formation transactions.
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. See Note 6.
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
Circles stockholders, on November 3, 2016:
|
|
|
Full Circle merged into the Company resulting in the Companys acquisition, by operation of the Merger, of Full Circles portfolio that we 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 Companys exchange agent paid a $5.4 million special cash dividend to former Full Circle stockholders.
|
The Company has accounted for the Merger as a business combination under ASC Topic 805 and Regulation
S-Xs
purchase
accounting guidance. The Company was designated as the accounting acquirer for accounting purposes. The difference between the fair value of Full Circles net assets and the consideration was recorded as a purchase accounting loss because the
fair value of the assets acquired and liabilities assumed, as of 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
|
|
|
|
|
|
|
F-28
The Company incurred approximately $3,471 of transaction-related expenses related to the Formation Transaction and
Merger during the period ended December 31, 2016. Transaction-related expenses are comprised primarily of legal, accounting and other professional fees and third party costs.
The following table provides the pro forma consolidated operational data as if the Merger had occurred on January 1, 2016 and we were in operations for the full
year. The pro forma consolidated operational data is based on assumptions and estimates; however, these pro forma results are not indicative of the results of operations that would have been obtained had the Merger occurred at the beginning of the
period presented, nor do they purport to represent the consolidated results of operations for future periods. Information presented for the year ended December 31, 2015 represents Full Circles financial information for the period,
unadjusted.
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
Twelve Months Ended
|
|
(in thousands, except per share data)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Total Investment Income
|
|
$
|
17,125
|
|
|
$
|
18,320
|
|
Net Investment Income
|
|
|
5,853
|
|
|
|
9,204
|
|
Net Decrease in Net Assets Resulting from Operations
|
|
$
|
(12,383
|
)
|
|
$
|
(7,197
|
)
|
|
|
|
Weighted average common shares outstanding
|
|
|
6,953
|
|
|
|
4,957
|
|
Net Decrease in Net Assets Resulting from Operations per share, basic and diluted
|
|
$
|
(1.78
|
)
|
|
$
|
(1.45
|
)
|
F-29
Issuer Purchases of Equity Securities
During the year ended December 31, 2017, the Company purchased 2,138,479 shares under its tender offer and $15,000 stock buyback program at a weighted average
price of $11.20 per share. As of March 31, 2018, the Company had cumulatively purchased 2,236,651 shares under its tender offer and stock buyback program at a weighted average price of $11.18 per share, resulting in $15,000 of cumulative cash
paid, under the program since November 4, 2016. Including the tender offer, the Company utilized $25,000 under its stock buyback and tender program for repurchasing shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
10,158,722
|
|
June 2017
|
|
|
15,215
|
|
|
$
|
10.42
|
|
|
|
15,215
|
|
|
$
|
10,000,182
|
|
July 2017
|
|
|
47,961
|
|
|
$
|
10.73
|
|
|
|
47,961
|
|
|
$
|
9,485,725
|
|
August 2017
|
|
|
37,666
|
|
|
$
|
10.78
|
|
|
|
37,666
|
|
|
$
|
9,079,585
|
|
September 2017
|
|
|
753,097
|
|
|
$
|
11.00
|
|
|
|
753,097
|
|
|
$
|
792,735
|
|
October 2017
|
|
|
65,945
|
|
|
$
|
10.27
|
|
|
|
65,945
|
|
|
$
|
115,277
|
|
November 2017
|
|
|
11,485
|
|
|
$
|
10.04
|
|
|
|
11,485
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2017
|
|
|
2,138,479
|
|
|
$
|
11.20
|
|
|
|
2,138,479
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,236,651
|
|
|
$
|
11.18
|
|
|
|
2,236,651
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Share amounts in this line include the repurchase of 869,565 shares on May 12, 2017 in the $10,000 tender offer we announced on March 30, 2017 that expired on May 5, 2017.
|
9. EARNINGS PER SHARE
The following information sets forth the
computation of basic and diluted earnings per share for the three months ended March 31, 2017:
|
|
|
|
|
|
|
For the Three
Months ended
March 31, 2017
|
|
Numerator for basic and diluted earnings per share - increase in net assets resulting from
operations
|
|
$
|
3,379
|
|
Denominator for basic and diluted earnings per share - weighted average shares outstanding
|
|
|
12,636,477
|
|
Basic and diluted earnings per share
|
|
$
|
0.27
|
|
F-30
The following information sets forth the computation of basic and diluted earnings per share for the three months ended
March 31, 2018:
|
|
|
|
|
|
|
For the Three
Months Ended
March 31,
|
|
|
|
2018
|
|
Numerator for basic and diluted earnings per share - increase in net assets resulting from
operations
|
|
$
|
(4,043
|
)
|
Denominator for basic and diluted earnings per share - weighted average shares outstanding
|
|
|
10,652,401
|
|
Basic and diluted earnings per share
|
|
$
|
(0.38
|
)
|
Diluted earnings per share equals basic earnings per share because there were no common stock equivalents outstanding during the
periods presented.
10. FINANCIAL HIGHLIGHTS
Below is the schedule
of financial highlights of the Company for the three months ended March 31, 2017 and three months ended March 31, 2018, respectively:
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
March 31,
|
|
|
For the Three
Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Per Share Data:
(1)
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
12.42
|
|
|
$
|
13.52
|
|
Net investment income
|
|
|
0.36
|
|
|
|
0.32
|
|
Net realized gains
|
|
|
0.03
|
|
|
|
0.16
|
|
Net unrealized losses
|
|
|
(0.77
|
)
|
|
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
|
(0.38
|
)
|
|
|
0.27
|
|
|
|
|
|
|
|
|
|
|
Accretion from share buybacks
|
|
|
0.00
|
|
|
|
0.05
|
|
Distributions declared from net investment
income
(2)
|
|
|
(0.25
|
)
|
|
|
(0.25
|
)
|
Net decrease resulting from distributions to common stockholders
|
|
|
(0.25
|
)
|
|
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
11.79
|
|
|
$
|
13.59
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding, end of year/period
|
|
|
10,652,401
|
|
|
|
12,545,151
|
|
Total return based on net asset value
(3)
|
|
|
(2.45
|
)%
|
|
|
2.38
|
%
|
Total return based on market value
(3)
|
|
|
(9.19
|
)%
|
|
|
(0.31
|
)%
|
|
|
|
Ratio/Supplemental Data:
|
|
|
|
|
|
|
|
|
Net assets, end of period
|
|
$
|
125,596
|
|
|
$
|
170,437
|
|
Average net assets
|
|
$
|
128,947
|
|
|
$
|
171,269
|
|
Ratio of expenses (without management fees, incentive fees and interest expenses) to average net assets
(4)
|
|
|
2.20
|
%
|
|
|
2.31
|
%
|
Ratio of management fees to average net
assets
(4)
|
|
|
2.18
|
%
|
|
|
1.40
|
%
|
Ratio of interest and credit facility expenses to average net assets
(4)
|
|
|
4.01
|
%
|
|
|
1.49
|
%
|
Ratio of incentive fees to average net
assets
(4)
|
|
|
3.04
|
%
|
|
|
2.42
|
%
|
Ratio of total expenses to average net assets before
waiver
(4)
|
|
|
11.42
|
%
|
|
|
7.64
|
%
|
Ratio of total expenses to average net assets after
waiver
(4)
|
|
|
11.42
|
%
|
|
|
7.63
|
%
|
Ratio of net investment income to average net
assets
(4)
|
|
|
12.16
|
%
|
|
|
9.69
|
%
|
Portfolio turnover
|
|
|
16
|
%
|
|
|
49
|
%
|
(1)
|
The per share data was derived by using the weighted average shares outstanding during the period, except where such calculations deviate from those specified under the instructions to Form
N-2.
|
(2)
|
The per share data for distributions declared reflects the actual amount of distributions of record per share for the period.
|
F-31
(3)
|
Total return based on net asset value is calculated as the change in net asset value per share, assuming the Companys distributions were reinvested through its dividend reinvestment plan. Total return based on
market value is calculated as the change in market value per share, assuming the Companys distributions were reinvested through its dividend reinvestment plan. Total return does not include any estimate of a sales load or commission paid to
acquire shares.
|
F-32
11. AFFILIATED AND CONTROLLED INVESTMENTS
Affiliated investment as defined by the Investment Company Act, whereby the Company owns between 5% and 25% of the portfolio companys outstanding voting
securities and the investments are not classified as controlled investments. The aggregate fair value of
non-controlled,
affiliated investments at March 31, 2018 represented 0.23% of the Companys
net assets. Fair value as of March 31, 2018 along with transactions during the three months ended March 31, 2018 in these affiliated investments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31, 2018
|
|
|
For the three months ended
March 31, 2018
|
|
Non-Controlled,
Affiliated Investments
|
|
Issue
(1)
|
|
Fair Value at
December 31,
2017
|
|
|
Gross
Additions
(Cost)
(2)
|
|
|
Gross
Reductions
(Cost)
(3)
|
|
|
Net
Unrealized
Gain (Loss)
|
|
|
Fair Value at
March 31,
2018
|
|
|
Net Realized
Gain (Loss)
|
|
|
Change in
Net Unrealized
Gain (Loss)
|
|
|
Interest
Income
|
|
|
Fee
Income
|
|
|
Dividend
Income
|
|
OPS Acquisitions Limited and Ocean Protection Services Limited
|
|
Term
Loan
|
|
$
|
1,770
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3,953
|
)
|
|
$
|
287
|
|
|
$
|
|
|
|
$
|
(1,483
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
OPS Acquisitions Limited and Ocean Protection Services Limited
|
|
Equity
(19% of
class)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
Term
Loan
|
|
$
|
1,770
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3,953
|
)
|
|
$
|
287
|
|
|
$
|
|
|
|
$
|
(1,483
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Non-unitized
equity investments are disclosed with percentage ownership in lieu of quantity.
|
(2)
|
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.
|
(3)
|
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.
|
Controlled investment as defined by
the Investment Company Act, whereby the Company owns more than 25% of the portfolio companys outstanding voting securities or maintains the ability to nominate greater than 50% of the board representation. The aggregate fair value of
controlled investments at March 31, 2018 represented 13.77% of the Companys net assets. Fair value as of March 31, 2018 along with transactions during the three months ended March 31, 2018 in these controlled investments was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31, 2018
|
|
|
For the three months ended
March 31, 2018
|
|
Controlled
Investments
|
|
Issue
(1)
|
|
|
Fair Value at
December 31,
2017
|
|
|
Gross
Additions
(Cost)
(2)
|
|
|
Gross
Reductions
(Cost)
(3)
|
|
|
Net
Unrealized
Gain (Loss)
|
|
|
Fair Value at
March 31,
2018
|
|
|
Net Realized
Gain (Loss)
|
|
|
Change in
Net Unrealized
Gain (Loss)
|
|
|
Interest
Income
|
|
|
Fee
Income
|
|
|
Dividend
Income
|
|
PE Facility Solutions, LLC
|
|
|
Revolver
|
|
|
|
|
|
|
|
17,646
|
|
|
|
15,298
|
|
|
|
|
|
|
|
2,348
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
10
|
|
|
|
|
|
|
|
|
Term
Loan A
|
|
|
|
9,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,900
|
|
|
|
|
|
|
|
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
Loan B
|
|
|
|
8,204
|
|
|
|
322
|
|
|
|
3,407
|
|
|
|
(664
|
)
|
|
|
5,049
|
|
|
|
210
|
|
|
|
(280
|
)
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
(83%
of class)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
18,104
|
|
|
$
|
17,968
|
|
|
$
|
18,705
|
|
|
$
|
(664
|
)
|
|
$
|
17,297
|
|
|
$
|
210
|
|
|
$
|
(280
|
)
|
|
$
|
656
|
|
|
$
|
10
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Non-unitized
equity investments are disclosed with percentage ownership in lieu of quantity.
|
(2)
|
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.
|
(3)
|
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
12. SUBSEQUENT EVENTS
In
December 2017, Avanti Communications Group plc (Avanti) announced a proposed restructuring plan whereby the terms of its second lien debt would be amended (its coupon rate reduced to 9.0%; the company to have the option to PIK its
interest payments for the remaining life of the security; and its maturity date to be extended by a year) and its current third lien debt would be equitized in a
debt-for-equity
swap. In April 2018, a majority of the Avanti shareholders voted in support of the proposed restructuring plan, allowing for the plan to close on
April 26, 2018. In consideration for their support, the existing shareholders retain 7.5% of the common equity
pro-forma
for the issuance associated with the restructuring and the third lien debtholders
own 92.5%. GECC now owns approximately 9.1% of Avantis common equity.
In April 2018, Kyle Whitehill joined Avanti as its new CEO, replacing Alan Harper,
previously the companys Interim CEO. With Mr. Whitehill starting in April, Mr. Harper resumed his role as a
Non-Executive
Director of the company.
In April 2018, Avanti successfully launched HYLAS 4. HYLAS 4 is Avantis largest capacity satellite and will provide data communications services with fixed
beams serving Africa and Europe and steerable beams that can cover territory as far west as the United States and as far south as the southern tip of South America. HYLAS 4 is now in its period of
in-orbit
testing, a period that typically lasts approximately three months.
In April 2018, we purchased an additional $1,764 of par value of Aptean Holdings, Inc. second
lien term loan at a price of approximately 101% of par value.
In April 2018, we purchased an additional $500 of par value of SESAC Holdco II LLC second lien
term loan at a price of approximately 100% of par value.
In April 2018, the senior secured term loan to PR Wireless, Inc. was sold for par, resulting in a
realized gain of approximately $800.
In April and May 2018, we funded an additional $1,750 of par value to Tallage Davis, LLC.
Our Board declared the monthly distributions for the third quarter of 2018 at an annual rate of approximately 8.45% of our March 31, 2018 NAV, which equates to
$0.083 per month. The schedule of distribution payments is as follows:
|
|
|
|
|
|
|
|
|
Month
|
|
Rate
|
|
|
Record Date
|
|
Payable Date
|
July
|
|
$
|
0.083
|
|
|
July 31, 2018
|
|
August 15, 2018
|
August
|
|
$
|
0.083
|
|
|
August 31, 2018
|
|
September 14, 2018
|
September
|
|
$
|
0.083
|
|
|
September 28, 2018
|
|
October 15, 2018
|
At our 2018 annual meeting of stockholders, which was held on May 3, 2018 (the Annual Meeting), a majority of our
stockholders approved the application of the modified minimum asset coverage requirements set forth in Section 61(a)(2) of the Investment Company Act, to the Company. As a result of such approval, and subject to satisfying certain ongoing
disclosure requirements, effective May 4, 2018 the asset coverage ratio test applicable to the Company was decreased from 200% to 150%, permitting us to incur additional leverage.
As of March 31, 2018, we had approximately $79.0 million of total outstanding indebtedness under two series of senior securities (unsecured senior
notes)the GECCL Notes and the GECCM Notesand our asset coverage ratio was 255%.
F-34
Report of Independent Regist
ered Public Accounting Firm
To the Shareholders and Board of Directors of
Great Elm Capital Corp.
Waltham, Massachusetts
Opinion on the Financial Statements and Financial
Highlights
We have audited the accompanying consolidated statement of assets and liabilities of Great Elm Capital Corp. (the Company), including
the schedules of investments, as of December 31, 2017 and 2016, and the related consolidated statement of operations, changes in net assets, cash flows, and financial highlights (presented in Note 11) for the period from inception (April 22,
2016) to December 31, 2016 and for the year ended December 31, 2017, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Company
as of December 31, 2017 and 2016, and the results of its operations, changes in nets assets, cash flows, and financial highlights (presented in Note 11) for the period from inception (April 22, 2016) to December 31, 2016 and the year ended
December 31, 2017, in conformity with principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Companys management. Our responsibility is to express an opinion on the
Companys financial statements and financial highlights based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards
of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Company is
not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our audits
included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of investments owned as of December 31, 2017 and 2016, by correspondence with the custodian, loan agents, and
borrowers; when replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
|
/s/ Deloitte & Touche LLP
|
|
McLean, Virginia
|
March 12, 2018
|
|
We have served as the Companys auditor since 2016.
|
F-35
GREAT ELM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
Dollar amounts in
thousands (except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Non-affiliated,
non-controlled
investments, at fair value (amortized cost of $179,558 and $163,809, respectively)
|
|
$
|
144,996
|
|
|
$
|
150,323
|
|
Non-affiliated,
non-controlled
short term investments, at fair value (amortized cost of $65,892 and $0, respectively)
|
|
|
65,890
|
|
|
|
|
|
Affiliated investments, at fair value (amortized cost of $4,240 and $4,255, respectively)
|
|
|
1,770
|
|
|
|
4,286
|
|
Controlled investments, at fair value (amortized cost of $18,487 and $68, respectively)
|
|
|
18,104
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
230,760
|
|
|
|
154,677
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,916
|
|
|
|
66,782
|
|
Receivable for investments sold
|
|
|
12
|
|
|
|
9,406
|
|
Interest receivable
|
|
|
5,027
|
|
|
|
4,338
|
|
Principal receivable
|
|
|
|
|
|
|
786
|
|
Due from portfolio company
|
|
|
204
|
|
|
|
312
|
|
Deposit at broker
|
|
|
|
|
|
|
56
|
|
Due from affiliates
|
|
|
692
|
|
|
|
80
|
|
Prepaid expenses and other assets
|
|
|
302
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
239,913
|
|
|
$
|
236,544
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Notes payable 8.25% due June 30, 2020 (including unamortized premium of $0 and $888 at
December 31, 2017 and December 31, 2016, respectively)
|
|
$
|
|
|
|
$
|
34,534
|
|
Notes payable 6.50% due September 18, 2022 (including unamortized discount of $1,435 and $0 at
December 31, 2017 and December 31, 2016, respectively)
|
|
|
31,196
|
|
|
|
|
|
Payable for investments purchased
|
|
|
66,165
|
|
|
|
21,817
|
|
Interest payable
|
|
|
354
|
|
|
|
|
|
Distributions payable
|
|
|
3,015
|
|
|
|
2,123
|
|
Due to affiliates
|
|
|
6,193
|
|
|
|
3,423
|
|
Accrued expenses and other liabilities
|
|
|
703
|
|
|
|
1,663
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
107,626
|
|
|
$
|
63,560
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share (100,000,000 shares authorized, 10,652,401 and 12,790,880 shares
issued and outstanding at December 31, 2017 and December 31, 2016, respectively)
|
|
$
|
107
|
|
|
$
|
128
|
|
Additional
paid-in
capital
|
|
|
198,426
|
|
|
|
219,317
|
|
Accumulated net realized losses
|
|
|
(33,328
|
)
|
|
|
(34,341
|
)
|
Undistributed net investment income
|
|
|
4,499
|
|
|
|
1,335
|
|
Net unrealized depreciation on investments
|
|
|
(37,417
|
)
|
|
|
(13,455
|
)
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
$
|
132,287
|
|
|
$
|
172,984
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and net assets
|
|
$
|
239,913
|
|
|
$
|
236,544
|
|
|
|
|
|
|
|
|
|
|
Net asset value per share
|
|
$
|
12.42
|
|
|
$
|
13.52
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-36
GREAT ELM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Dollar amounts in thousands
(except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31,
2017
|
|
|
For the
Period Ended
December 31,
2016
|
|
Investment Income:
|
|
|
|
|
|
|
|
|
Interest income from:
|
|
|
|
|
|
|
|
|
Non-affiliated,
non-controlled
investments
|
|
$
|
15,830
|
|
|
$
|
5,211
|
|
Non-affiliated,
non-controlled
investments (PIK)
|
|
|
10,719
|
|
|
|
|
|
Affiliated investments
|
|
|
73
|
|
|
|
102
|
|
Controlled investments
|
|
|
1,312
|
|
|
|
|
|
Controlled investments (PIK)
|
|
|
990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
28,924
|
|
|
|
5,313
|
|
|
|
|
|
|
|
|
|
|
Dividend income from
non-affiliated,
non-controlled
investments
|
|
|
298
|
|
|
|
|
|
Other income from:
|
|
|
|
|
|
|
|
|
Non-affiliated,
non-controlled
investments
|
|
|
470
|
|
|
|
518
|
|
Controlled investments
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
506
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
29,728
|
|
|
|
5,831
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Management fees
|
|
|
2,298
|
|
|
|
392
|
|
Incentive fees
|
|
|
4,394
|
|
|
|
863
|
|
Administration fees
|
|
|
1,362
|
|
|
|
224
|
|
Custody fees
|
|
|
62
|
|
|
|
10
|
|
Directors fees
|
|
|
136
|
|
|
|
38
|
|
Professional services
|
|
|
1,013
|
|
|
|
186
|
|
Professional services related to the Merger and Formation transactions
|
|
|
|
|
|
|
3,471
|
|
Interest expense
|
|
|
2,039
|
|
|
|
420
|
|
Other expenses
|
|
|
655
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
11,959
|
|
|
|
5,818
|
|
Accrued administration fee waiver
|
|
|
(70
|
)
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Net expenses
|
|
|
12,029
|
|
|
|
5,738
|
|
|
|
|
|
|
|
|
|
|
Net investment income before taxes
|
|
|
17,699
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
Excise tax
|
|
|
124
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
17,575
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains (losses) on investment transactions:
|
|
|
|
|
|
|
|
|
Net realized gain (loss) from:
|
|
|
|
|
|
|
|
|
Non-affiliated,
non-controlled
investments
|
|
|
3,641
|
|
|
|
274
|
|
Affiliated investments
|
|
|
|
|
|
|
|
|
Controlled investments
|
|
|
(8
|
)
|
|
|
|
|
Purchase accounting
|
|
|
|
|
|
|
(4,698
|
)
|
|
|
|
|
|
|
|
|
|
Total net realized gain (loss)
|
|
|
3,633
|
|
|
|
(4,424
|
)
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation (depreciation) from:
|
|
|
|
|
|
|
|
|
Non-affiliated,
non-controlled
investments
|
|
|
(21,078
|
)
|
|
|
(13,487
|
)
|
Affiliated investments
|
|
|
(2,501
|
)
|
|
|
32
|
|
Controlled investments
|
|
|
(383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net change in unrealized appreciation (depreciation)
|
|
|
(23,962
|
)
|
|
|
(13,455
|
)
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains (losses)
|
|
|
(20,329
|
)
|
|
|
(17,879
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(2,754
|
)
|
|
$
|
(17,874
|
)
|
|
|
|
|
|
|
|
|
|
Net investment income per share (basic and diluted):
|
|
$
|
1.52
|
|
|
$
|
|
(1)
|
Earnings per share (basic and diluted):
|
|
$
|
(0.24
|
)
|
|
$
|
(1.39
|
)
|
Weighted average shares outstanding:
|
|
|
11,655,370
|
|
|
|
12,852,758
|
|
(1)
|
Rounds to less than 0.005
|
The accompanying
notes are an integral part of these financial statements.
F-37
GREAT ELM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
Dollar amounts in
thousands
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31,
2017
|
|
|
For the
Period
Ended
December 31,
2016
|
|
Increase (decrease) in net assets resulting from operations:
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
17,575
|
|
|
$
|
5
|
|
Net realized gain (loss) on investments
|
|
|
3,633
|
|
|
|
274
|
|
Purchase accounting loss
|
|
|
|
|
|
|
(4,698
|
)
|
Net change in unrealized appreciation (depreciation) on investments
|
|
|
(23,962
|
)
|
|
|
(13,455
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
|
(2,754
|
)
|
|
|
(17,874
|
)
|
|
|
|
|
|
|
|
|
|
Distributions to stockholders from:
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(13,682
|
)
|
|
|
(2,123
|
)
|
|
|
|
|
|
|
|
|
|
Total distributions to stockholders
|
|
|
(13,682
|
)
|
|
|
(2,123
|
)
|
|
|
|
|
|
|
|
|
|
Capital transactions:
|
|
|
|
|
|
|
|
|
Cash contribution
|
|
|
|
|
|
|
30,000
|
|
Acquired assets in the formation transaction
|
|
|
|
|
|
|
90,494
|
|
Acquired assets in the merger
|
|
|
|
|
|
|
73,541
|
|
Purchases of common stock
|
|
|
(24,261
|
)
|
|
|
(1,054
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from capital transactions
|
|
|
(24,261
|
)
|
|
|
192,981
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in net assets
|
|
|
(40,697
|
)
|
|
|
172,984
|
|
|
|
|
|
|
|
|
|
|
Net assets at beginning of period
|
|
$
|
172,984
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
132,287
|
|
|
$
|
172,984
|
|
|
|
|
|
|
|
|
|
|
Undistributed net investment income
|
|
$
|
4,499
|
|
|
$
|
1,335
|
|
Capital share activity
|
|
|
|
|
|
|
|
|
Shares outstanding at the beginning of the period
|
|
|
12,790,880
|
|
|
|
|
|
Shares issued cash contributions
|
|
|
|
|
|
|
1,966,667
|
|
Shares issued formation transaction
|
|
|
|
|
|
|
5,935,800
|
|
Shares issued merger
|
|
|
|
|
|
|
4,986,585
|
|
Shares purchased
|
|
|
(2,138,479
|
)
|
|
|
(98,172
|
)
|
|
|
|
|
|
|
|
|
|
Shares outstanding at the end of the period
|
|
|
10,652,401
|
|
|
|
12,790,880
|
|
The accompanying notes are an integral part of these financial statements.
F-38
GREAT ELM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollar amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31,
2017
|
|
|
For the Period Ended
December
31,
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(2,754
|
)
|
|
$
|
(17,874
|
)
|
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash
provided by (used for) operating activities:
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(188,168
|
)
|
|
|
(42,516
|
)
|
Increase (decrease) in payable for investments purchased
|
|
|
44,348
|
|
|
|
21,817
|
|
Net change in short-term investments
|
|
|
(65,892
|
)
|
|
|
|
|
Payment-in-kind
income
|
|
|
(11,709
|
)
|
|
|
510
|
|
Proceeds from sales of investments
|
|
|
54,332
|
|
|
|
10,640
|
|
(Increase) decrease in receivable for investments sold
|
|
|
9,394
|
|
|
|
(9,406
|
)
|
Proceeds from principal payments
|
|
|
120,652
|
|
|
|
31,098
|
|
Net realized (gain) loss on investments
|
|
|
(3,633
|
)
|
|
|
(274
|
)
|
Purchase Accounting Loss
|
|
|
|
|
|
|
4,698
|
|
Net change in unrealized (appreciation) depreciation on investments
|
|
|
23,962
|
|
|
|
13,455
|
|
Amortization of premium and accretion of discount, net
|
|
|
(5,627
|
)
|
|
|
(2,438
|
)
|
Amortization of discount (premium) on long term debt
|
|
|
(804
|
)
|
|
|
(40
|
)
|
Increase (decrease) in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in principal receivable
|
|
|
786
|
|
|
|
434
|
|
(Increase) decrease in interest receivable
|
|
|
(689
|
)
|
|
|
(1,342
|
)
|
(Increase) decrease in deposit at broker
|
|
|
56
|
|
|
|
(56
|
)
|
(Increase) decrease in due from portfolio company
|
|
|
108
|
|
|
|
(224
|
)
|
(Increase) decrease in due from affiliates
|
|
|
(612
|
)
|
|
|
(80
|
)
|
(Increase) decrease in prepaid expenses and other assets
|
|
|
(195
|
)
|
|
|
174
|
|
Increase (decrease) in interest payable
|
|
|
354
|
|
|
|
77
|
|
Increase (decrease) in due to affiliates
|
|
|
2,770
|
|
|
|
890
|
|
Increase (decrease) in accrued expenses and other liabilities
|
|
|
(960
|
)
|
|
|
(816
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities
|
|
|
(24,281
|
)
|
|
|
8,727
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Cash contributions
|
|
|
|
|
|
|
59,109
|
|
Purchases of common stock
|
|
|
(24,261
|
)
|
|
|
(1,054
|
)
|
Repayment of 2020 Notes payable
|
|
|
(33,645
|
)
|
|
|
|
|
Issuance of GECCL Notes payable
|
|
|
31,111
|
|
|
|
|
|
Distributions paid
|
|
|
(12,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
(39,585
|
)
|
|
|
58,055
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(63,866
|
)
|
|
|
66,782
|
|
Cash, beginning of period
|
|
|
66,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
2,916
|
|
|
$
|
66,782
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of
non-cash
financing activities
:
|
|
|
|
|
|
|
|
|
Assets purchased for shares
|
|
$
|
|
|
|
$
|
169,738
|
|
Long term debt assumed in the merger
|
|
$
|
|
|
|
$
|
34,574
|
|
Short term debt assumed in the merger
|
|
$
|
|
|
|
$
|
2,558
|
|
Short term debt assumed in the formation
|
|
$
|
|
|
|
$
|
2,377
|
|
Dividends declared, not yet paid
|
|
$
|
3,015
|
|
|
$
|
2,123
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for excise tax
|
|
$
|
88
|
|
|
$
|
0
|
|
Cash paid for interest
|
|
$
|
2,489
|
|
|
$
|
460
|
|
The accompanying notes are an integral part of these financial statements.
F-39
GREAT ELM CORP.
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2017
Dollar amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Security
|
|
Industry
|
|
Interest
(2)
|
|
Maturity
|
|
Par
Amount/Quantity
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
% of
NAV
|
|
Investments at Fair Value -
174.43% of Net Assets
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlled Investments - 13.68%
of Net Assets
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PE Facility Solutions, LLC
|
|
1st Lien, Senior Secured Revolver
(5,15)
|
|
Building Cleaning and Maintenance
Services
|
|
11.38% (L + 10.00%)
(6)
|
|
02/27/2022
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
San Diego, CA
|
|
1st Lien, Senior Secured Revolver
- Unfunded
(5,15)
|
|
|
|
11.38% (L + 10.00%)
(6)
|
|
02/27/2022
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Lien, Senior Secured Loan A
(5,15)
|
|
|
|
12.38% (L + 11.00%)
(6)
|
|
02/27/2022
|
|
|
9,900
|
|
|
|
9,900
|
|
|
|
9,900
|
|
|
|
7.48
|
%
|
|
|
1st Lien, Senior Secured Loan B
(5,15)
|
|
|
|
15.38% (L + 14.00%)
(6,7)
|
|
02/27/2022
|
|
|
9,105
|
|
|
|
8,587
|
|
|
|
8,204
|
|
|
|
6.20
|
%
|
|
|
Common Equity
(5,8,15)
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,487
|
|
|
|
18,104
|
|
|
|
13.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Controlled Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,487
|
|
|
|
18,104
|
|
|
|
13.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments - 1.34% of Net Assets
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPS Acquisitions Limited and Ocean Protection Services Limited
|
|
1st Lien, Senior Secured Loan
(5,10,16)
|
|
Maritime Security Services
|
|
16.38% (L + 12.00%, 12.50% Floor)
(6,7,9)
|
|
06/01/2018
|
|
|
4,903
|
|
|
|
4,240
|
|
|
|
1,770
|
|
|
|
1.34
|
%
|
London, UK
|
|
Common Equity
(5,8,10,16)
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,240
|
|
|
|
1,770
|
|
|
|
1.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,240
|
|
|
|
1,770
|
|
|
|
1.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control,
Non-Affiliate
Investments - 109.60% of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Almonde, Inc.
|
|
2nd Lien, Senior Secured Loan
(5,10,17)
|
|
Software Services
|
|
8.94% (L + 7.25%, 8.25% floor)
(13)
|
|
06/13/2025
|
|
|
5,000
|
|
|
|
5,037
|
|
|
|
5,005
|
|
|
|
3.78
|
%
|
Philadelphia, PA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avanti Communications Group PLC
|
|
2nd Lien, Senior Secured Bond
(10,11)
|
|
Wireless Telecommunications
Services
|
|
12.50%
|
|
10/01/2021
|
|
|
34,917
|
|
|
|
30,427
|
|
|
|
28,807
|
|
|
|
21.78
|
%
|
London, UK
|
|
3rd Lien, Senior Secured Bond
(10,11)
|
|
|
|
14.50% (20.00% if PIK election is made)
(7)
|
|
10/01/2023
|
|
|
54,113
|
|
|
|
45,011
|
|
|
|
13,257
|
|
|
|
10.02
|
%
|
|
|
Common Equity
(8,10)
|
|
|
|
|
|
|
|
|
1,829,496
|
|
|
|
23
|
|
|
|
213
|
|
|
|
0.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,461
|
|
|
|
42,277
|
|
|
|
31.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Security
|
|
Industry
|
|
Interest
(2)
|
|
Maturity
|
|
Par
Amount/Quantity
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
% of
NAV
|
|
Commercial Barge Line Company
|
|
1st Lien, Senior Secured
Loan
(5,18)
|
|
Water Transport
|
|
10.32% (L + 8.75%, 9.75% Floor)
(6)
|
|
11/12/2020
|
|
|
9,254
|
|
|
|
7,551
|
|
|
|
5,279
|
|
|
|
3.99
|
%
|
Jeffersonville, IN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Davidzon Radio, Inc.
|
|
1st Lien, Senior Secured
Loan
(5,16)
|
|
Radio
Broadcasting
|
|
14.38% (L + 10.00%, 11.00% Floor)
(6,14)
|
|
03/31/2020
|
|
|
9,685
|
|
|
|
9,144
|
|
|
|
8,876
|
|
|
|
6.71
|
%
|
Brooklyn, NY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geo Specialty Chemicals, Inc.
|
|
1st Lien, Senior Secured
Revolver
(5,19)
|
|
Chemicals
|
|
6.28% (L + 4.75%, 5.75% Floor)
(6)
|
|
04/30/2019
|
|
|
3,646
|
|
|
|
3,465
|
|
|
|
3,500
|
|
|
|
2.64
|
%
|
Lafayette, Indiana
|
|
1st Lien, Senior Secured
Revolver - Unfunded
(5,19)
|
|
|
|
6.28% (L + 4.75%, 5.75% Floor)
(6)
|
|
04/30/2019
|
|
|
729
|
|
|
|
(29
|
)
|
|
|
(29
|
)
|
|
|
(0.02
|
)%
|
|
|
1st Lien, Senior Secured
Loan
(5,19)
|
|
|
|
6.28% (L + 4.75%, 5.75% Floor)
(6)
|
|
04/30/2019
|
|
|
6,563
|
|
|
|
6,248
|
|
|
|
6,300
|
|
|
|
4.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,684
|
|
|
|
9,771
|
|
|
|
7.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Wire Group Inc
|
|
2nd Lien, Senior
Secured Bond
(11)
|
|
Manufacturing
|
|
10.75%
|
|
08/01/2021
|
|
|
13,000
|
|
|
|
12,071
|
|
|
|
11,960
|
|
|
|
9.04
|
%
|
Camden, NY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luling Lodging, LLC
|
|
1st Lien, Senior Secured
Loan
(5,16)
|
|
Hotel Operator
|
|
18.38% (L + 12.00%,12.25% Floor)
(6,9,12)
|
|
12/18/2017
|
|
|
2,715
|
|
|
|
1,300
|
|
|
|
1,605
|
|
|
|
1.21
|
%
|
Luling, TX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Baker International, LLC
|
|
2nd Lien, Senior
Secured Bond
(11)
|
|
Industrial
Conglomerates
|
|
8.75%
|
|
03/01/2023
|
|
|
5,000
|
|
|
|
4,876
|
|
|
|
4,838
|
|
|
|
3.66
|
%
|
Pittsburgh, PA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NANA Development Corp.
|
|
1st Lien, Senior Secured
Bond
(11)
|
|
Industrial Other
|
|
9.50%
|
|
03/15/2019
|
|
|
7,000
|
|
|
|
6,902
|
|
|
|
7,070
|
|
|
|
5.34
|
%
|
Anchorage, AK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PEAKS Trust
2009-1
|
|
1st Lien, Senior Secured
Loan
(5,10,16)
|
|
Consumer
Finance
|
|
7.50% (L + 5.50%, 7.50% Floor)
(6)
|
|
01/27/2020
|
|
|
1,462
|
|
|
|
1,020
|
|
|
|
878
|
|
|
|
0.67
|
%
|
Carmel, IN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PR Wireless, Inc.
|
|
1st Lien, Senior Secured
Loan
(5,16)
|
|
Wireless
Communications
|
|
6.94% (L + 5.25%)
(13)
|
|
06/29/2020
|
|
|
9,754
|
|
|
|
8,908
|
|
|
|
9,749
|
|
|
|
7.37
|
%
|
Guaynabo, PR
|
|
1st Lien, Senior Secured
Delayed Draw
Loan
(5,20)
|
|
|
|
8.75% (Prime Rate + 4.25%)
(13)
|
|
06/29/2020
|
|
|
274
|
|
|
|
274
|
|
|
|
274
|
|
|
|
0.21
|
%
|
|
|
1st Lien, Senior Secured
Unfunded Delayed
Draw Loan
(5,20)
|
|
|
|
8.75% (Prime Rate + 4.25%)
(13)
|
|
06/29/2020
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,182
|
|
|
|
10,023
|
|
|
|
7.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
Company
|
|
Security
|
|
|
Industry
|
|
Interest
(2)
|
|
Maturity
|
|
|
Par
Amount/Quantity
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
% of
NAV
|
|
RiceBran Technologies Corporation
|
|
|
Warrants
(5,8,16)
|
|
|
Grain Mill Products
|
|
$1.60 Strike Price
|
|
|
05/12/2020
|
|
|
|
300,000
|
|
|
|
145
|
|
|
|
136
|
|
|
|
0.10
|
%
|
Scottsdale, AZ
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SESAC Holdco II LLC
|
|
|
2nd Lien, Senior Secured
Loan
(5,21)
|
|
|
Business Services
|
|
8.94% (L+7.25%)
(13)
|
|
|
02/24/2025
|
|
|
|
4,150
|
|
|
|
4,103
|
|
|
|
4,156
|
|
|
|
3.14
|
%
|
Nashville, TN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sungard Availability Services Capital, Inc.
|
|
|
1st Lien, Senior Secured
Loan
(5,22)
|
|
|
Technology Services
|
|
11.69% (L+10.00%)
(13)
|
|
|
10/01/2022
|
|
|
|
6,000
|
|
|
|
5,700
|
|
|
|
5,952
|
|
|
|
4.50
|
%
|
Wayne, PA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tallage Lincoln, LLC.
|
|
|
1st Lien, Senior Secured
Loan
(5,16)
|
|
|
Real Estate Services
|
|
11.69% (L + 10.00%, 11.00% Floor)
(13)
|
|
|
12/31/2019
|
|
|
|
5,723
|
|
|
|
5,725
|
|
|
|
5,718
|
|
|
|
4.32
|
%
|
Boston, MA
|
|
|
1st Lien,
Senior Secured Loan -
Unfunded
(5,16)
|
|
|
|
|
11.69% (L + 10.00%, 11.00% Floor)
(13)
|
|
|
12/31/2019
|
|
|
|
2,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,725
|
|
|
|
5,718
|
|
|
|
4.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Finance Company
|
|
|
1st Lien, Senior Secured
Loan
(5,16)
|
|
|
Consumer Finance
|
|
17.88% (L + 13.50%, 14.00% Floor)
(6,12)
|
|
|
03/31/2018
|
|
|
|
2,191
|
|
|
|
2,191
|
|
|
|
1,993
|
|
|
|
1.51
|
%
|
Silver Springs, MD
|
|
|
1st Lien,
Senior Secured Unfunded
Loan
(5,16)
|
|
|
|
|
17.88% (L + 13.50%, 14.00% Floor)
(6,12)
|
|
|
03/31/2018
|
|
|
|
709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,191
|
|
|
|
1,993
|
|
|
|
1.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Selling Source, LLC
|
|
|
1st Lien, Senior Secured
Loan
(5,16,23)
|
|
|
Information and Data Services
|
|
17.00% (9.00% PIK, 8.00% Cash)
(7,9)
|
|
|
12/31/2017
|
|
|
|
5,689
|
|
|
|
4,202
|
|
|
|
4,659
|
|
|
|
3.52
|
%
|
|
|
|
|
|
|
|
|
|
Las Vegas, NV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tru Taj, LLC
|
|
|
1st Lien, Senior Secured
Bond
(11)
|
|
|
Retail
|
|
12.00%
|
|
|
08/15/2021
|
|
|
|
16,000
|
|
|
|
15,264
|
|
|
|
14,800
|
|
|
|
11.19
|
%
|
Wayne, NJ
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Control,
Non- Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179,558
|
|
|
|
144,996
|
|
|
|
109.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Investments - 49.81% of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Street Institutional Treasury Money Market Fund
|
|
|
Money Market Mutual
Fund
|
|
|
|
|
|
|
|
|
|
|
|
16,052,817
|
|
|
|
16,053
|
|
|
|
16,053
|
|
|
|
12.13
|
%
|
United States Treasury
|
|
|
Treasury Bill
|
|
|
|
|
|
|
|
3/29/2018
|
|
|
|
50,000
|
|
|
|
49,839
|
|
|
|
49,837
|
|
|
|
37.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Short-Term Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,892
|
|
|
|
65,890
|
|
|
|
49.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENTS
(14)
174.43% of Net
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
268,177
|
|
|
$
|
230,760
|
|
|
|
174.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities in Excess of Assets - (74.43)% of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(98,473
|
)
|
|
|
(74.43
|
)%
|
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
132,287
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Companys investments are generally acquired in private transactions exempt from registration under the Securities Act of 1933 and, therefore, are generally subject to limitations on resale, and may be deemed
to be restricted securities under the Securities Act of 1933.
|
F-42
(2)
|
A majority of the Companys variable rate debt investments bear interest at a rate that is determined by reference to LIBOR (London Interbank Offered Rate) or the U.S. prime rate, and which
is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of December 31, 2017. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is
the minimum rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate.
|
(3)
|
Controlled Investments are investments in those companies that are Controlled Investments of the Company, as defined in the Investment Company Act. A company is deemed to
be a Controlled Investment of the Company if the Company owns more than 25% of the voting securities of such company.
|
(4)
|
Affiliate Investments are investments in those companies that are Affiliated Companies of the Company, a defined in the Investment Company Act, which are not
Controlled Investments. A company is deemed to be an Affiliate of the Company if the Company owns 5% or more, but less than 25%, of the voting securities of such company.
|
(5)
|
Investments classified as Level 3 whereby fair value was determined by the Companys board of directors.
|
(6)
|
The interest rate on these loans may be subject to the greater of a LIBOR floor, if any, or 1 month LIBOR plus a base rate. The 1 month LIBOR as of December 31, 2017 was 1.56%.
|
(7)
|
Security pays, or has the option to pay, all of its interest in kind.
|
(8)
|
Non-income
producing security.
|
(9)
|
Investment was on
non-accrual
status as of December 31, 2017.
|
(10)
|
Indicates assets that the Company believes do not represent qualifying assets under Section 55(a) of the Investment Company Act. Qualifying assets must represent at least 70% of the
Companys total assets at the time of acquisition of any additional
non-qualifying
assets. Of the Companys total assets, 20.82% were
non-qualifying
assets as
of December 31, 2017.
|
(11)
|
Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933. Such security may be sold in certain transactions (normally to qualified institutional buyers) and remain exempt from
registration.
|
(12)
|
The interest rate on these loans includes a default interest rate.
|
(13)
|
The interest rate on these loans is subject to the greater of a LIBOR floor or 3 month LIBOR plus a base rate. The 3 month LIBOR as of December 31, 2017 was 1.69%.
|
(14)
|
As of December 31, 2017, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $2,353; the aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value was $25,103; the net unrealized depreciation was $22,750; the aggregate cost of securities for Federal income tax purposes was $253,510.
|
(15)
|
Restricted security initially obtained on February 28, 2017.
|
(16)
|
Restricted security initially obtained on November 3, 2016.
|
(17)
|
Restricted security initially obtained on December 14, 2017.
|
(18)
|
Restricted security initially obtained on May 17, 2017.
|
(19)
|
Restricted security initially obtained on September 28, 2017.
|
F-43
(20)
|
Restricted security initially obtained on November 15, 2017.
|
(21)
|
Restricted security initially obtained on December 13, 2017.
|
(22)
|
Restricted security initially obtained on December 20, 2017.
|
(23)
|
Loan defaulted on January 1, 2018.
|
L = LIBOR
As of December 31, 2017, the Companys investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Investment Type
|
|
Cost
|
|
|
Fair Value
|
|
1st Lien/Senior Secured Debt
|
|
$
|
202,117
|
|
|
$
|
164,521
|
|
Equity/Other
|
|
|
168
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
Total Long Term Investments
|
|
$
|
202,285
|
|
|
$
|
164,870
|
|
|
|
|
|
|
|
|
|
|
F-44
As of December 31, 2017, the industry composition of the Companys portfolio at fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Investments at Fair
Value
|
|
|
Percentage of
Total
Investment
Portfolio
|
|
Wireless Telecommunications Services
|
|
$
|
42,277
|
|
|
|
25.6
|
%
|
Building Cleaning and Maintenance Services
|
|
|
18,104
|
|
|
|
11.0
|
%
|
Retail
|
|
|
14,800
|
|
|
|
9.0
|
%
|
Manufacturing
|
|
|
11,960
|
|
|
|
7.3
|
%
|
Wireless Communications
|
|
|
10,023
|
|
|
|
6.1
|
%
|
Chemicals
|
|
|
9,771
|
|
|
|
5.9
|
%
|
Radio Broadcasting
|
|
|
8,876
|
|
|
|
5.4
|
%
|
Industrial Other
|
|
|
7,070
|
|
|
|
4.3
|
%
|
Technology Services
|
|
|
5,952
|
|
|
|
3.6
|
%
|
Real Estate Services
|
|
|
5,718
|
|
|
|
3.5
|
%
|
Water Transport
|
|
|
5,279
|
|
|
|
3.2
|
%
|
Software Services
|
|
|
5,005
|
|
|
|
3.0
|
%
|
Industrial Conglomerates
|
|
|
4,838
|
|
|
|
2.9
|
%
|
Information and Data Services
|
|
|
4,659
|
|
|
|
2.8
|
%
|
Business Services
|
|
|
4,156
|
|
|
|
2.5
|
%
|
Consumer Finance
|
|
|
2,871
|
|
|
|
1.7
|
%
|
Maritime Security Services
|
|
|
1,770
|
|
|
|
1.1
|
%
|
Hotel Operator
|
|
|
1,605
|
|
|
|
1.0
|
%
|
Grain Mill Products
|
|
|
136
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
164,870
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017, the geographic composition of the Companys portfolio at fair value was as follows:
|
|
|
|
|
Geographic
|
|
December 31, 2017
|
|
United States
|
|
|
73.3
|
%
|
United Kingdom
|
|
|
26.7
|
%
|
|
|
|
|
|
Total percentage of net assets
|
|
|
100.0
|
%
|
|
|
|
|
|
F-45
GREAT ELM CORP.
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2016
Dollar amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
|
Interest
|
|
|
Maturity
|
|
Par
Amount/Quantity
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
% of
NAV
|
|
Investments at Fair Value - 89.42% (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt - 89.13% (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Lien/Senior Secured Debt - 82.10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310E53RD, LLC
(3) (4)
|
|
|
Real Estate Holding
Company
|
|
|
|
10.77% (L + 10.00, 10.15% Floor,
16.00%
Cap)
|
|
|
07/01/2017
|
|
$
|
6,000
|
|
|
|
5,982
|
|
|
$
|
5,982
|
|
|
|
3.46
|
%
|
Ads Direct Media, Inc.
(3) (4) (5)
|
|
|
Internet Advertising
|
|
|
|
16.50% (L + 13.00%, 16.50% Floor)
|
|
|
05/02/2018
|
|
|
2,035
|
|
|
|
745
|
|
|
|
830
|
|
|
|
0.48
|
%
|
Avanti Communications Group PLC
(6) (7) (8)
(9)
|
|
|
Wireless
Telecommunications
Services
|
|
|
|
10.00%
|
|
|
10/01/2019
|
|
|
70,035
|
|
|
|
55,298
|
|
|
|
42,021
|
|
|
|
24.29
|
%
|
Chester Downs & Marina LLC / Chester Downs Finance Corp.
(6)
|
|
|
Casinos and
Gaming
|
|
|
|
9.25%
|
|
|
02/01/2020
|
|
|
6,000
|
|
|
|
5,801
|
|
|
|
5,760
|
|
|
|
3.33
|
%
|
Davidzon Radio, Inc.
(3) (4)
|
|
|
Radio Broadcasting
|
|
|
|
11.00% (L + 10.00%, 11.00% Floor)
|
|
|
03/31/2020
|
|
|
10,127
|
|
|
|
9,358
|
|
|
|
9,297
|
|
|
|
5.37
|
%
|
JN Medical Corporation
(3) (4) (5) (10)
|
|
|
Biological Products
|
|
|
|
16.77% (L + 16.00%, 11.25% Floor,
17.00%
Cap)
|
|
|
06/30/2016
|
|
|
3,500
|
|
|
|
1,750
|
|
|
|
1,656
|
|
|
|
0.96
|
%
|
Luling Lodging, LLC
(3) (4) (5)
|
|
|
Hotel Operator
|
|
|
|
17.77% (L + 17.00%, 12.25% Floor)
|
|
|
12/18/2017
|
|
|
4,500
|
|
|
|
3,578
|
|
|
|
3,578
|
|
|
|
2.07
|
%
|
OPS Acquisitions Limited and Ocean Protection Services Limited
(3) (4) (7) (13)
|
|
|
Maritime Security
Services
|
|
|
|
12.77% (L + 12.00%, 12.50% Floor)
|
|
|
06/01/2018
|
|
|
4,371
|
|
|
|
4,255
|
|
|
|
4,286
|
|
|
|
2.48
|
%
|
Optima Specialty Steel, Inc.
(3) (6) (14)
|
|
|
Metals and Mining
|
|
|
|
12.50%
|
|
|
12/15/2016
|
|
|
15,100
|
|
|
|
15,100
|
|
|
|
13,854
|
|
|
|
8.01
|
%
|
PEAKS Trust
2009-1
(3) (4) (7)
|
|
|
Consumer Financing
|
|
|
|
7.50% (L + 5.00%, 7.50% Floor)
|
|
|
01/27/2020
|
|
|
1,862
|
|
|
|
1,092
|
|
|
|
1,072
|
|
|
|
0.62
|
%
|
PR Wireless, Inc.
(3) (14)
|
|
|
Wireless
Communications
|
|
|
|
10.00% (L + 9.00%, 10.00% Floor)
|
|
|
06/27/2020
|
|
|
8,288
|
|
|
|
7,524
|
|
|
|
7,645
|
|
|
|
4.42
|
%
|
Pristine Environments, Inc., Revolver
(3) (4)
(11)
|
|
|
Building Cleaning
and Maintenance
Services
|
|
|
|
15.27% (L + 14.50%, 11.70% Floor)
|
|
|
03/31/2017
|
|
|
8,129
|
|
|
|
8,129
|
|
|
|
8,129
|
|
|
|
4.70
|
%
|
Pristine Environments, Inc., Term Loan A
(3) (4)
(11)
|
|
|
Building Cleaning
and Maintenance
Services
|
|
|
|
16.27% (L + 15.50%, 12.70% Floor)
|
|
|
03/31/2017
|
|
|
1,630
|
|
|
|
1,630
|
|
|
|
1,630
|
|
|
|
0.94
|
%
|
Pristine Environments, Inc., Term Loan B
(3) (4)
(11)
|
|
|
Building Cleaning
and Maintenance
Services
|
|
|
|
16.27% (L + 15.50%, 12.70% Floor)
|
|
|
03/31/2017
|
|
|
3,004
|
|
|
|
3,004
|
|
|
|
2,807
|
|
|
|
1.62
|
%
|
RiceBran Technologies Corporation
(3) (4)
|
|
|
Grain Mill Products
|
|
|
|
11.52% (L + 10.75%, 11.50% Floor,
12.00% cap)
|
|
|
06/01/2018
|
|
|
1,384
|
|
|
|
1,384
|
|
|
|
1,362
|
|
|
|
0.79
|
%
|
RiceBran Technologies Corporation
(3) (4)
|
|
|
Grain Mill Products
|
|
|
|
11.52% (L + 10.75%, 11.50% Floor,
12.00% cap)
|
|
|
06/01/2018
|
|
|
1,375
|
|
|
|
1,362
|
|
|
|
1,366
|
|
|
|
0.79
|
%
|
Sonifi Solutions, Inc.
(3) (8)
|
|
|
Consumer
Discretionary
|
|
|
|
8.00%
|
|
|
03/28/2018
|
|
|
11,577
|
|
|
|
5,933
|
|
|
|
6,715
|
|
|
|
3.88
|
%
|
Tallage Adams, LLC
(3) (15)
|
|
|
Real Estate Services
|
|
|
|
11.00% (L + 10.00%, 11.00% Floor)
|
|
|
12/31/2017
|
|
|
1,505
|
|
|
|
1,507
|
|
|
|
1,504
|
|
|
|
0.87
|
%
|
Tallage Lincoln, LLC.
(3) (15)
|
|
|
Real Estate Services
|
|
|
|
11.00% (L + 10.00%, 11.00% Floor)
|
|
|
12/31/2019
|
|
|
5,423
|
|
|
|
5,430
|
|
|
|
5,415
|
|
|
|
3.13
|
%
|
The Finance Company
(3) (4)
|
|
|
Consumer Finance
|
|
|
|
14.02% (L + 13.25%, 13.75% Floor)
|
|
|
03/31/2018
|
|
|
2,697
|
|
|
|
2,697
|
|
|
|
2,650
|
|
|
|
1.53
|
%
|
The Selling Source, LLC
(3) (5) (8)
|
|
|
Information and
Data Services
|
|
|
|
17.00%
|
|
|
12/31/2017
|
|
|
5,155
|
|
|
|
4,444
|
|
|
|
4,201
|
|
|
|
2.43
|
%
|
Trilogy International Partners
(6)
|
|
|
Wireless
Telecommunications
Services
|
|
|
|
13.38%
|
|
|
05/15/2019
|
|
|
10,000
|
|
|
|
10,005
|
|
|
|
10,250
|
|
|
|
5.93
|
%
|
Total 1st Lien/Senior Secured Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,008
|
|
|
|
142,010
|
|
|
|
82.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Debt - 7.03%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Everi Payments, Inc.
|
|
|
Hardware
|
|
|
|
10.00%
|
|
|
01/15/2022
|
|
|
12,289
|
|
|
|
11,598
|
|
|
|
12,166
|
|
|
|
7.03
|
%
|
Modular Process Control, LLC
(3) (5) (12)
|
|
|
Energy Efficiency
Services
|
|
|
|
5.00%
|
|
|
04/01/2025
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unsecured Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,598
|
|
|
|
12,166
|
|
|
|
7.03
|
%
|
Equity/Other - 0.29%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infinite Aegis Group, LLC, Warrants
(3) (12)
|
|
|
Healthcare Billing
and Collections
|
|
|
|
|
|
|
08/01/2023
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
OPS Acquisitions Limited and Ocean Protection Services Limited, Common Stock
(3) (7) (12)
|
|
|
Maritime Security
Services
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
PR Wireless, Inc., Warrants
(3) (12)
|
|
|
Wireless
Communications
|
|
|
|
|
|
|
06/27/2024
|
|
|
101
|
|
|
|
313
|
|
|
|
314
|
|
|
|
0.18
|
%
|
RiceBran Technologies Corporation, Warrants
(3)
(12)
|
|
|
Grain Mill Products
|
|
|
|
|
|
|
05/12/2020
|
|
|
300,000
|
|
|
|
145
|
|
|
|
119
|
|
|
|
0.07
|
%
|
Texas Westchester Financial, LLC, Limited Liability Company Interests
(3) (12) (16)
|
|
|
Consumer Financing
|
|
|
|
|
|
|
|
|
|
9,278
|
|
|
|
68
|
|
|
|
68
|
|
|
|
0.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity/Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
526
|
|
|
|
501
|
|
|
|
0.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENTS 89.42%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
168,132
|
|
|
|
154,677
|
|
|
|
89.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets in Excess of Liabilities - 10.58%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,307
|
|
|
|
10.58
|
%
|
|
|
|
|
|
|
|
|
NET ASSETS - 100.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
172,984
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Companys investments are generally acquired in private transactions exempt from registration under the Securities Act of 1933 and, therefore, are generally
subject to limitations on resale, and may be deemed to be restricted securities under the Securities Act of 1933.
|
F-46
(2)
|
A majority of the Companys variable rate debt investments bear interest at a rate that is determined by reference to LIBOR (London Interbank Offered
Rate) or the U.S. prime rate, and which is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of December 31, 2016. If no reference to LIBOR or the U.S.
prime rate is made, the rate is fixed. A floor is the minimum rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate.
|
(3)
|
Investments classified as Level 3 whereby fair value was determined by the Companys board of directors.
|
(4)
|
The interest rate on these loans is subject to the greater of a LIBOR floor or 1 month LIBOR plus a base rate. The 1 month LIBOR as of December 31, 2016 was
0.77%.
|
(5)
|
Investment was on
non-accrual
status as of December 31, 2016.
|
(6)
|
Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933. Such security may be sold in certain transactions (normally to qualified
institutional buyers) and remain exempt from registration.
|
(7)
|
Indicates assets that the Company believes do not represent qualifying assets under Section 55(a) of the Investment Company Act.
Qualifying assets must represent at least 70% of the Companys total assets at the time of acquisition of any additional
non-qualifying
assets. Of the Companys total assets, 20.0% are
non-qualifying
assets.
|
(8)
|
Security pays all or a portion of its interest in kind.
|
(9)
|
On January 27, 2017, Avanti announced the completion of its previously announced refinancing, with the settlement of its (1) consent solicitation to permit,
among other things, the incurrence of up to $132,500 in super senior indebtedness (the PIK Toggle Notes) and the payment of PIK interest on the Existing Notes in lieu of cash for certain future interest payments due on the Existing
Notes, (2) the New Money Offer and (3) offer to holders participating in the New Money Offer to exchange a portion of their Existing Notes for additional PIK Toggle Notes. Holders who elected to backstop the New Money Offer also received
their pro rata share of additional common equity issued by Avanti in an aggregate amount equal to 9.09% of Avantis total outstanding shares. Through completion of the consent solicitation and the New Money Offer, Avanti received $80,000 of new
cash funding, with an additional $50,000 of funding available on a delayed draw basis, and will have the ability to defer up to $112,000 of future interest payments through April 2018. The Company took part in the refinancing, exchanging $22,900 of
Existing Notes for new PIK Toggle Notes and purchasing an additional $9,200 of PIK Toggle Notes for $8,900 of funded cash. The Company continues to hold $47,200 of the Existing Notes.
|
(10)
|
In February 2017, the Company sold its loan to JNI Medical Corporation for total consideration, including payment for expenses due under the loan agreement of $3,000.
The Company recognized approximately $1,000 of realized gain on the sale.
|
(11)
|
In February 2016, the Pristine Environments, Inc. loans were refinanced at par plus accrued interest and fees, less approximately $500 of remaining principal on the
Term Loan B.
|
(12)
|
Non-income
producing security.
|
F-47
(13)
|
Affiliate Investments are investments in those companies that are Affiliated Companies of the Company, a defined in
the Investment Company Act, which are not Control Investments. A company is deemed to be an Affiliate of the Company if the Company owns 5% or more, but less than 25%, of the voting securities of such
company.
|
(14)
|
In March 2017, the Optima Specialty Steel, Inc. note was refinanced at par plus accrued interest and fees.
|
(15)
|
The interest rate on these loans is subject to the greater of a LIBOR floor or 3 month LIBOR plus a base rate. The 3 month LIBOR as of December 31, 2016 was
1.00%.
|
(16)
|
Control Investments are investments in those companies that are Control Investments of the Company, as defined in the
Investment Company Act. A company is deemed to be a Control Investment of the Company if the Company owns more than 25% of the voting securities of such company.
|
L = LIBOR
As of December 31, 2016, the Companys
investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Period Ended
December 31, 2016
|
|
Investment Type
|
|
Cost
|
|
|
Fair Value
|
|
1st Lien/Senior Secured Debt
|
|
$
|
156,008
|
|
|
$
|
142,010
|
|
Unsecured Debt
|
|
|
11,598
|
|
|
|
12,166
|
|
Equity/Other
|
|
|
526
|
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
168,132
|
|
|
$
|
154,677
|
|
|
|
|
|
|
|
|
|
|
F-48
As of December 31, 2016, the industry composition of the Companys portfolio at fair value was as follows:
|
|
|
|
|
Industry
|
|
December 31, 2016
|
|
Wireless Telecommunications Services
|
|
|
33.8
|
%
|
Metals & Mining
|
|
|
9.0
|
|
Building Cleaning and Maintenance Services
|
|
|
8.1
|
|
Hardware
|
|
|
7.9
|
|
Radio Broadcasting
|
|
|
6.0
|
|
Wireless Communications
|
|
|
5.2
|
|
Consumer Discretionary
|
|
|
4.3
|
|
Real Estate Holding Company
|
|
|
3.9
|
|
Casinos and Gaming
|
|
|
3.7
|
|
Real Estate Services
|
|
|
3.5
|
|
Maritime Security Services
|
|
|
2.8
|
|
Information and Data Services
|
|
|
2.7
|
|
Hotel Operator
|
|
|
2.3
|
|
Grain Mill Products
|
|
|
1.8
|
|
Enterprise Software Company
|
|
|
1.7
|
|
Biological Products
|
|
|
1.1
|
|
Real Estate Services
|
|
|
1.0
|
|
Consumer Financing
|
|
|
0.7
|
|
Internet Advertising
|
|
|
0.5
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
|
|
As of December 31, 2016, the geographic composition of the Companys portfolio at fair value was as follows:
|
|
|
|
|
Geographic
|
|
December 31, 2016
|
|
United States
|
|
|
70.1
|
%
|
United Kingdom
|
|
|
29.9
|
%
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-49
GREAT ELM CAPITAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the
year ended December 31, 2017 and
Dollar amounts in thousands, except share and 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 Circles 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 Companys 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
.
The Companys December 31, 2016 consolidated financial statements were reclassified in order to be
consistent with the format used for the December 31, 2017 consolidated financial statements.
Prior to the Merger, the Company applied ASC Topic 915,
Development Stage Entities
(ASC 915) and accordingly had determined whether costs incurred were to be charged to expense when incurred or were to be capitalized or deferred. The Company concluded that costs incurred before the
date of the Merger were contingent and these costs were charged to expense as permitted under ASC 915.
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 Companys
accounts and the accounts of the Companys 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.
Use of Estimates
. The preparation of the consolidated 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 consolidated 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.
F-50
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, 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.
Interest Income received as
paid-in-kind
(PIK) is reported separately in
the Statements of Operations. Income is included as PIK if the instrument solely provides for settlement in kind. In the event that the borrower can settle in kind or via cash payment, the income is not included as PIK until the borrower elects to
pay in kind and the payment is received by the Company. In the event there is a lesser cash rate in a PIK toggle instrument, income is accrued at the lesser cash rate until the coupon is paid in kind and such larger payment is received by the
Company.
Certain of the Companys 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 instruments 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.
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
Companys 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).
F-51
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 Companys
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 Companys documented 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 Companys investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ 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 Companys investments than on the fair values 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
purchaser, 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:
|
|
|
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;
|
|
|
|
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;
|
|
|
|
The fair value of investments comprising in the aggregate less than 5% of the Companys total capitalization may be determined by GECM in good faith in accordance with the Companys valuation policy without
the employment of an independent valuation firm.
|
The Companys audit committee recommends, and the Board of Directors approves, the fair
value of the investments in the Companys 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 companys 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.
F-52
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 has elected to be taxed as a regulated investment company (RIC) under subchapter M of the Code for the partial taxable period 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 carryover ICTI must be distributed prior to the 15th day 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 Companys stockholders and will not be reflected in the consolidated 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 has accrued $124 of excise tax expense in fiscal 2017 and accrued $80 of excise tax expense in fiscal 2016.
At December 31, 2017, the Company, for federal income tax purposes, had capital loss carryforwards of $46,984 which will reduce its taxable income arising from
future net realized gains on investment transactions, if any, to the extent permitted by the Internal Revenue 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 tax. On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the Modernization Act) was signed by the President. The Modernization Act changed the capital loss carryforward
rules as they relate to regulated investment companies. Capital losses generated in tax years beginning after the date of enactment may now be carried forward indefinitely, and retain the character of the original loss. Of the capital loss
carryforwards at December 31, 2017, $46,984 are limited losses and available for use subject to annual limitation under Section 382. Of the capital losses at December 31, 2017, $16,815 are short-term and $30,169 are long 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 Companys 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.
F-53
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 GECMs 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
Companys 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 Companys 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 year ended December 31, 2017 and the period ended December 31, 2016, management fees amounted to $2,298 and
$392, respectively. As of December 31, 2017 and December 31, 2016, $612 and $392 remained payable, respectively.
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 Companys
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
Companys 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 Companys net assets at the end of the immediately preceding calendar quarter, in any calendar quarter, GECM will receive 20.0% of the
Companys
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 December 31, 2017 was $20,168. Accrued Unpaid Income includes PIK income of $11,709 earned during the year ended December 31, 2017 and
$1,962 of accrued interest income that is expected to PIK under PIK toggle elections. Accrued Unpaid Income as of December 31, 2016 was $4,199. Accrued Unpaid Income as of December 31, 2016 includes $1,128 of accrued interest income that
is expected to PIK under PIK toggle elections.
Any income incentive fee otherwise payable with respect to Accrued Unpaid Income (collectively, the Accrued
Unpaid Income Incentive Fees) is 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.
F-54
Payment of the incentive fee is subject to a total return requirement, which provides that no incentive fee in respect
of the Companys
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 Companys
pre-incentive
fee net investment income, realized gains and losses and unrealized appreciation and depreciation from and after November 4, 2016.
For the year ended December 31, 2017 and the period ended December 31, 2016, the Company incurred Incentive Fees based on income of $4,394 and $863,
respectively. As of December 31, 2017 and December 31, 2016, $5,257 and $863 remained payable of which $5,257 of the payable at December 31, 2017 and $863 of the payable at December 31, 2016 was Accrued Unpaid Income Incentive
Fees and $0 was immediately payable after calculating the total return requirement. For the year ended December 31, 2017 and the period ended December 31, 2016, 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 GECMs services under the Investment Management Agreement or otherwise as an investment adviser
of the Company.
The Companys chief executive officer is also the chief investment officer of GECM, and the chief executive officer and a member of the
board of directors of GEC. The Companys chief compliance officer is also an executive officer of GECM, and serves as GECMs chief compliance officer.
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 Companys average net asset value during such period. GECMs
expense cap was calculated retrospectively for the year ending November 4, 2017 and the cap on costs was determined to be $0 and $70 of the $80 accrued at December 31, 2016 was reversed for the year ended December 31, 2017 with $10
due from our
sub-administrator
remaining waived.
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 GECMs
services under the Administration Agreement or otherwise as administrator for the Company.
For the year ended December 31, 2017 and the period ended
December 31, 2016, the Company incurred expenses under the Administration Agreement of $1,362 and $224, respectively. As of December 31, 2017 and December 31, 2016, $257 and $138 remained payable, respectively.
F-55
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.
A
financial instruments 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
|
|
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.
|
|
|
|
|
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.
|
F-56
Level 3 Instruments Valuation Techniques and Significant Inputs
|
|
|
Bank Loans, Corporate Debt, and Other Debt Obligations
|
|
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.
|
|
|
Equity
|
|
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.
|
As noted above, the income and market approaches were used in the determination of fair value of certain Level 3 assets as of
December 31, 2016 and December 31, 2017. 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 Companys investment assets categorized within the fair value hierarchy as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Secured and Unsecured Debt
|
|
$
|
|
|
|
$
|
80,732
|
|
|
$
|
83,789
|
|
|
$
|
164,521
|
|
Equity/Other
|
|
|
213
|
|
|
|
|
|
|
|
136
|
|
|
|
349
|
|
Short Term Investments
|
|
|
65,890
|
|
|
|
|
|
|
|
|
|
|
|
65,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment assets
|
|
$
|
66,103
|
|
|
$
|
80,732
|
|
|
$
|
83,925
|
|
|
$
|
230,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Companys 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-57
The following is a reconciliation of Level 3 assets for the year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
December 31,
2017
|
|
Senior Secured and Unsecured Debt
|
|
$
|
83,979
|
|
|
$
|
139,859
|
|
|
$
|
2,053
|
|
|
$
|
(2,854
|
)
|
|
$
|
(142,824
|
)
|
|
$
|
3,576
|
|
|
$
|
83,789
|
|
Equity/Other
|
|
|
501
|
|
|
|
2,137
|
|
|
|
(321
|
)
|
|
|
17
|
|
|
|
(2,198
|
)
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment assets
|
|
$
|
84,480
|
|
|
$
|
141,996
|
|
|
$
|
1,732
|
|
|
$
|
(2,837
|
)
|
|
$
|
(145,022
|
)
|
|
$
|
3,576
|
|
|
$
|
83,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of Level 3 assets for the period from November 4, 2016 (commencement of operations as a
BDC) through 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
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
(2)
|
Change in unrealized appreciation (depreciation) relating to assets still held at December 31, 2017 totaled $(3,315) consisting of the following: Senior Secured and Unsecured Debt $(3,332) and Equity/Other $17.
Change in unrealized appreciation (depreciation) relating to assets still held at December 31, 2016 totaled $(951) consisting of the following: Senior Secured and Unsecured Debt $(926) and Equity/Other $(25).
|
No securities were transferred into the Level 3 hierarchy and no securities were transferred out of the Level 3 hierarchy during the period from
November 4, 2016 through December 31, 2016 or for the year ended December 31, 2017. Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur.
The tables below present the ranges of significant unobservable inputs used to value the Companys Level 3 assets and liabilities as of December 31,
2016 and December 31, 2017, 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 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 Companys Level 3 assets.
F-58
December 31, 2017
|
|
|
|
|
|
|
Level 3 Instruments
|
|
Level 3 Assets as of
December 31, 2017
|
|
Significant Unobservable
Inputs by Valuation
Techniques
1
|
|
Range
2
of Significant
Unobservable
Inputs (Weighted Average
3
) as
of
December 31,
2017
|
Bank Loans, Corporate Debt, and Other Debt Obligations
|
|
1st Lien/Senior Secured and Unsecured Debt
$83,789
|
|
Discounted cash flows:
Discount Rate
Comparable multiples:
EV/EBITDA
4
Liquidation/Waterfall analysis:
EV/EBITDA
4
|
|
7.69% - 38.75% (11.30%)
4.25 - 13.75 (6.68)
|
|
|
|
|
Equity
|
|
Common Stock, LLC Units and Warrants on private stock $0
|
|
Liquidation Value
|
|
N/A
|
|
|
|
|
Equity
|
|
Warrants on publicly traded stock $136
|
|
Volatility:
|
|
67.99% - 67.99% (67.99%)
|
December 31, 2016
|
|
|
|
|
|
|
Level 3 Instruments
|
|
Level 3 Assets as of
December 31, 2016
|
|
Significant Unobservable
Inputs by Valuation
Techniques
1
|
|
Range
2
of
Significant
Unobservable
Inputs (Weighted Average
3
) as
of
December 31,
2016
|
Bank Loans, Corporate Debt, and Other Debt Obligations
|
|
1st Lien/Senior Secured and Unsecured Debt
$83,979
Unsecured Debt $0
|
|
Discounted cash flows:
Discount Rate
Comparable multiples:
EV/EBITDA
4
Liquidation/Waterfall analysis:
EV/EBITDA
4
Liquidation Value
|
|
11.85% - 39.80% (16.33%)
3.50 - 6.35 (5.76)
$0 - $0 ($0)
|
Equity
|
|
Common Stock, LLC Units and Warrants on private stock
$314
|
|
Comparable multiples:
EV/EBITDA
4
Liquidation Value
|
|
3.50 - 6.00
(6.00)
$68 - $68 ($68)
|
Equity
|
|
Warrants on publicly traded stock $119
|
|
Volatility:
|
|
71.10% - 71.10% (71.10%)
|
(1)
|
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.
|
(2)
|
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.
|
(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.
|
F-59
5. DEBT
On
November 3, 2016, the Company assumed $33,646 of Full Circle 8.25% Senior Notes due 2020 (the 2020 Notes) in connection with the Merger by executing the second supplemental indenture dated November 3, 2016. The 2020 Notes had a
maturity date of June 30, 2020 and on October 20, 2017 we redeemed them completely at their par value plus accrued and unpaid interest.
On
September 13, 2017, we offered $28,375 in aggregate principal amount of 6.50% notes due 2022 (the GECCL Notes). On September 29, 2017, we sold to several underwriters an additional $4,256 of the GECCL Notes upon full exercise
of the underwriters over-allotment option. As a result of the issuance of these Notes, the aggregate principal balance of Notes outstanding is $32,631.
The GECCL Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCL Notes are
effectively subordinated, or junior in right of payment, to any future secured indebtedness that we may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. We pay interest on the GECCL Notes on
January 31, April 30, July 31 and October 31 of each year. The GECCL Notes will mature on September 18, 2022 and can be called on, or after, September 18, 2019. Holders of the GECCL Notes do not have the option to have
the GECCL Notes repaid prior to the stated maturity date. The GECCL Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.
As part of the offering, the Company incurred fees and costs, which are treated as a reduction of the carrying amount of the debt on our Statements of Assets and
Liabilities. These deferred financing costs presented as a reduction to the Notes payable balance are being amortized into interest expense over the term of the Notes.
The Investment Company Act limits, with certain exceptions, the Companys 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 December 31, 2017, the Companys outstanding borrowings were $32,631, and the Companys asset coverage ratio was 5 to 1.
Information about the Companys senior securities (including debt securities and other indebtedness) is shown in the following tables as of December 31,
2017 and December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 - GECCL Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
$
|
32,631
|
|
|
$
|
5.01
|
|
|
$
|
N/A
|
|
|
$
|
1.017
|
|
|
|
|
|
|
Unsecured Debt - 2020 Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
$
|
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 Great Elms 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)
|
Not applicable for senior securities that are not registered for public trading. The average market value per unit for the Notes is based on the average daily prices of such notes and is expressed per $1 of indebtedness
for each year and since November 4, 2016 for the period ended December 31, 2016.
|
F-60
The indentures 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. As of December 31, 2017, the Company had not repurchased any of the Notes. As of December 31, 2017 and December 31, 2016, the Company was in compliance
with all covenants under the indentures.
|
|
|
|
|
|
|
Period Ended
December 31, 2016
|
|
Borrowing interest expense
|
|
$
|
460
|
|
Facility fees
|
|
|
|
|
Amortization of acquisition premium
|
|
|
(40
|
)
|
|
|
|
|
|
Total
|
|
$
|
420
|
|
|
|
|
|
|
Weighted average interest rate
|
|
|
7.86
|
%
|
Average outstanding balance
|
|
$
|
33,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the Companys Notes are determined in accordance with ASC 820, which defines fair value in terms of the price
that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Companys Notes is determined by utilizing market quotations at the
measurement date as they are Level 1 securities.
The summary information of the 2020 Notes for the year ended December 31, 2017, is as follows:
|
|
|
|
|
|
|
Twelve
Months
Ended
December 31,
2017
(1)
|
|
Borrowing interest expense
|
|
$
|
2,236
|
|
Amortization of acquisition premium
|
|
|
(888
|
)
|
|
|
|
|
|
Total
|
|
$
|
1,348
|
|
|
|
|
|
|
Weighted average interest rate
|
|
|
4.99
|
%
|
Average outstanding balance
|
|
$
|
33,646
|
|
(1)
|
The information presented for the 2020 Notes is for the period from January 1, 2017 through October 20, 2017, which represents the date the 2020 Notes were redeemed in full.
|
The summary information of the GECCL Notes for the year ended December 31, 2017, is as follows:
|
|
|
|
|
|
|
Twelve
Months
Ended
December 31,
2017
(2)
|
|
Borrowing interest expense
|
|
$
|
607
|
|
Amortization of acquisition premium
|
|
|
84
|
|
|
|
|
|
|
Total
|
|
$
|
691
|
|
|
|
|
|
|
Weighted average interest rate
|
|
|
7.36
|
%
|
Average outstanding balance
|
|
$
|
32,631
|
|
(2)
|
The information presented for the GECCL Notes is for the period from September 19, 2017, which represents the date the GECCL Notes were issued, through December 31, 2017.
|
F-61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Facility
|
|
Commitments
|
|
|
Borrowings
Outstanding
|
|
|
Fair
Value
|
|
Unsecured Debt - GECCL Notes
|
|
$
|
32,631
|
|
|
$
|
32,631
|
|
|
$
|
33,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,631
|
|
|
$
|
32,631
|
|
|
$
|
33,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the Companys Notes are determined in accordance with ASC 820, which defines fair value in terms of the price
that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Companys Notes is determined by utilizing market quotations at the
measurement date as they are Level 1 securities.
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 December 31, 2017, the Company had approximately $7,786 in unfunded loan commitments, subject to the Companys approval in certain instances, to provide debt financing to certain of its
portfolio companies. To the degree applicable, unrealized gains or losses on these commitments as of December 31, 2017 are included in the Companys Statement of Assets and Liabilities and the corresponding Schedule of Investments. The
Company believes that it had sufficient cash and other liquid assets on its balance sheet to satisfy the unfunded commitments.
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 Circles 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 Companys 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 Companys maximum exposure under these
agreements cannot be known; however, the Company expects any risk of loss to be remote.
F-62
8. CAPITAL TRANSACTIONS
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 Company 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, and the total is included in the accompanying consolidated statement of changes as Shares issued formation
transactions.
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. See Note 6.
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
Circles stockholders, on November 3, 2016:
|
|
|
Full Circle merged into the Company resulting in the Companys acquisition, by operation of the Merger, of Full Circles portfolio that we 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 Companys exchange agent paid a $5.4 million special cash dividend to former Full Circle stockholders.
|
F-63
The Company has accounted for the Merger as a business combination under ASC Topic 805 and Regulation
S-Xs
purchase accounting guidance. The Company was designated as the accounting acquirer for accounting purposes. The difference between the fair value of Full Circles net assets and the consideration
was recorded as a purchase accounting loss because the fair value of the assets acquired and liabilities assumed, as of 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 during the
period ended December 31, 2016. Transaction-related expenses are comprised primarily of legal, accounting and other professional fees and third party costs.
The following table provides the pro forma consolidated operational data as if the Merger had occurred on January 1, 2016 and we were in operations for the full
year. The pro forma consolidated operational data is based on assumptions and estimates; however, these pro forma results are not indicative of the results of operations that would have been obtained had the Merger occurred at the beginning of the
period presented, nor do they purport to represent the consolidated results of operations for future periods. Information presented for the year ended December 31, 2015 represents Full Circles financial information for the period,
unadjusted.
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
Twelve Months Ended
|
|
(in thousands, except per share data)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Total Investment Income
|
|
$
|
17,125
|
|
|
$
|
18,320
|
|
Net Investment Income
|
|
|
5,853
|
|
|
|
9,204
|
|
Net Decrease in Net Assets Resulting from Operations
|
|
$
|
(12,383
|
)
|
|
$
|
(7,197
|
)
|
Weighted average common shares outstanding
|
|
|
6,953
|
|
|
|
4,957
|
|
Net Decrease in Net Assets Resulting from Operations per share, basic and diluted
|
|
$
|
(1.78
|
)
|
|
$
|
(1.45
|
)
|
F-64
Issuer Purchases of Equity Securities
During the year ended December 31, 2017 the Company purchased 2,138,479 shares under its tender offer and $15,000 stock buyback program at a weighted average
price of $11.20 per share. As of December 31, 2017, the Company had cumulatively purchased 2,236,651 shares under its tender offer and stock buyback program at a weighted average price of $11.18 per share, resulting in $14,995 of cumulative
cash paid, under the program since November 4, 2016. Including the tender offer, the Company utilized $24,995 under its stock buyback and tender program for repurchasing shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
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
|
|
|
$
|
10,158,722
|
|
June 2017
|
|
|
15,215
|
|
|
$
|
10.42
|
|
|
|
15,215
|
|
|
$
|
10,000,182
|
|
July 2017
|
|
|
47,961
|
|
|
$
|
10.73
|
|
|
|
47,961
|
|
|
$
|
9,485,725
|
|
August 2017
|
|
|
37,666
|
|
|
$
|
10.78
|
|
|
|
37,666
|
|
|
$
|
9,079,585
|
|
September 2017
|
|
|
753,097
|
|
|
$
|
11.00
|
|
|
|
753,097
|
|
|
$
|
792,735
|
|
October 2017
|
|
|
65,945
|
|
|
$
|
10.27
|
|
|
|
65,945
|
|
|
$
|
115,277
|
|
November 2017
|
|
|
11,485
|
|
|
$
|
10.04
|
|
|
|
11,485
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2017
|
|
|
2,138,479
|
|
|
$
|
11.20
|
|
|
|
2,138,479
|
|
|
|
|
|
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
|
|
|
|
|
|
Total
|
|
|
2,236,651
|
|
|
$
|
11.18
|
|
|
|
2,236,651
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Share amounts in this line include the repurchase of 869,565 shares on May 12, 2017 in the $10,000 tender offer we announced on March 30, 2017 that expired on May 5, 2017.
|
F-65
9. EARNINGS PER SHARE
The
following information sets forth the computation of basic and diluted earnings per share for the year ended December 31, 2017:
|
|
|
|
|
|
|
For the Year
Ended
December 31,
|
|
|
|
2017
|
|
Numerator for basic and diluted earnings per share - increase in net assets resulting from
operations
|
|
$
|
(2,754
|
)
|
Denominator for basic and diluted earnings per share - weighted average shares outstanding
|
|
|
11,655,370
|
|
Basic and diluted earnings per share
|
|
$
|
(0.24
|
)
|
The following information sets forth the computation of basic and diluted earnings per share for the period ended December 31,
2016:
|
|
|
|
|
|
|
Period Ended
December 31, 2016
|
|
Numerator for basic and diluted earnings per share - decrease in net assets resulting from
operations
|
|
$
|
(17,874
|
)
|
Denominator for basic and diluted earnings per share - weighted average shares outstanding
|
|
|
12,853
|
|
Basic and diluted earnings per share
|
|
$
|
(1.39
|
)
|
Weighted average shares outstanding represents the weighted average shares outstanding after giving effect to the Merger and
Formation Transactions, and as such is calculated from November 3, 2016 through December 31, 2016 for the period ended December 31, 2016.
Diluted
earnings per share equals basic earnings per share because there were no common stock equivalents outstanding during the periods presented.
10. TAX
INFORMATION
The tax character of distributions during the year ended December 31, 2017 and the period ended December 31, 2016, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Period Ended
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Distributions paid from:
|
|
|
|
|
|
|
|
|
Ordinary Income
|
|
$
|
13,682
|
|
|
$
|
2,123
|
|
Net Long-Term Capital Gains
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total Taxable Distributions
|
|
$
|
13,682
|
|
|
$
|
2,123
|
|
|
|
|
|
|
|
|
|
|
The components of Distributable Earnings (Losses) on a tax basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Undistributed Ordinary Income - net
|
|
$
|
3,488
|
|
|
$
|
1,781
|
|
Capital Loss Carryforwards
|
|
$
|
(46,984
|
)
|
|
$
|
(41,842
|
)
|
|
|
|
|
|
|
|
|
|
Total Undistributed Earnings
|
|
$
|
(43,496
|
)
|
|
$
|
(40,061
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized Earnings (Losses) - net
|
|
$
|
(22,750
|
)
|
|
$
|
(6,402
|
)
|
|
|
|
|
|
|
|
|
|
Total Accumulated Earnings (Losses) - net
|
|
$
|
(66,246
|
)
|
|
$
|
(46,463
|
)
|
|
|
|
|
|
|
|
|
|
F-66
The Companys aggregate unrealized appreciation and depreciation on investments based on cost for U.S. federal
income tax purposes were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Tax cost
|
|
$
|
253,510
|
|
|
$
|
224,762
|
|
Gross unrealized appreciation
|
|
$
|
2,353
|
|
|
$
|
1,837
|
|
Gross unrealized depreciation
|
|
$
|
(25,103
|
)
|
|
$
|
(8,239
|
)
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation on investments
|
|
$
|
(22,750
|
)
|
|
$
|
(6,402
|
)
|
|
|
|
|
|
|
|
|
|
The difference between GAAP-basis and tax basis unrealized gains (losses) is attributable primarily to differences in the tax
treatment of underlying fund investments.
In order to present certain components of the Companys capital accounts on a
tax-basis,
certain reclassifications have been recorded to the Companys accounts. These reclassifications have no impact on the net asset value of the Companys and result primarily from dividend
redesignations, certain
non-deductible
expenses, and differences in the tax treatment of paydown gains and losses.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Paid-in
capital in excess of par
|
|
$
|
3,349
|
|
|
$
|
26,464
|
|
Accumulated undistributed net investment income
|
|
$
|
(729
|
)
|
|
$
|
3,454
|
|
Accumulated net realized gain (loss)
|
|
$
|
(2,620
|
)
|
|
$
|
(29,918
|
)
|
At December 31, 2017, the Company, for federal income tax purposes, had capital loss carryforwards of $46,984 which will reduce
its taxable income arising from future net realized gains on investment transactions, if any, to the extent permitted by the Internal Revenue 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 tax. On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the Modernization Act) was signed by the President. The Modernization Act changed the
capital loss carryforward rules as they relate to regulated investment companies. Capital losses generated in tax years beginning after the date of enactment may now be carried forward indefinitely, and retain the character of the original loss. Of
the capital loss carryforwards at December 31, 2017, $46,984 are limited losses and available for use subject to annual limitation under Section 382. Of the capital losses at December 31, 2017, $16,815 are short-term and $30,169 are
long 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 Companys 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.
F-67
11. FINANCIAL HIGHLIGHTS
Below is the schedule of financial highlights of the Company:
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31,
|
|
|
November 3, 2016
(Commencement
of Operations) to
December 31,
|
|
|
|
2017
|
|
|
2016
(5)
|
|
Per Share Data:
(1)
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
13.52
|
|
|
$
|
14.41
|
|
Net investment income
|
|
|
1.52
|
|
|
|
0.28
|
|
Net realized gains
|
|
|
0.31
|
|
|
|
0.02
|
|
Net unrealized losses
|
|
|
(2.13
|
)
|
|
|
(1.05
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
|
(0.30
|
)
|
|
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
Accretion from share buybacks
|
|
|
0.40
|
|
|
|
0.03
|
|
Distributions declared from net investment
income
(2)
|
|
|
(1.20
|
)
|
|
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease resulting from distributions to common stockholders
|
|
|
(1.20
|
)
|
|
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
12.42
|
|
|
$
|
13.52
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding, end of year/period
|
|
|
10,652,401
|
|
|
|
12,790,880
|
|
Total return based on net asset value
(3)
|
|
|
0.69
|
%
|
|
|
(5.30
|
)%
|
Total return based on market value
(3)
|
|
|
(5.56
|
)%
|
|
|
(2.03
|
)%
|
|
|
Ratio/Supplemental Data (all amounts in thousands except ratios):
|
|
|
|
|
|
Net assets, end of period
|
|
$
|
132,287
|
|
|
$
|
172,984
|
|
Average net assets
|
|
$
|
151,986
|
|
|
$
|
179,366
|
|
Ratio of expenses (without management fees, incentive fees and interest and credit facility
expenses) to average net assets
(4,6)
|
|
|
2.25
|
%
|
|
|
4.37
|
%
|
Ratio of management fees to average net
assets
(4)
|
|
|
1.51
|
%
|
|
|
1.38
|
%
|
Ratio of interest and credit facility expenses to average net assets
(4)
|
|
|
1.34
|
%
|
|
|
1.48
|
%
|
Ratio of incentive fees to average net
assets
(4)
|
|
|
2.89
|
%
|
|
|
3.04
|
%
|
Ratio of total expenses to average net assets before
waiver
(4,6)
|
|
|
7.87
|
%
|
|
|
10.27
|
%
|
Ratio of total expenses to average net assets after
waiver
(4,6)
|
|
|
8.00
|
%
|
|
|
9.99
|
%
|
Ratio of net investment income to average net
assets
(4,6)
|
|
|
11.56
|
%
|
|
|
10.52
|
%
|
Portfolio turnover
|
|
|
116
|
%
|
|
|
27
|
%
|
(1)
|
The per share data was derived by using the weighted average shares outstanding during the period, except where such calculations deviate from those specified under the instructions to Form
N-2.
|
(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 Companys distributions were reinvested through its dividend reinvestment plan. Total return based on
market value is calculated as the change in market value per share, assuming the Companys distributions were reinvested through its dividend reinvestment plan. Total return does not include any estimate of a sales load or commission paid to
acquire shares. For the period ended December 31, 2016, 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 Companys
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 Companys
distributions were reinvested through its dividend reinvestment plan, and is assumed to be $12.03 on November 4, 2016. $12.03 represents the closing price of Full Circles common stock on its last day of trading prior to the merger, as
adjusted by the exchange ratio in the merger agreement.
|
F-68
(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 the 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).
|
12.
AFFILIATED AND CONTROLLED INVESTMENTS
Affiliated investment as defined by the Investment Company Act, whereby the Company owns between 5% and 25% of the
portfolio companys outstanding voting securities and the investments are not classified as controlled investments. The aggregate fair value of
non-controlled,
affiliated investments at December 31,
2017 represented 1.34% of the Companys net assets. Fair value as of December 31, 2017 along with transactions during the year ended December 31, 2017 in these affiliated investments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the twelve months ended
December 31,
2017
|
|
|
For the twelve months ended
December 31,
2017
|
|
Non-Controlled,
Affiliated Investments
|
|
Issue
(1)
|
|
Fair Value at
December 31,
2016
|
|
|
Gross
Additions
(Cost)
(2)
|
|
|
Gross
Reductions
(Cost)
(3)
|
|
|
Net
Unrealized
Gain (Loss)
|
|
|
Fair Value at
December
31,
2017
|
|
|
Net Realized
Gain (Loss)
|
|
|
Change
in
Net Unrealized
Gain (Loss)
|
|
|
Interest
Income
|
|
|
Fee
Income
|
|
|
Dividend
Income
|
|
OPS Acquisitions Limited and Ocean Protection Services Limited
|
|
Term Loan
|
|
$
|
4,286
|
|
|
$
|
25
|
|
|
$
|
(40
|
)
|
|
$
|
(2,501
|
)
|
|
$
|
1,770
|
|
|
$
|
|
|
|
$
|
(2,470
|
)
|
|
$
|
73
|
|
|
$
|
|
|
|
$
|
|
|
OPS Acquisitions Limited and Ocean Protection Services Limited
|
|
Equity (19%
of class)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
Term Loan
|
|
$
|
4,286
|
|
|
$
|
25
|
|
|
$
|
(40
|
)
|
|
$
|
(2,501
|
)
|
|
$
|
1,770
|
|
|
$
|
|
|
|
$
|
(2,470
|
)
|
|
$
|
73
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Non-unitized
equity investments are disclosed with percentage ownership in lieu of quantity.
|
(2)
|
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.
|
(3)
|
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-69
Controlled investment as defined by the Investment Company Act, whereby the Company owns more than 25% of the portfolio
companys outstanding voting securities or maintains the ability to nominate greater than 50% of the board representation. The aggregate fair value of controlled investments at December 31, 2017 represented 13.68% of the Companys net
assets. Fair value as of December 31, 2017 along with transactions during the year ended December 31, 2017 in these controlled investments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the twelve months ended
December 31,
2017
|
|
|
For the twelve months ended
December 31,
2017
|
|
Controlled
Investments
|
|
Issue
(1)
|
|
|
Fair Value at
December 31,
2016
|
|
|
Gross
Additions
(Cost)
(2)
|
|
|
Gross
Reductions
(Cost)
(3)
|
|
|
Net
Unrealized
Gain (Loss)
|
|
|
Fair Value at
December 31,
2017
|
|
|
Net Realized
Gain (Loss)
|
|
|
Change in
Net Unrealized
Gain (Loss)
|
|
|
Interest
Income
|
|
|
Fee
Income
|
|
|
Dividend
Income
|
|
Texas Westchester Financial, LLC
|
|
|
Equity (100%
of class)
|
|
|
$
|
68
|
|
|
$
|
|
|
|
$
|
(68
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
PE Facility Solutions, LLC
|
|
|
Revolver
|
|
|
|
|
|
|
|
51,166
|
|
|
|
(51,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
36
|
|
|
|
|
|
|
|
|
Term Loan A
|
|
|
|
|
|
|
|
10,000
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
9,900
|
|
|
|
|
|
|
|
|
|
|
|
1,035
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan B
|
|
|
|
|
|
|
|
8,587
|
|
|
|
|
|
|
|
(383
|
)
|
|
|
8,204
|
|
|
|
|
|
|
|
(383
|
)
|
|
|
1,209
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity (83%
of class)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Double Deuce Lodging, LLC
|
|
|
Equity (100%
of class)
|
|
|
|
|
|
|
|
2,138
|
|
|
|
(2,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
68
|
|
|
$
|
71,891
|
|
|
$
|
(53,472
|
)
|
|
$
|
(383
|
)
|
|
$
|
18,104
|
|
|
$
|
(8
|
)
|
|
$
|
(383
|
)
|
|
$
|
2,302
|
|
|
$
|
36
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Non-unitized
equity investments are disclosed with percentage ownership in lieu of quantity.
|
(2)
|
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.
|
(3)
|
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-70
13. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following are the quarterly results of operations for the period ended December 31, 2016 and the year ended December 31, 2017. The following information
reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
December 31, 2017
|
|
|
September 30,
2017
|
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
|
December 31, 2016
(1)
|
|
|
September 30, 2016
|
|
|
June 30, 2016
|
|
Investment income
|
|
$
|
9,710
|
|
|
$
|
6,466
|
|
|
$
|
6,237
|
|
|
$
|
7,315
|
|
|
$
|
5,831
|
|
|
$
|
|
|
|
$
|
|
|
Net investment income
|
|
|
6,433
|
|
|
|
3,570
|
|
|
|
3,478
|
|
|
|
4,094
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized losses
|
|
|
(1,367
|
)
|
|
|
(12,302
|
)
|
|
|
(5,945
|
)
|
|
|
(715
|
)
|
|
|
(17,879
|
)
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
|
5,066
|
|
|
|
(8,732
|
)
|
|
|
(2,467
|
)
|
|
|
3,379
|
|
|
|
(17,874
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (losses) per common share
|
|
|
0.47
|
|
|
|
(0.77
|
)
|
|
|
(0.20
|
)
|
|
|
0.27
|
|
|
|
(1.39
|
)
|
|
|
|
|
|
|
|
|
Net asset value per common share at end of quarter
|
|
$
|
12.42
|
|
|
$
|
12.38
|
|
|
$
|
13.29
|
|
|
$
|
13.59
|
|
|
$
|
13.52
|
|
|
$
|
|
|
|
$
|
|
|
(1)
|
Partial quarter for the period from November 4, 2016 through December 31, 2016.
|
F-71
14. SUBSEQUENT EVENTS
Subsequent events after the have been evaluated through March 12, 2018. Other than the items discussed below, the Company has concluded that there is no impact
requiring adjustment or disclosure in the consolidated financial statements.
In January 2018, we sold our position in Almonde, Inc. at a price of approximately
101% of par value.
In January 2018, we sold a $2.0 million portion of our position in NANA Development Corp. at a price of approximately 101% of par value.
In January 2018, we purchased $5.0 million of par value of Sungard Availability Services, Inc. first lien term loan at a price of approximately 93% of par
value. Such debt security bears interest at a rate of
3-Month
LIBOR plus 7.00% and matures September 30, 2021.
In
February 2018, we purchased $10.0 million of par value of Full House Resorts, Inc. senior secured first lien notes at an issuance price of approximately 98% of par value. Such debt security bears interest at a rate of 3 Month LIBOR plus 7.00%
and matures February 2, 2024.
In February 2018, PE Facility Solutions, LLC prepaid approximately $1.0 million of its term loan B at par plus accrued
interest.
In February 2018, we purchased an additional $4.4 million of par value of Michael Baker International, LLC second lien bonds at a price of
approximately 98% of par value.
In February and March 2018, we purchased an additional $2.6 million of par value of SESAC Holdco II, LLC second lien loan
at a price of approximately par.
In March 2018, the court in Caldwell County, Texas ruled in our favor in FCCC v. Pumphrey and awarded us damages of $3,850.
This amount is in addition to amounts previously collected on our investment in Luling Lodging LLC. While these damages have been awarded to us, there are no guarantees as to their timing or collectability.
On January 19, 2018, we sold $44,898 in aggregate principal amount of 6.75% notes due 2025 (the GECCM Notes).
On February 13, 2018, we sold an additional $1,500 of the GECCM Notes upon partial exercise of the underwriters over-allotment option. As a result of the
issuance of these Notes, the aggregate principal balance of Notes outstanding is $46,398.
Our Board declared the monthly distributions for the second quarter of
2018 at an annual rate of approximately 8.02% of our December 31, 2017 NAV, which equates to $0.083 per month. The schedule of distribution payments is as follows:
|
|
|
|
|
|
|
|
|
Month
|
|
Rate
|
|
|
Record Date
|
|
Payable Date
|
April
|
|
$
|
0.083
|
|
|
April 30, 2018
|
|
May 15, 2018
|
May
|
|
$
|
0.083
|
|
|
May 31, 2018
|
|
June 15,
2018
|
June
|
|
$
|
0.083
|
|
|
June 29, 2018
|
|
July 16, 2018
|
F-72
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Full Circle Capital Corporation and
Subsidiaries
We have audited the accompanying consolidated statements of assets and liabilities, including the consolidated schedules of
investments, of Full Circle Capital Corporation and Subsidiaries (the Company) as of June 30, 2016 and 2015, and the related consolidated statements of operations, changes in net assets and cash flows for each of the two years in the period
ended June 30, 2016. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of investments owned as of
June 30, 2016, by correspondence with the custodians, management of the underlying investments, as applicable, or by other appropriate auditing procedures where replies from these parties, as applicable, were not received. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Full Circle Capital Corporation and Subsidiaries as of June 30, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, and the changes in net assets for
each of the two years in the period then ended in conformity with U.S. generally accepted accounting principles.
We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), Full Circle Capital Corporation and Subsidiaries internal control over financial reporting as of June 30, 2016, based on criteria established
in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated September 28, 2016 expressed an
unqualified opinion on the effectiveness of Full Circle Capital Corporation and Subsidiaries internal control over financial reporting.
|
/s/ RSM US LLP
|
|
New York, New York
|
September 28, 2016
|
F-73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Full Circle Capital Corporation
and Subsidiaries
We have audited Full Circle Capital Corporation and Subsidiaries internal control over financial reporting as of
June 30, 2016, based on criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Full Circle
Capital Corporation and Subsidiaries management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes those policies and procedures that
(a)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(b)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(c)
provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Full Circle Capital Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of June 30, 2016, based on criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
statements of assets and liabilities of Full Circle Capital Corporation and Subsidiaries, including the consolidated schedules of investments, as of June 30, 2016 and 2015, and the related consolidated statements of operations, changes in net
assets, and cash flows for each of the two years in the period ended June 30, 2016, and our report dated September 28, 2016 expressed an unqualified opinion.
|
/s/ RSM US LLP
|
|
New York, New York
|
September 28, 2016
|
F-74
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Control Investments at Fair Value (Cost of $314,312 and $11,409,596, respectively)
|
|
|
|
|
|
$
|
100,000
|
|
|
$
|
5,812,064
|
|
Affiliate Investments at Fair Value (Cost of $5,727,925 and $24,434,726, respectively)
|
|
|
|
|
|
|
313,355
|
|
|
|
16,019,272
|
|
Non-Control/Non-Affiliate
Investments at Fair Value (Cost of $89,806,480 and $136,351,581, respectively)
|
|
|
|
|
|
|
80,708,860
|
|
|
|
130,282,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments at Fair Value (Cost of $95,848,717 and $172,195,903, respectively)
|
|
|
(NOTE 9
|
)
|
|
|
81,122,215
|
|
|
|
152,113,759
|
|
Cash
|
|
|
|
|
|
|
33,390,695
|
|
|
|
3,736,563
|
|
Interest Receivable
|
|
|
|
|
|
|
993,965
|
|
|
|
1,903,606
|
|
Principal Receivable
|
|
|
|
|
|
|
126,448
|
|
|
|
23,287
|
|
Distributions Receivable
|
|
|
|
|
|
|
|
|
|
|
15,141
|
|
Due from Affiliates
|
|
|
|
|
|
|
|
|
|
|
605,749
|
|
Due from Portfolio Investments
|
|
|
|
|
|
|
93,450
|
|
|
|
180,300
|
|
Receivable on Open Swap Contract
|
|
|
|
|
|
|
|
|
|
|
1,081
|
|
Prepaid Expenses
|
|
|
|
|
|
|
66,149
|
|
|
|
66,105
|
|
Other Assets
|
|
|
|
|
|
|
15,286
|
|
|
|
1,483,578
|
|
Deferred Offering Expenses
|
|
|
|
|
|
|
|
|
|
|
328,168
|
|
Deferred Credit Facility Fees
|
|
|
(NOTE 8
|
)
|
|
|
51,486
|
|
|
|
267,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
115,859,694
|
|
|
|
160,724,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to Affiliates
|
|
|
(NOTE 5
|
)
|
|
|
388,965
|
|
|
|
1,052,489
|
|
Accrued Liabilities
|
|
|
|
|
|
|
1,486,055
|
|
|
|
179,378
|
|
Deposit from Swap Counterparty
|
|
|
|
|
|
|
|
|
|
|
10,380,000
|
|
Payable for Investments Acquired
|
|
|
|
|
|
|
|
|
|
|
15,020,000
|
|
Distributions Payable
|
|
|
|
|
|
|
|
|
|
|
813,240
|
|
Interest Payable
|
|
|
|
|
|
|
3,889
|
|
|
|
57,605
|
|
Other Liabilities
|
|
|
|
|
|
|
204,313
|
|
|
|
305,957
|
|
Accrued Offering Expenses
|
|
|
|
|
|
|
|
|
|
|
7,258
|
|
Notes Payable 8.25% due June 30, 2020 (plus unamortized premium of $135,498 and $158,504 and less
deferred debt issuance costs of $675,046 and $833,541, respectively)
|
|
|
(NOTE 8
|
)
|
|
|
33,105,977
|
|
|
|
32,970,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
|
|
|
|
35,189,199
|
|
|
|
60,786,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
(NOTE 13
|
)
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
$
|
80,670,495
|
|
|
$
|
99,938,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, par value $0.01 per share (100,000,000 authorized; 22,472,243 and 23,235,430 issued and
outstanding, respectively)
|
|
|
|
|
|
$
|
224,722
|
|
|
$
|
232,354
|
|
Paid-in
Capital in Excess of Par
|
|
|
|
|
|
|
128,084,659
|
|
|
|
132,487,067
|
|
Distributions in Excess of Net Investment Income
|
|
|
|
|
|
|
(107,390
|
)
|
|
|
(119,318
|
)
|
Accumulated Net Realized Losses
|
|
|
|
|
|
|
(32,804,994
|
)
|
|
|
(12,579,392
|
)
|
Accumulated Net Unrealized Losses
|
|
|
|
|
|
|
(14,726,502
|
)
|
|
|
(20,082,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
$
|
80,670,495
|
|
|
$
|
99,938,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value Per Share
|
|
|
|
|
|
$
|
3.59
|
|
|
$
|
4.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-75
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30, 2016
|
|
|
Year Ended
June 30,
2015
|
|
Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income from
Non-Control/Non-Affiliate
Investments
|
|
|
|
|
|
$
|
12,610,189
|
|
|
$
|
13,044,316
|
|
Interest Income from Affiliate Investments
|
|
|
|
|
|
|
1,093,451
|
|
|
|
2,445,713
|
|
Interest Income from Control Investments
|
|
|
|
|
|
|
464,244
|
|
|
|
1,465,069
|
|
Dividend Income from Control Investments
|
|
|
|
|
|
|
75,207
|
|
|
|
36,247
|
|
Other Income from
Non-Control/Non-Affiliate
Investments
|
|
|
|
|
|
|
2,070,241
|
|
|
|
542,164
|
|
Other Income from Affiliate Investments
|
|
|
|
|
|
|
4,314
|
|
|
|
98,671
|
|
Other Income from Control Investments
|
|
|
|
|
|
|
119,385
|
|
|
|
50,000
|
|
Other Income from
Non-Investment
Sources
|
|
|
(NOTE 5)
|
|
|
|
21,362
|
|
|
|
67,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Income
|
|
|
|
|
|
|
16,458,393
|
|
|
|
17,749,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Fee
|
|
|
|
|
|
|
1,992,111
|
|
|
|
2,280,058
|
|
Incentive Fee
|
|
|
|
|
|
|
1,263,241
|
|
|
|
1,798,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Advisory Fees
|
|
|
(NOTE 5
|
)
|
|
|
3,255,352
|
|
|
|
4,078,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of Overhead Expenses
|
|
|
|
|
|
|
212,783
|
|
|
|
171,559
|
|
Sub-Administration
Fees
|
|
|
|
|
|
|
246,268
|
|
|
|
256,236
|
|
Officers Compensation
|
|
|
|
|
|
|
305,226
|
|
|
|
303,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs Incurred Under Administration Agreement
|
|
|
(NOTE 5
|
)
|
|
|
764,277
|
|
|
|
731,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors Fees
|
|
|
|
|
|
|
168,000
|
|
|
|
182,196
|
|
Interest Expenses
|
|
|
(NOTE 8)
|
|
|
|
3,799,951
|
|
|
|
4,305,558
|
|
Professional Services Expense
|
|
|
|
|
|
|
2,564,170
|
|
|
|
700,324
|
|
Bank Fees
|
|
|
|
|
|
|
33,302
|
|
|
|
39,931
|
|
Other
|
|
|
|
|
|
|
549,864
|
|
|
|
519,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Operating Expenses
|
|
|
|
|
|
|
11,134,916
|
|
|
|
10,557,114
|
|
Fees Waiver and Expense Reimbursement
|
|
|
(NOTE 5)
|
|
|
|
(967,372
|
)
|
|
|
(1,420,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Operating Expenses
|
|
|
|
|
|
|
10,167,544
|
|
|
|
9,136,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
|
|
|
|
6,290,849
|
|
|
|
8,613,072
|
|
Net Change in Unrealized Gain (Loss) on Investments
|
|
|
|
|
|
|
5,355,642
|
|
|
|
(6,237,328
|
)
|
Net Realized Gain (Loss) on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate
Investments
|
|
|
|
|
|
|
(4,388,061
|
)
|
|
|
(4,055,309
|
)
|
Affiliate Investments
|
|
|
|
|
|
|
(9,593,394
|
)
|
|
|
321,394
|
|
Control Investments
|
|
|
|
|
|
|
(5,482,804
|
)
|
|
|
(3,842,390
|
)
|
Open Swap Contract
|
|
|
|
|
|
|
(1,882,293
|
)
|
|
|
1,081
|
|
Foreign Currency Transactions
|
|
|
|
|
|
|
(101
|
)
|
|
|
(1,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized Gain (Loss)
|
|
|
|
|
|
|
(21,346,653
|
)
|
|
|
(7,576,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Net Assets Resulting from Operations
|
|
|
|
|
|
$
|
(9,700,162
|
)
|
|
$
|
(5,200,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per Common Share Basic and Diluted
|
|
|
(NOTE 4)
|
|
|
$
|
(0.43
|
)
|
|
$
|
(0.35
|
)
|
Net Investment Income per Common Share Basic and Diluted
|
|
|
|
|
|
$
|
0.28
|
|
|
$
|
0.63
|
|
Weighted Average Shares of Common Stock Outstanding Basic and Diluted
|
|
|
|
|
|
|
22,662,947
|
|
|
|
14,803,637
|
|
See notes to consolidated financial statements.
F-76
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30, 2016
|
|
|
Year Ended
June 30,
2015
|
|
Increase (Decrease) in Net Assets Resulting from Operations:
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
$
|
6,290,849
|
|
|
$
|
8,613,072
|
|
Net Change in Unrealized Gain (Loss) on Investments
|
|
|
5,355,642
|
|
|
|
(6,237,328
|
)
|
Net Realized Gain (Loss) on:
|
|
|
|
|
|
|
|
|
Investments and Open Swap Contract
|
|
|
(21,346,552
|
)
|
|
|
(7,575,224
|
)
|
Foreign Currency Transactions
|
|
|
(101
|
)
|
|
|
(1,248
|
)
|
|
|
|
|
|
|
|
|
|
Net Realized Gain (Loss)
|
|
|
(21,346,653)
|
|
|
|
(7,576,472
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Net Assets Resulting from Operations
|
|
|
(9,700,162
|
)
|
|
|
(5,200,728
|
)
|
|
|
|
|
|
|
|
|
|
Dividends from Net Investment Income
|
|
|
(6,093,604
|
)
|
|
|
(8,613,072
|
)
|
Return of Capital
|
|
|
(1,051,922
|
)
|
|
|
(1,031,916
|
)
|
|
|
|
|
|
|
|
|
|
Net Decrease in Net Assets Resulting from Distributions
|
|
|
(7,145,526
|
)
|
|
|
(9,644,988
|
)
|
|
|
|
|
|
|
|
|
|
Capital Share Transactions:
|
|
|
|
|
|
|
|
|
Repurchase of Common Stock Under Share Repurchase Program
|
|
|
(2,422,384
|
)
|
|
|
|
|
Issuance of Common Stock
|
|
|
|
|
|
|
43,246,786
|
|
Less Offering Costs and Underwriting Fees
|
|
|
|
|
|
|
(1,442,780
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions
|
|
|
(2,422,384
|
)
|
|
|
41,804,006
|
|
|
|
|
|
|
|
|
|
|
Total Increase (Decrease) in Net Assets
|
|
|
(19,268,072
|
)
|
|
|
26,958,290
|
|
Net Assets at Beginning of Year
|
|
|
99,938,567
|
|
|
|
72,980,277
|
|
|
|
|
|
|
|
|
|
|
Net Assets at End of Year
|
|
$
|
80,670,495
|
|
|
$
|
99,938,567
|
|
|
|
|
|
|
|
|
|
|
Capital Share Activity:
|
|
|
|
|
|
|
|
|
Shares Repurchased Under Share Repurchase Program
|
|
|
(763,187
|
)
|
|
|
|
|
Shares Issued
|
|
|
|
|
|
|
11,792,396
|
|
Shares Outstanding at Beginning of Year
|
|
|
23,235,430
|
|
|
|
11,443,034
|
|
|
|
|
|
|
|
|
|
|
Shares Outstanding at End of Year
|
|
|
22,472,243
|
|
|
|
23,235,430
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-77
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30, 2016
|
|
|
Year Ended
June 30, 2015
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Net Assets Resulting from Operations
|
|
$
|
(9,700,162
|
)
|
|
$
|
(5,200,728
|
)
|
Adjustments to Reconcile Net Increase (Decrease) in Net Assets Resulting from Operations to Net Cash
Provided by (Used in) Operating Activities
|
|
|
|
|
|
|
|
|
Purchases of Investments
|
|
|
(96,437,681
|
)
|
|
|
(136,691,882
|
)
|
Increase in Investments Due to PIK
|
|
|
(291,992
|
)
|
|
|
(429,720
|
)
|
Proceeds from Sale or Refinancing of Investments and Open Swap Contract
|
|
|
153,241,487
|
|
|
|
122,880,572
|
|
Net Realized (Gain) Loss on:
|
|
|
|
|
|
|
|
|
Investments and Open Swap Contract
|
|
|
21,346,552
|
|
|
|
7,575,224
|
|
Foreign Currency Transactions
|
|
|
101
|
|
|
|
1,248
|
|
Net Change in Unrealized (Gain) Loss on Investments
|
|
|
(5,355,642
|
)
|
|
|
6,237,328
|
|
Amortization and Accretion of Fixed Income Premiums and Discounts
|
|
|
(1,511,281
|
)
|
|
|
(1,496,851
|
)
|
Amortization and Accretion of Deferred Debt Issuance Premiums and Costs
|
|
|
135,489
|
|
|
|
129,066
|
|
Amortization of Deferred Credit Facility Fees
|
|
|
282,278
|
|
|
|
274,826
|
|
Write-off
of Deferred Operating Expenses
|
|
|
320,910
|
|
|
|
|
|
Change in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
Deposit with Broker
|
|
|
|
|
|
|
2,525,000
|
|
Interest Receivable
|
|
|
909,641
|
|
|
|
(886,880
|
)
|
Principal Receivable
|
|
|
(103,161
|
)
|
|
|
183,946
|
|
Distributions Receivable
|
|
|
15,141
|
|
|
|
(15,141
|
)
|
Due from Affiliates
|
|
|
605,749
|
|
|
|
(601,476
|
)
|
Due from Portfolio Investments
|
|
|
86,850
|
|
|
|
(45,012
|
)
|
Receivable on Open Swap Contract
|
|
|
1,081
|
|
|
|
|
|
Prepaid Expenses
|
|
|
(44
|
)
|
|
|
(8,635
|
)
|
Other Assets
|
|
|
1,468,292
|
|
|
|
(733,252
|
)
|
Due to Affiliates
|
|
|
(663,524
|
)
|
|
|
160,523
|
|
Accrued Liabilities
|
|
|
1,306,677
|
|
|
|
(5,479
|
)
|
Deposit from Swap Counterparty
|
|
|
(10,380,000
|
)
|
|
|
10,380,000
|
|
Due to Broker
|
|
|
|
|
|
|
(25,000,221
|
)
|
Payable for Investments Acquired
|
|
|
(15,020,000
|
)
|
|
|
(9,880,172
|
)
|
Interest Payable
|
|
|
(53,716
|
)
|
|
|
12,351
|
|
Other Liabilities
|
|
|
(101,644
|
)
|
|
|
(770,843
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Operating Activities
|
|
|
40,101,401
|
|
|
|
(31,406,208
|
)
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-78
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30, 2016
|
|
|
Year Ended
June 30, 2015
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Bank Overdraft
|
|
|
|
|
|
|
(821,316
|
)
|
Borrowings Under Credit Facility
|
|
|
101,505,921
|
|
|
|
200,789,889
|
|
Payments Under Credit Facility
|
|
|
(101,505,921
|
)
|
|
|
(209,225,352
|
)
|
Distributions Paid to Shareholders
|
|
|
(7,958,766
|
)
|
|
|
(9,598,431
|
)
|
Deferred Credit Facility Fees
|
|
|
(66,119
|
)
|
|
|
(93,121
|
)
|
Payment of Offering Expenses and Underwriting Fees
|
|
|
|
|
|
|
(1,799,518
|
)
|
Payment of Distribution Notes
|
|
|
|
|
|
|
|
|
Proceeds from Notes Payable
|
|
|
|
|
|
|
12,643,834
|
|
Proceeds from Issuance of Common Stock
|
|
|
|
|
|
|
43,246,786
|
|
Payment for Repurchase of Common Stock Under Share Repurchase Program
|
|
|
(2,422,384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (Used in) Provided by Financing Activities
|
|
|
(10,447,269
|
)
|
|
|
35,142,771
|
|
|
|
|
|
|
|
|
|
|
Total Increase (Decrease) in Cash
|
|
|
29,654,132
|
|
|
|
3,736,563
|
|
Cash Balance at Beginning of Year
|
|
|
3,736 ,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Balance at End of Year
|
|
$
|
33,390,695
|
|
|
$
|
3,736,563
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of
Non-Cash
Operating
Activities:
|
|
|
|
|
|
|
|
|
Exercise of General Cannabis Corp. Warrant into Common Stock
|
|
$
|
|
|
|
$
|
486,786
|
|
Supplemental Disclosures of
Non-Cash
Financing
Activities:
|
|
|
|
|
|
|
|
|
Distributions Declared, Not Yet Paid
|
|
$
|
|
|
|
$
|
813,240
|
|
Accrued Offering Expenses
|
|
$
|
|
|
|
$
|
7,258
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash Paid During the Period for Interest
|
|
$
|
3,435,900
|
|
|
$
|
3,889,315
|
|
See notes to consolidated financial statements.
F-79
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description and
Industry
(1)
|
|
Type of Investment
(2)
|
|
Par
Amount/Quantity
|
|
|
Cost
|
|
|
Fair Value
|
|
|
% of Net Asset
Value
|
|
Control Investments
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas Westchester Financial, LLC
Consumer Financing
|
|
Limited Liability
Company Interests
^
|
|
|
9,278
|
|
|
$
|
314,312
|
|
|
$
|
100,000
|
|
|
|
0.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
|
|
|
314,312
|
|
|
|
100,000
|
|
|
|
0.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Oilfield Company, LLC
Oil and Gas Field Services
|
|
Senior Secured Revolving Loan, 12.47% (one month LIBOR plus 12.00%), 12/31/2017
(5)
|
|
$
|
186,624
|
|
|
|
186,624
|
|
|
|
10,137
|
|
|
|
0.01
|
%
|
|
|
Senior Secured Term Loan A, 12.47% (one month LIBOR plus 12.00%),
12/31/2017
(5)
|
|
$
|
861,728
|
|
|
|
856,358
|
|
|
|
46,809
|
|
|
|
0.06
|
%
|
|
|
Senior Secured Term Loan B, 12.47% (one month LIBOR plus 12.00%),
12/31/2017
(5)
|
|
$
|
4,720,391
|
|
|
|
4,684,943
|
|
|
|
256,409
|
|
|
|
0.32
|
%
|
|
|
Warrant for 7.625% of the outstanding Class A voting LLC interests (strike price $0.01), expires 8/13/2024
^
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
Warrants for 4.788% of the outstanding Class B
non-voting
LLC interests (strike price $0.01), expire 8/13/2024
^
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,727,925
|
|
|
|
313,355
|
|
|
|
0.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
|
|
|
5,727,925
|
|
|
|
313,355
|
|
|
|
0.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310E53RD, LLC
Real Estate Holding Company
|
|
Senior Secured Term Loan, 10.47% (one month LIBOR plus 10.00%, 10.15% floor, 16.00% cap) 7/1/2017
|
|
$
|
6,000,000
|
|
|
|
5,935,776
|
|
|
|
6,000,000
|
|
|
|
7.44
|
%
|
Ads Direct Media, Inc.
Internet Advertising
|
|
Senior Secured Term Loan, 12.00% 5/2/2018,
(5)
|
|
$
|
2,072,539
|
|
|
|
1,885,195
|
|
|
|
1,115,711
|
|
|
|
1.38
|
%
|
|
|
Warrant for 3.25% of outstanding LLC interests (strike price $0.01) expires 10/9/2024
^
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,885,195
|
|
|
|
1,115,711
|
|
|
|
1.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AP Gaming I, LLC
Gambling Machine Manufacturer
|
|
Senior Secured Term Loan, 9.25% (one month LIBOR plus 8.25%, 9.25% floor) 12/20/2020
|
|
$
|
3,949,367
|
|
|
|
3,915,675
|
|
|
|
3,712,405
|
|
|
|
4.60
|
%
|
Aptean, Inc
Enterprise Software Company
|
|
Unfunded Revolving Loan, 4.22% (one month LIBOR plus 3.75%) (purchased with an 11.00% netback), 2/26/2019
(6)
|
|
$
|
7,500,000
|
|
|
|
(696,402
|
)
|
|
|
(640,152
|
)
|
|
|
(0.79
|
)%
|
Attention Transit Advertising Systems, LLC
Outdoor Advertising Services
|
|
Senior Secured Term Loan, 11.50%, 9/30/2016
|
|
$
|
1,683,179
|
|
|
|
1,683,179
|
|
|
|
1,784,058
|
|
|
|
2.21
|
%
|
Background Images, Inc.
Equipment Rental Services
|
|
Senior Secured Term Loan Term A, 14.97% (one month LIBOR plus 14.50%), 9/1/2016
(5)
|
|
$
|
121,127
|
|
|
|
121,127
|
|
|
|
146,128
|
|
|
|
0.18
|
%
|
|
|
Senior Secured Term Loan Term B, 16.72% (one month LIBOR plus 16.25%), 9/1/2016
(5)
|
|
$
|
446,465
|
|
|
|
446,465
|
|
|
|
471,467
|
|
|
|
0.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
567,592
|
|
|
|
617,595
|
|
|
|
0.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-80
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description and Industry
(1)
|
|
Type of Investment
(2)
|
|
|
|
Par
Amount/Quantity
|
|
|
|
|
Cost
|
|
|
|
|
Fair Value
|
|
|
|
|
% of Net Asset
Value
|
|
Other Investments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bioventus, LLC
Specialty Pharmaceuticals
|
|
Subordinated Secured Term Loan, 11.00% (one month LIBOR plus 10.00%, 11.00% floor), 4/10/2020
|
|
|
|
$
|
6,000,000
|
|
|
|
|
$
|
5,954,883
|
|
|
|
|
$
|
6,000,000
|
|
|
|
|
|
7.44
|
%
|
Davidzon Radio, Inc.
Radio Broadcasting
|
|
Senior Secured Term Loan, 11.00% (one month LIBOR plus 10.00%, 11.00% floor), 3/31/2020
|
|
|
|
$
|
10,334,155
|
|
|
|
|
|
8,809,981
|
|
|
|
|
|
9,650,035
|
|
|
|
|
|
11.96
|
%
|
GC Pivotal, LLC
Data Connectivity Services Company
|
|
Unsecured Notes, 11.00%, 12/31/2020
|
|
|
|
$
|
3,164,000
|
|
|
|
|
|
3,170,905
|
|
|
|
|
|
3,096,712
|
|
|
|
|
|
3.84
|
%
|
Infinite Aegis Group, LLC
Healthcare Billing and Collections
|
|
Warrant for 2.0% of the outstanding LLC interests (at a $0.01 strike price), expires 8/1/2023
^
|
|
|
|
|
1
|
|
|
|
|
|
107,349
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
JN Medical Corporation
Biological Products
|
|
Senior Secured Term Loan, 16.47%, (one month LIBOR plus 16.00%, 11.25% floor, 12.00% cap), 6/30/2016
(5),(9)
|
|
|
|
$
|
3,500,000
|
|
|
|
|
|
3,500,000
|
|
|
|
|
|
3,249,213
|
|
|
|
|
|
4.03
|
%
|
Luling Lodging, LLC
Hotel Operator
|
|
Senior Secured Term Loan, 12.47% (one month LIBOR plus 12.00%, 12.25% floor), 12/17/2017
(8)
|
|
|
|
$
|
4,500,000
|
|
|
|
|
|
4,476,382
|
|
|
|
|
|
3,053,505
|
|
|
|
|
|
3.79
|
%
|
Modular Process Control, LLC
Energy Efficiency Services
|
|
Unsecured Loan, 5.00%, 4/1/2025
(5)
|
|
|
|
$
|
800,000
|
|
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
OPS Acquisitions Limited and Ocean Protection Services Limited*
Maritime Security Services
|
|
Senior Secured Term Loan, 12.50%, (one month LIBOR plus 12.00%, 12.50% floor), 3/4/2017
|
|
|
|
$
|
4,596,293
|
|
|
|
|
|
4,490,547
|
|
|
|
|
|
4,449,058
|
|
|
|
|
|
5.52
|
%
|
PEAKS Trust
2009-1*
Consumer Financing
|
|
Senior Secured Term Loan, 7.50%, (one month LIBOR plus 5.50%, 7.50% floor), 1/27/2020
(10)
|
|
|
|
$
|
2,129,426
|
|
|
|
|
|
1,873,367
|
|
|
|
|
|
1,787,014
|
|
|
|
|
|
2.21
|
%
|
PR Wireless, Inc.
Wireless Communications
|
|
Senior Secured Term Loan, 10.00%, (one month LIBOR plus 9.00%, 10.00% floor), 6/27/2020
|
|
|
|
$
|
8,330,000
|
|
|
|
|
|
7,756,435
|
|
|
|
|
|
7,497,000
|
|
|
|
|
|
9.29
|
%
|
|
|
Warrant for 101 shares (at a $0.01 strike price), expires 6/27/2024
^
|
|
|
|
|
1
|
|
|
|
|
|
634,145
|
|
|
|
|
|
209,844
|
|
|
|
|
|
0.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,390,580
|
|
|
|
|
|
7,706,844
|
|
|
|
|
|
9.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pristine Environments, Inc.
Building Cleaning and Maintenance Services
|
|
Senior Secured Revolving Loan, 14.97% (one month LIBOR plus 14.50%, 11.70% floor), 3/31/2017
|
|
|
|
$
|
5,990,807
|
|
|
|
|
|
5,990,807
|
|
|
|
|
|
5,990,807
|
|
|
|
|
|
7.42
|
%
|
|
|
Senior Secured Term Loan A, 15.97% (one month LIBOR plus 15.50%, 12.70% floor), 3/31/2017
|
|
|
|
$
|
1,515,546
|
|
|
|
|
|
1,513,330
|
|
|
|
|
|
1,515,546
|
|
|
|
|
|
1.88
|
%
|
|
|
Senior Secured Term Loan B, 15.97% (one month LIBOR plus 15.50%, 12.70% floor), 3/31/2017
|
|
|
|
$
|
2,848,423
|
|
|
|
|
|
2,828,824
|
|
|
|
|
|
2,845,575
|
|
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,332,961
|
|
|
|
|
|
10,351,928
|
|
|
|
|
|
12.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-81
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description and Industry
(1)
|
|
Type of Investment
(2)
|
|
Par
Amount/Quantity
|
|
Cost
|
|
Fair Value
|
|
|
% of Net Asset
Value
|
|
Other Investments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
RiceBran Technologies Corporation
Grain Mill Products
|
|
Senior Secured Revolving Loan, 11.50% (one month LIBOR plus 10.75%, 11.50% floor, 12.00% cap), 6/1/2018
|
|
$1,958,382
|
|
$1,916,188
|
|
$
|
1,889,838
|
|
|
|
2.34
|
%
|
|
|
Senior Secured Term Loan, 11.50% (one month LIBOR plus 10.75%, 11.50% floor, 12.00% cap), 6/1/2018
|
|
$1,500,000
|
|
1,435,956
|
|
|
1,452,500
|
|
|
|
1.80
|
%
|
|
|
Warrants for 300,000 shares (at a $1.85 strike price), expire
5/12/2020
^
|
|
300,000
|
|
39,368
|
|
|
110,905
|
|
|
|
0.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,391,512
|
|
|
3,453,243
|
|
|
|
4.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sundberg America, LLC et al.
Appliance Parts Distributor
|
|
Senior Secured Notes, 9.50%, 4/30/2020
|
|
$7,278,684
|
|
7,247,922
|
|
|
7,278,684
|
|
|
|
9.02
|
%
|
The Finance Company, LLC
Consumer Financing
|
|
Senior Secured Revolving Loan, 13.25% (one month LIBOR plus 12.75%, 13.25% floor), 3/31/2018
|
|
$1,841,325
|
|
1,841,325
|
|
|
1,848,752
|
|
|
|
2.29
|
%
|
The Selling Source, LLC
Information and Data Services
|
|
Senior Secured Term Loan, 17.00%, 12/31/2017**
|
|
$4,924,966
|
|
4,132,707
|
|
|
3,965,090
|
|
|
|
4.92
|
%
|
US Shale Solutions, Inc.
Oil and Gas Field Services
|
|
Senior Secured Term Loan, 10.00%, 9/15/2018 **
|
|
$1,084,337
|
|
1,084,337
|
|
|
1,059,036
|
|
|
|
1.31
|
%
|
|
|
Subordinated Secured Term Loan, 12.00%, 9/15/2019 **
|
|
$2,584,968
|
|
2,584,968
|
|
|
1,170,129
|
|
|
|
1.45
|
%
|
|
|
Limited Liability Company
Interests
(7), ^
|
|
15,079
|
|
4,325,739
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,995,044
|
|
|
2,229,165
|
|
|
|
2.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Investments
|
|
|
|
|
|
89,806,480
|
|
|
80,708,860
|
|
|
|
100.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
$95,848,717
|
|
$
|
81,122,215
|
|
|
|
100.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-82
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2016
The following tables
show the fair value of our portfolio of investments by geography and industry as of June 30, 2016.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Geography
|
|
Investment at
Fair Value
(in millions)
|
|
|
Percentage of
Net Assets
|
|
United States
|
|
$
|
76.7
|
|
|
|
95.04
|
%
|
United Kingdom
|
|
|
4.4
|
|
|
|
5.52
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81.1
|
|
|
|
100.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Industry
|
|
Investment at
Fair Value
(in millions)
|
|
|
Percentage of
Net Assets
|
|
Building Cleaning and Maintenance Services
|
|
$
|
10.4
|
|
|
|
12.83
|
%
|
Radio Broadcasting
|
|
|
9.7
|
|
|
|
11.96
|
|
Wireless Communications
|
|
|
7.6
|
|
|
|
9.55
|
|
Appliance Parts Distributor
|
|
|
7.3
|
|
|
|
9.02
|
|
Real Estate Holding Company
|
|
|
6.0
|
|
|
|
7.44
|
|
Specialty Pharmaceuticals
|
|
|
6.0
|
|
|
|
7.44
|
|
Maritime Security Services
|
|
|
4.4
|
|
|
|
5.51
|
|
Information and Data Services
|
|
|
4.0
|
|
|
|
4.92
|
|
Consumer Financing
|
|
|
3.7
|
|
|
|
4.63
|
|
Gambling Machine Manufacturer
|
|
|
3.7
|
|
|
|
4.60
|
|
Grain Mill Products
|
|
|
3.5
|
|
|
|
4.28
|
|
Biological Products
|
|
|
3.2
|
|
|
|
4.03
|
|
Data Connectivity Service Company
|
|
|
3.1
|
|
|
|
3.84
|
|
Hotel Operator
|
|
|
3.1
|
|
|
|
3.79
|
|
Oil and Gas Field Services
|
|
|
2.5
|
|
|
|
3.15
|
|
Outdoor Advertising Services
|
|
|
1.8
|
|
|
|
2.21
|
|
Internet Advertising
|
|
|
1.1
|
|
|
|
1.38
|
|
Equipment Rental Services
|
|
|
0.6
|
|
|
|
0.77
|
|
Healthcare Billing and Collections
|
|
|
|
|
|
|
|
|
Energy Efficiency Services
|
|
|
|
|
|
|
|
|
Enterprise Software Company
|
|
|
(0.6
|
)
|
|
|
(0.79
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81.1
|
|
|
|
100.56
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
The Companys investments are acquired in private transactions exempt from registration under the Securities Act of 1933 and, therefore, are generally subject to certain limitations on resale, and may be deemed to
be restricted securities under the Securities Act of 1933.
|
(2)
|
A majority of the Companys variable rate debt investments bear interest at a rate that is determined by reference to LIBOR (London Interbank Offered Rate) or the U.S. prime rate, and which is reset
daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of June 30, 2016. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the minimum
rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate.
|
See notes to consolidated financial statements.
F-83
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2016
(3)
|
Control Investments are investments in those companies that are Control Investments of the Company, as defined in the Investment Company Act of 1940. A company is deemed to be a Control
Investment of Full Circle Capital Corporation if Full Circle Capital Corporation owns more than 25% of the voting securities of such company.
|
(4)
|
Affiliate Investments are investments in those companies that are Affiliated Companies of the Company, as defined in the Investment Company Act of 1940, which are not Control
Investments. A company is deemed to be an Affiliate of Full Circle Capital Corporation if Full Circle Capital Corporation owns 5% or more, but less than 25%, of the voting securities of such company.
|
(5)
|
Investments were on
non-accrual
status as of June 30, 2016.
|
(6)
|
The negative fair value is the result of the unfunded commitment being valued below par. These amounts may or may not be funded to the borrowing party now or in the future. The cost basis of the loan reflects the
unamortized portion of the netback received on the settlement date when the Company acquired the commitment. The par value disclosure represents the size of the commitment.
|
(7)
|
Full Circle Capital Corporations equity investment in US Shale Solutions, Inc. is held through its wholly owned subsidiary FC Shale Inc.
|
(8)
|
Investment is on
non-accrual
status as of July 19, 2016.
|
(9)
|
On August 17, 2016, the Company foreclosed on the commercial property underlying its loan to JN Medical Corporation (JNI). Subsequent to the foreclosure, on September 14, 2016 the Company entered
into a forbearance agreement with JNI, which among other things, required JNI to enter into a triple net lease agreement with respect to the commercial property and to fund an initial payment of $730,723 to the Company in addition to resuming all
other obligations under the loan agreement.
|
(10)
|
The Company holds collateralized note obligations from PEAKS Trust
2009-1.
ITT Educational Services Inc. (ITT) has guaranteed payment on these notes. On
August 26, 2016, ITT announced that it would no longer be accepting new students for enrollment during the current academic year. Subsequently ITT terminated operations at its campuses and on September 16, 2016 ITT filed for Chapter 7
bankruptcy. To the degree that ITT has liabilities in excess of the proceeds resulting from the Chapter 7 proceedings, ITT may not be able to meet obligations under its guarantee, which could impair the value of the notes. At August 31, 2016,
the Company valued the notes at 70.91% of par value as compared to 83.92% of par value at June 30, 2016. The Company is currently reviewing the situation, but does not expect a significant change in the value of the notes due to the status of
ITT.
|
*
|
Indicates assets that the Company believes do not represent qualifying assets under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of the Companys total assets at the time
of acquisition of any additional
non-qualifying
assets. Of the Companys total assets, 5.3% are
non-qualifying
assets.
|
**
|
Security pays all or a portion of its interest in kind.
|
^
|
Security is a nonincome-producing security.
|
See notes to consolidated financial statements.
F-84
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description and
Industry
(1)
|
|
Type of Investment
(2)
|
|
Par
Amount/
Quantity
|
|
|
Cost
|
|
|
Fair Value
|
|
|
% of Net
Asset
Value
|
|
Control Investments
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Takoda Resources Inc.*
Geophysical Surveying and Mapping Services
|
|
Senior Secured Term Loan, 16.00%, 4/1/2016
(9)
|
|
$
|
3,054,532
|
|
|
$
|
3,054,532
|
|
|
$
|
161,585
|
|
|
|
0.16
|
%
|
|
|
Common Stock
^,(5)
|
|
|
749
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,054,532
|
|
|
|
161,585
|
|
|
|
0.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas Westchester Financial, LLC
Consumer Financing
|
|
Limited Liability Company Interests
^
|
|
|
9,278
|
|
|
|
491,713
|
|
|
|
177,500
|
|
|
|
0.18
|
%
|
The Finance Company, LLC
Consumer Financing
|
|
Senior Secured Term Loan, 15.00% (one month LIBOR plus 14.25%, 15.00% floor), 9/30/2015
|
|
$
|
4,195,915
|
|
|
|
4,187,977
|
|
|
|
4,204,167
|
|
|
|
4.21
|
%
|
|
|
Limited Liability Company Interests
|
|
|
50
|
|
|
|
140,414
|
|
|
|
802,027
|
|
|
|
0.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,328,391
|
|
|
|
5,006,194
|
|
|
|
5.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TransAmerican Asset Servicing Group, LLC
Asset Recovery Services
|
|
Senior Secured Revolving Loan, 12.00%, 7/25/2016
(9)
|
|
$
|
3,563,246
|
|
|
|
3,534,960
|
|
|
|
466,785
|
|
|
|
0.47
|
%
|
|
|
Limited Liability Company Interests
^,(6)
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,534,960
|
|
|
|
466,785
|
|
|
|
0.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
|
|
|
11,409,596
|
|
|
|
5,812,064
|
|
|
|
5.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modular Process Control, LLC
Energy Efficiency Services
|
|
Senior Secured Revolving Loan, 14.50% (one month LIBOR plus 13.50%, 14.50% floor), 3/28/2017
|
|
$
|
1,297,884
|
|
|
|
1,294,200
|
|
|
|
1,175,320
|
|
|
|
1.18
|
%
|
|
|
Senior Secured Term Loan, 15.50% (one month LIBOR plus 14.50%, 15.50% floor), 3/28/2017
|
|
$
|
4,900,000
|
|
|
|
4,743,125
|
|
|
|
2,296,957
|
|
|
|
2.30
|
%
|
|
|
Senior Secured Term Loan
Tranche 2, 18.00% (one month LIBOR plus 17.00%, 18.00% floor), 3/28/2017**
|
|
$
|
953,143
|
|
|
|
953,143
|
|
|
|
191,550
|
|
|
|
0.19
|
%
|
|
|
Warrant for 14.50% of the outstanding Class B LLC Interests (at a $0.01 strike price), expires 3/28/2023
^
|
|
|
1
|
|
|
|
288,000
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,278,468
|
|
|
|
3,663,827
|
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ProGrade Ammo Group, LLC
Munitions
|
|
Senior Secured Revolving Loan, 9.19% (one month LIBOR plus 9.00%, 9.19% floor), 3/30/2016
(9)
|
|
$
|
1,821,447
|
|
|
|
1,821,447
|
|
|
|
1,821,447
|
|
|
|
1.82
|
%
|
|
|
Senior Secured Term Loan, 16.19% (one month LIBOR plus 16.00%, 16.19% floor), 3/30/2016
(9)
|
|
$
|
4,843,750
|
|
|
|
4,843,750
|
|
|
|
768,862
|
|
|
|
0.77
|
%
|
|
|
Warrants for 19.9% of the outstanding LLC interests (at a $10.00 strike price), expire 8/2/2018
^
|
|
|
181,240
|
|
|
|
176,770
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,841,967
|
|
|
|
2,590,309
|
|
|
|
2.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-85
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description and Industry
(1)
|
|
Type of Investment
(2)
|
|
Par
Amount/
Quantity
|
|
|
Cost
|
|
|
Fair Value
|
|
|
% of Net Asset
Value
|
|
Affiliate Investments
(4)
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOLEX Fine Foods, LLC; Catsmo, LLC
Food Distributors and Wholesalers
|
|
Senior Secured Term Loan, 12.33% (one month LIBOR plus 12.14%), 12/28/2016
|
|
$
|
3,861,696
|
|
|
$
|
3,814,813
|
|
|
$
|
3,832,347
|
|
|
|
3.83
|
%
|
|
|
Limited Liability Company
Interests
^,(7)
|
|
|
1
|
|
|
|
290,284
|
|
|
|
|
|
|
|
|
%
|
|
|
Warrants for 1.6% of the outstanding LLC interests (strike price $0.01), expire 12/31/2022
^,(7)
|
|
|
1
|
|
|
|
58,055
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,163,152
|
|
|
|
3,832,347
|
|
|
|
3.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Oilfield Company, LLC
Oil and Gas Field Services
|
|
Senior Secured Revolving Loan, 12.69% (one month LIBOR plus 12.50%), 8/13/2017
|
|
$
|
545,118
|
|
|
|
545,118
|
|
|
|
545,118
|
|
|
|
0.55
|
%
|
|
|
Senior Secured Term Loan A, 12.69% (one month LIBOR plus 12.50%), 8/13/2017
|
|
$
|
854,167
|
|
|
|
847,155
|
|
|
|
840,415
|
|
|
|
0.84
|
%
|
|
|
Senior Secured Term Loan B, 12.69% (one month LIBOR plus 12.50%), 8/13/2017
|
|
$
|
4,368,132
|
|
|
|
4,328,366
|
|
|
|
4,297,805
|
|
|
|
4.30
|
%
|
|
|
Warrant for 7.625% of the outstanding Class A voting LLC interests (strike price $0.01), expires 8/13/2024
^
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
Warrants for 1.824% of the outstanding Class B
non-voting
LLC interests (strike price $0.01), expires 8/13/2024
^
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,720,639
|
|
|
|
5,683,338
|
|
|
|
5.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West World Media, LLC
Information and Data Services
|
|
Limited Liability Company
Interests
^,(8)
|
|
|
148,326
|
|
|
|
430,500
|
|
|
|
249,451
|
|
|
|
0.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
|
|
|
24,434,726
|
|
|
|
16,019,272
|
|
|
|
16.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ads Direct Media, Inc.
Internet Advertising
|
|
Senior Secured Term Loan, 13.50% (one month LIBOR plus 13.00%, 13.50% floor) 10/9/2017
|
|
$
|
2,406,250
|
|
|
|
2,387,763
|
|
|
|
2,392,294
|
|
|
|
2.39
|
%
|
|
|
Warrant for 3.25% of outstanding LLC interests (strike price $0.01) expires 10/9/2024
^
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,387,763
|
|
|
|
2,392,294
|
|
|
|
2.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AP Gaming I, LLC
Gambling Machine Manufacturer
|
|
Unfunded Revolving Loan, 8.25%, 12/20/2018
(10)
|
|
$
|
|
|
|
|
(146,988
|
)
|
|
|
(146,988
|
)
|
|
|
(0.15
|
)%
|
|
|
Senior Secured Term Loan, 9.25% (one month LIBOR plus 8.25%, 9.25% floor) 12/20/2020
|
|
$
|
3,989,873
|
|
|
|
3,950,167
|
|
|
|
3,950,167
|
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,803,179
|
|
|
|
3,803,179
|
|
|
|
3.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attention Transit Advertising Systems, LLC
Outdoor Advertising Services
|
|
Senior Secured Term Loan, 11.50%, 9/30/2016
|
|
$
|
1,915,341
|
|
|
|
1,915,341
|
|
|
|
1,979,058
|
|
|
|
1.98
|
%
|
See notes to consolidated financial statements.
F-86
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description and
Industry
(1)
|
|
|
|
Type of Investment
(2)
|
|
Par Amount/
Quantity
|
|
|
Cost
|
|
|
Fair Value
|
|
|
% of Net
Asset Value
|
|
Other Investments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Background Images, Inc.
Equipment Rental Services
|
|
Senior Secured Term Loan Term A, 14.69% (one month LIBOR plus 14.50%), 7/31/2015
|
|
$
|
132,866
|
|
|
$
|
132,866
|
|
|
$
|
146,525
|
|
|
|
0.15
|
%
|
|
|
Senior Secured Term Loan Term B, 16.44% (one month LIBOR plus 16.25%), 7/31/2015
|
|
$
|
485,725
|
|
|
|
485,725
|
|
|
|
493,449
|
|
|
|
0.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
618,591
|
|
|
|
639,974
|
|
|
|
0.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bioventus, LLC
Specialty
Pharmaceuticals
|
|
Subordinated Secured Term Loan, 11.00% (one month LIBOR plus 10.00%, 11.00% floor), 4/10/2020
|
|
$
|
6,000,000
|
|
|
|
5,944,426
|
|
|
|
5,970,000
|
|
|
|
5.97
|
%
|
Butler Burgher Group, LLC
Real Estate Management Services
|
|
Senior Secured Revolving Loan, 13.50% (one month LIBOR plus 13.25%, 13.50% floor), 6/30/2017
|
|
$
|
750,000
|
|
|
|
745,237
|
|
|
|
800,000
|
|
|
|
0.80
|
%
|
|
|
Senior Secured Term Loan, 13.50% (one month LIBOR plus 13.25%, 13.50% floor), 6/30/2017
|
|
$
|
7,349,264
|
|
|
|
7,302,515
|
|
|
|
7,716,728
|
|
|
|
7.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,047,752
|
|
|
|
8,516,728
|
|
|
|
8.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Davidzon Radio, Inc.
Radio Broadcasting
|
|
Senior Secured Term Loan, 11.00% (one month LIBOR plus 10.00%, 11.00% floor), 3/31/2020
|
|
$
|
10,897,013
|
|
|
|
8,991,089
|
|
|
|
9,262,098
|
|
|
|
9.27
|
%
|
Fuse, LLC
Television Programming
|
|
Senior Secured Note, 10.375%, 7/1/2019
|
|
$
|
7,000,000
|
|
|
|
7,041,962
|
|
|
|
5,775,000
|
|
|
|
5.78
|
%
|
GC Pivotal, LLC
Data Connectivity Services
Company
|
|
Unsecured Notes, 11.00%, 12/31/2020
|
|
$
|
3,164,000
|
|
|
|
3,171,910
|
|
|
|
3,171,910
|
|
|
|
3.17
|
%
|
General Cannabis Corp.
Non-Residential
Property Owner
|
|
Common Stock
^
|
|
|
654,409
|
|
|
|
515,094
|
|
|
|
1,308,818
|
|
|
|
1.31
|
%
|
GK Holdings Inc.
IT and Business Skill Training
|
|
Subordinated Secured Term Loan, 10.50% (one month LIBOR plus 9.50%, 10.50% floor), 1/20/2022
|
|
$
|
2,000,000
|
|
|
|
1,962,074
|
|
|
|
1,980,000
|
|
|
|
1.98
|
%
|
Good Technology Corporation
Mobile Device Management
|
|
Senior Secured Note, 5.00%, 10/1/2017
|
|
$
|
10,000,000
|
|
|
|
8,201,173
|
|
|
|
8,845,667
|
|
|
|
8.85
|
%
|
|
|
Warrants for 203.252 shares (at a $4.92 strike price), expire 9/30/2018
^
|
|
|
10,000
|
|
|
|
2,289,400
|
|
|
|
2,289,400
|
|
|
|
2.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,490,573
|
|
|
|
11,135,067
|
|
|
|
11.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granite Ridge Energy, LLC
Power Generation
|
|
Common Stock
^
|
|
|
60,000
|
|
|
|
12,975,000
|
|
|
|
12,975,000
|
|
|
|
12.98
|
%
|
GW Power, LLC and Greenwood Fuels WI, LLC
Electric Services
|
|
Senior Secured Term Loan, 12.19% (one month LIBOR plus 12.00%, 12.16% floor), 3/31/2016
|
|
$
|
5,320,388
|
|
|
|
5,299,835
|
|
|
|
5,255,480
|
|
|
|
5.26
|
%
|
Infinite Aegis Group, LLC
Healthcare Billing and Collections
|
|
Warrant for 2.0% of the outstanding LLC interests (at a $0.01 strike price), expires 8/1/2023
^
|
|
|
1
|
|
|
|
107,349
|
|
|
|
|
|
|
|
|
%
|
See notes to consolidated financial statements.
F-87
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description and Industry
(1)
|
|
Type of Investment
(2)
|
|
Par
Amount/
Quantity
|
|
|
Cost
|
|
|
Fair Value
|
|
|
% of Net Asset
Value
|
|
Other Investments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JN Medical Corporation
Biological Products
|
|
Senior Secured Term Loan, 11.25%, (one month LIBOR plus 11.00%, 11.25% floor, 12.00% cap), 6/30/2016
|
|
$
|
3,500,000
|
|
|
$
|
3,481,766
|
|
|
$
|
3,449,367
|
|
|
|
3.45
|
%
|
Lee Enterprises, Incorporated
Daily and Weekly Newspaper Publisher
|
|
Senior Secured Notes, 9.50%, 3/15/2022
|
|
$
|
2,000,000
|
|
|
|
2,045,000
|
|
|
|
2,045,000
|
|
|
|
2.05
|
%
|
Luling Lodging, LLC
Hotel Operator
|
|
Senior Secured Term Loan, 12.25% (one month LIBOR plus 12.00%, 12.25% floor), 12/17/2017
|
|
$
|
4,500,000
|
|
|
|
4,463,119
|
|
|
|
4,303,650
|
|
|
|
4.31
|
%
|
Medinet Investments, LLC
Medical Liability Claims Factoring
|
|
Senior Secured Revolving Loan, 13.50%, (one month LIBOR plus 13.00%, 13.50% floor), 7/23/2017
|
|
$
|
188,313
|
|
|
|
183,211
|
|
|
|
103,083
|
|
|
|
0.10
|
%
|
New Media West, LLC
Cable TV/Broadband Services
|
|
Senior Secured Term Loan, 9.00%, 12/31/2017
(9)
|
|
$
|
3,811,681
|
|
|
|
3,811,681
|
|
|
|
|
|
|
|
|
%
|
OPS Acquisitions Limited and Ocean Protection Services Limited*
Maritime Security Services
|
|
Senior Secured Term Loan, 12.50%, (one month LIBOR plus 12.00%, 12.50% floor), 3/4/2017
|
|
$
|
5,950,000
|
|
|
|
5,913,412
|
|
|
|
5,968,246
|
|
|
|
5.97
|
%
|
PEAKS Trust
2009-1*
Consumer Financing
|
|
Senior Secured Term Loan, 7.50%, (one month LIBOR plus 5.50%, 7.50% floor), 1/27/2020
|
|
$
|
3,450,828
|
|
|
|
2,947,443
|
|
|
|
2,705,449
|
|
|
|
2.71
|
%
|
PR Wireless, Inc.
Wireless Communications
|
|
Senior Secured Term Loan, 10.00%, (one month LIBOR plus 9.00%, 10.00% floor), 6/27/2020
|
|
$
|
8,415,000
|
|
|
|
7,618,897
|
|
|
|
7,573,500
|
|
|
|
7.58
|
%
|
|
|
Warrant for 101 shares (at a $0.01 strike price), expires 6/27/2024
^
|
|
|
1
|
|
|
|
634,145
|
|
|
|
378,675
|
|
|
|
0.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,253,042
|
|
|
|
7,952,175
|
|
|
|
7.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pristine Environments, Inc.
Building Cleaning and Maintenance Services
|
|
Senior Secured Revolving Loan, 11.70% (one month LIBOR plus 11.50%, 11.70% floor), 3/31/2017
|
|
$
|
5,614,310
|
|
|
|
5,614,310
|
|
|
|
5,863,211
|
|
|
|
5.87
|
%
|
|
|
Senior Secured Term Loan A, 12.70% (one month LIBOR plus 12.50%, 12.70% floor), 3/31/2017
|
|
$
|
1,607,656
|
|
|
|
1,602,678
|
|
|
|
1,685,037
|
|
|
|
1.69
|
%
|
|
|
Senior Secured Term Loan B, 12.70% (one month LIBOR plus 12.50%, 12.70% floor), 3/31/2017
|
|
$
|
3,026,563
|
|
|
|
2,979,285
|
|
|
|
3,172,039
|
|
|
|
3.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,196,273
|
|
|
|
10,720,287
|
|
|
|
10.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RiceBran Technologies Corporation
Grain
Mill Products
|
|
Senior Secured Revolving Loan, 11.50% (one month LIBOR plus 10.75%, 11.50% floor), 6/1/2018
|
|
$
|
1,000,000
|
|
|
|
939,362
|
|
|
|
939,362
|
|
|
|
0.94
|
%
|
|
|
Senior Secured Term Loan, 11.50% (one month LIBOR plus 10.75%, 11.50% floor), 6/1/2018
|
|
$
|
2,500,000
|
|
|
|
2,348,330
|
|
|
|
2,348,330
|
|
|
|
2.35
|
%
|
|
|
Warrants for 300,000 (at a $5.25 strike price), expires 5/12/2020
^
|
|
|
300,000
|
|
|
|
39,368
|
|
|
|
27,000
|
|
|
|
0.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,327,060
|
|
|
|
3,314,692
|
|
|
|
3.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-88
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description and
Industry
(1)
|
|
Type of Investment
(2)
|
|
Par
Amount/
Quantity
|
|
|
Cost
|
|
|
Fair Value
|
|
|
% of Net
Asset
Value
|
|
Other Investments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sundberg America, LLC et al.
Appliance Parts Distributor
|
|
Senior Secured Notes, 9.50%, 4/30/2020
|
|
$
|
8,000,000
|
|
|
$
|
7,960,112
|
|
|
$
|
7,960,112
|
|
|
|
7.97
|
%
|
The Selling Source, LLC
Information and Data Services
|
|
Senior Secured Term Loan, 15.00%, 12/31/2017**
|
|
$
|
3,869,881
|
|
|
|
3,855,453
|
|
|
|
3,140,666
|
|
|
|
3.14
|
%
|
US Shale Solutions, Inc.
Oil and Gas Field Services
|
|
Senior Secured Note, 12.50%, 9/1/2017
(9)
|
|
$
|
9,000,000
|
|
|
|
6,641,957
|
|
|
|
4,455,000
|
|
|
|
4.46
|
%
|
|
|
Warrants for 2.78 shares (at a $0.01 strike price), expire 9/1/2024
^
|
|
|
9,000
|
|
|
|
114
|
|
|
|
90
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,642,071
|
|
|
|
4,455,090
|
|
|
|
4.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Investments
|
|
|
|
|
|
|
|
|
136,351,581
|
|
|
|
130,282,423
|
|
|
|
130.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
|
|
$
|
172,195,903
|
|
|
$
|
152,113,759
|
|
|
|
152.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
|
|
Instrument
|
|
# of
Contracts
|
|
|
Notional
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
% of
Net
Asset
Value
|
|
Open Swap Contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reef Road Master Fund, Ltd.
|
|
Total Return Swap, Pay Total Return on 60,000 shares of Granite Ridge Energy, LLC, Receive
3.00% Fixed Rate, expires June 29, 2016
|
|
|
1
|
|
|
$
|
12,975,000
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
See notes to consolidated financial statements.
F-89
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2015
The following tables show the fair
value of our portfolio of investments by geography and industry as of June 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
Geography
|
|
Investment at
Fair Value
(in millions)
|
|
|
Percentage of
Net Assets
|
|
United States
|
|
$
|
145.9
|
|
|
|
146.08
|
%
|
United Kingdom
|
|
|
6.0
|
|
|
|
5.97
|
|
Canada
|
|
|
0.2
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
152.1
|
|
|
|
152.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
Industry
|
|
Investment at
Fair Value
(in millions)
|
|
|
Percentage of
Net Assets
|
|
Power Generation
|
|
$
|
13.0
|
|
|
|
12.98
|
%
|
Mobile Device Management
|
|
|
11.1
|
|
|
|
11.14
|
|
Building Cleaning and Maintenance Services
|
|
|
10.7
|
|
|
|
10.73
|
|
Oil and Gas Field Services
|
|
|
10.1
|
|
|
|
10.14
|
|
Radio Broadcasting
|
|
|
9.3
|
|
|
|
9.27
|
|
Real Estate Management Services
|
|
|
8.5
|
|
|
|
8.52
|
|
Appliance Parts Distributor
|
|
|
8.0
|
|
|
|
7.97
|
|
Wireless Communications
|
|
|
8.0
|
|
|
|
7.96
|
|
Consumer Financing
|
|
|
7.9
|
|
|
|
7.90
|
|
Specialty Pharmaceuticals
|
|
|
6.0
|
|
|
|
5.97
|
|
Maritime Security Services
|
|
|
6.0
|
|
|
|
5.97
|
|
Television Programming
|
|
|
5.8
|
|
|
|
5.78
|
|
Electric Services
|
|
|
5.2
|
|
|
|
5.26
|
|
Hotel Operator
|
|
|
4.3
|
|
|
|
4.31
|
|
Food Distributors and Wholesalers
|
|
|
3.8
|
|
|
|
3.83
|
|
Gambling Machine Manufacturer
|
|
|
3.8
|
|
|
|
3.81
|
|
Energy Efficiency Services
|
|
|
3.6
|
|
|
|
3.67
|
|
Biological Products
|
|
|
3.4
|
|
|
|
3.45
|
|
Information and Data Services
|
|
|
3.4
|
|
|
|
3.39
|
|
Grain Mill Products
|
|
|
3.3
|
|
|
|
3.32
|
|
Data Connectivity Service Company
|
|
|
3.2
|
|
|
|
3.17
|
|
Munitions
|
|
|
2.6
|
|
|
|
2.59
|
|
Internet Advertising
|
|
|
2.4
|
|
|
|
2.39
|
|
Daily and Weekly Newspaper Publisher
|
|
|
2.0
|
|
|
|
2.05
|
|
IT and Business Skill Training
|
|
|
2.0
|
|
|
|
1.98
|
|
Outdoor Advertising Services
|
|
|
2.0
|
|
|
|
1.98
|
|
Non-Residential
Property Owner
|
|
|
1.3
|
|
|
|
1.31
|
|
Equipment Rental Services
|
|
|
0.6
|
|
|
|
0.64
|
|
Asset Recovery Services
|
|
|
0.5
|
|
|
|
0.47
|
|
Geophysical Surveying and Mapping Services
|
|
|
0.2
|
|
|
|
0.16
|
|
Medical Liability Claims Factoring
|
|
|
0.1
|
|
|
|
0.10
|
|
Cable TV/Broadband Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
152.1
|
|
|
|
152.21
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
The Companys investments are acquired in private transactions exempt from registration under the Securities Act of 1933 and, therefore, are generally subject to certain limitations on resale, and may be deemed to
be restricted securities under the Securities Act of 1933.
|
See notes to consolidated financial statements.
F-90
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
June 30, 2015
(2)
|
A majority of the Companys variable rate debt investments bear interest at a rate that is determined by reference to LIBOR (London Interbank Offered Rate) or the U.S. prime rate, and which is reset
daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of June 30, 2015. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. A floor is the minimum
rate that will be applied in calculating an interest rate. A cap is the maximum rate that will be applied in calculating an interest rate.
|
(3)
|
Control Investments are investments in those companies that are Control Investments of the Company, as defined in the Investment Company Act of 1940. A company is deemed to be a Control
Investment of Full Circle Capital Corporation if Full Circle Capital Corporation owns more than 25% of the voting securities of such company.
|
(4)
|
Affiliate Investments are investments in those companies that are Affiliated Companies of the Company, as defined in the Investment Company Act of 1940, which are not Control
Investments. A company is deemed to be an Affiliate of Full Circle Capital Corporation if Full Circle Capital Corporation owns 5% or more, but less than 25%, of the voting securities of such company.
|
(5)
|
Full Circle Capital Corporations equity investment in Takoda Resources Inc. is held through its wholly owned subsidiary FC Takoda Holdings, LLC.
|
(6)
|
Full Circle Capital Corporations equity investment in TransAmerican Asset Servicing Group, LLC is held through its wholly owned subsidiary TransAmerican Asset Servicing Group, Inc.
|
(7)
|
Full Circle Capital Corporations equity investments in SOLEX Fine Foods, LLC; Catsmo, LLC are held through its wholly owned subsidiary FC New Specialty Foods, Inc.
|
(8)
|
A portion of Full Circle Capital Corporations investment in West World Media, LLC is held through its wholly owned subsidiary Full Circle West, Inc. The remainder of the LLC interests are held directly by Full
Circle Capital Corporation.
|
(9)
|
Investments were on
non-accrual
status as of June 30, 2015.
|
(10)
|
The negative fair value is the result of the unfunded commitment being valued below par. These amounts may or may not be funded to the borrowing party now or in the future.
|
*
|
Indicates assets that the Company believes do not represent qualifying assets under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of the Companys total assets at the time
of acquisition of any additional
non-qualifying
assets.
|
**
|
Security pays all or a portion of its interest in kind.
|
^
|
Security is a nonincome-producing security.
|
See notes to consolidated financial statements.
F-91
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 1. Organization
References herein to we, us or our refer to Full Circle Capital Corporation and Subsidiaries (Full Circle
Capital or the Company) unless the context specifically requires otherwise.
We were formed as Full Circle Capital Corporation,
a Maryland corporation, on April 16, 2010 and were funded in an initial public offering, or IPO, completed on August 31, 2010. We are a
non-diversified,
closed-end
investment company that has filed an election to be regulated as a business development company, or BDC, under the Investment Company Act of 1940 (the 1940 Act). As a BDC, we have
elected to be treated, and expect to continue to qualify annually, as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, which we refer to as the Code. We invest primarily in senior secured
term debt issued by lower middle-market and middle-market companies. Our investment objective is to generate both current income and capital appreciation through debt and equity investments.
Note 2. Significant Accounting Policies
Use of Estimates and Basis
of Presentation
The preparation of the accompanying Consolidated Financial Statements in conformity with accounting principles generally
accepted in the United States of America (GAAP) requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported
amounts of income and expenses during the reporting period. Changes in the economic environment, financial markets, creditworthiness of our portfolio companies and any other parameters used in determining these estimates could cause actual results
to differ materially.
Reclassifications
The
June 30, 2015 Consolidated Financial Statements were reclassified in order to conform with the June 30, 2016 Consolidated Financial Statements.
Upon the adoption of Accounting Standards Update (ASU)
No. 2015-03,
Interest-Imputation
of Interest (Subtopic
835-30):
Simplifying the Presentation of Debt Issuance Costs
(ASU
2015-03)
effective January 1, 2016, debt issuance costs
associated with our borrowings, other than our revolving credit facilities, were reclassified as a direct deduction from the carrying amount of the related borrowing. In accordance with ASU
No. 2015-15,
Interest-Imputation of Interest (Subtopic
835-30):
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with
Line-of-Credit
Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June
18, 2015 EITF Meeting
, debt issuance costs
associated with our revolving credit facilities remain classified as an asset, regardless of whether there are any outstanding borrowings on the facility.
Investment Classification
We are a
non-diversified
company within the meaning of the 1940 Act. We classify our investments by level of control. As defined in the 1940 Act, control investments are those where there is the ability or power to exercise
a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of 25% or more of the voting
securities of an investee company. Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist through the possession outright, or via the right to acquire within 60 days or less, beneficial
ownership of 5% or more of the outstanding voting securities owned by another company or person.
Investments are recognized when we assume an
obligation to acquire a financial instrument and assume the risks for gains or losses related to that instrument. Investments are derecognized when we assume an obligation to sell a financial instrument and forego the risks for gains or losses
related to that instrument. Specifically, we record all security transactions on a trade date basis. Investments in other,
non-security
F-92
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 2. Significant Accounting Policies (continued)
financial instruments, such as limited partnerships or private companies, are recorded on the basis of subscription date or redemption date, as applicable. Amounts for investments recognized or
derecognized but not yet settled are reported as receivables for investments sold and payables for investments acquired, respectively, in the Consolidated Statements of Assets and Liabilities.
Basis of Consolidation
Under the 1940 Act and the
rules thereunder, the rules and regulations pursuant to Article 6 of Regulation
S-X,
the SECs Division of Investment Managements consolidation guidance in IM Guidance Update
No. 2014-11
issued in October 2014 and Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 946, Financial Services-Investment Companies (ASC
946), we are precluded from consolidating any entity other than another investment company that acts as an extension of our investment operations and facilitates the execution of our investment strategy. An exception to this guidance occurs if
we have an investment in a controlled operating company that provides substantially all of its services to us. Our Consolidated Financial Statements include our accounts and the accounts of Full Circle West, Inc., FC New Media, Inc., TransAmerican
Asset Servicing Group, Inc., FC New Specialty Foods, Inc., FC Shale Inc., and FC Takoda Holdings, LLC, our currently wholly owned, or previously wholly owned, subsidiaries. All intercompany balances and transactions have been eliminated in
consolidation.
Valuation of Investments
In
accordance with GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date.
Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from an independent
pricing service or broker-dealers or market makers. Debt and equity securities for which market quotations are not readily available or are not considered to be the best estimate of fair value are valued at fair value as determined in good faith by
the Companys board of directors (the Board). Because the Company expects that there will not be a readily available market value for many of the investments in the Companys portfolio, it is expected that many of the
Companys portfolio investments values will be determined in good faith by the Board in accordance with a documented valuation policy that has been reviewed and approved by the Board and in accordance with GAAP. Due to the inherent
uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Companys investments may differ significantly from the values that would have been used had a readily available
market value existed for such investments, and the differences could be material.
In determining fair value, the Board uses various valuation
approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when
available.
Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from
sources independent of the Board. Unobservable inputs reflect the Boards assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
Securities for which reliable market quotations are not readily available or for which the pricing source does not provide a valuation or methodology
or provides a valuation or methodology that, in the judgment of the Board or the Audit Committee of the Board (the Audit Committee), does not represent fair value, are valued as follows:
|
1.
|
The quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals at Full Circle Advisors, LLC (the Adviser) who are responsible for the
portfolio investment;
|
F-93
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 2. Significant Accounting Policies (continued)
|
2.
|
Preliminary valuation conclusions are then documented and discussed with the Companys senior management. Independent third-party valuation firms are engaged by, or on behalf of, the Audit Committee to conduct
independent appraisals or review managements preliminary valuations or make their own independent assessment, for certain assets;
|
|
3.
|
The Audit Committee discusses valuations and recommends the fair value of each investment in the portfolio in good faith based on the input of the Company and, where appropriate, the independent valuation firms; and
|
|
4.
|
The Board then discusses the recommended valuations and determines in good faith the fair value of each investment in the portfolio based upon input from the Companys senior management, estimates from the
independent valuation firms and the recommendations of the Audit Committee.
|
GAAP establishes a framework for measuring fair value
that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the
fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1 Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the
ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not
entail a significant degree of judgment.
Level 2 Valuations based on quoted prices in markets that are not active or for which
all significant inputs are observable, either directly or indirectly.
Level 3 Valuations based on inputs that are unobservable
and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from investment to
investment and is affected by a wide variety of factors, including the type of investment, whether the investment is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that
valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized
due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready
market for the securities existed. Accordingly, the degree of judgment exercised by the Board in determining fair value is greatest for investments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is
significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather
than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Companys own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement
date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This
condition could cause an investment to be reclassified to a lower level within the fair value hierarchy.
F-94
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 2. Significant Accounting Policies (continued)
Valuation Techniques
Senior and Subordinated Loans
The
Companys portfolio consists primarily of private debt instruments such as senior and subordinated loans. Investments for which market quotations are readily available (Level 2 Debt) are generally valued using market
quotations, which are generally obtained from an independent pricing service or broker-dealers. For other debt investments (Level 3 Debt), market quotations are not available and other techniques are used to determine fair value.
The Company considers its Level 3 Debt to be performing if the borrower is not in default, the borrower is remitting payments in a timely manner, the loan is in covenant compliance or is otherwise not deemed to be impaired. In determining the
fair value of the performing Level 3 Debt, the Board considers fluctuations in current interest rates, the trends in yields of debt instruments with similar credit ratings, financial condition of the borrower, economic conditions, success and
prepayment fees, and other relevant factors, both qualitative and quantitative. In the event that a Level 3 Debt instrument is not performing, as defined above, the Board may evaluate the value of the collateral utilizing the same framework
described above for a performing loan to determine the value of the Level 3 Debt instrument.
This evaluation will be updated no less than
quarterly for Level 3 Debt instruments that are not performing, and more frequently for time periods where there are significant changes in the investor base or significant changes in the perceived value of the underlying collateral. The
collateral value will be analyzed on an ongoing basis using internal metrics, appraisals, third-party valuation agents and other data as may be acquired and analyzed by management and the Board.
Investments in Private Companies
The
Board determines the fair value of its investments in private companies where no market quotations are readily available (Level 3 Private Companies) by incorporating valuations that consider the evaluation of financing and sale
transactions with third parties, expected cash flows and market-based information, including comparable transactions, and performance multiples, among other factors, including work performed by third-party valuation agents. The Level 3 Private
Companies investments can include limited liability company interests, common stock and other equity investments. These nonpublic investments are included in Level 3 of the fair value hierarchy.
Warrants
The Board ascribes value to
warrants based on fair value analyses that can include discounted cash flow analyses, option pricing models, comparable analyses and other techniques as deemed appropriate.
Publicly Traded Common Stock
Publicly
traded common stock in an active market (Level 1 Common Stock) is valued based on unadjusted quoted prices in active markets for identical Level 1 Common Stock that the Company has the ability to access. Valuation adjustments
and block discounts are not applied to Level 1 Common Stock.
Swap Contracts
Derivative financial instruments such as swap contracts are valued based on discounted cash flow models and options pricing models, as appropriate.
Models use observable data to the extent practicable. However, areas such as credit risk (both our own and that of the counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors
could affect the reported fair value of derivative financial instruments at the valuation date.
The Companys accounting policy is to not
offset fair value amounts recognized for derivative financial instruments. The related assets and liabilities are presented gross in the Consolidated Statements of Assets and Liabilities. Any cash collateral payables or receivables associated with
these instruments are not added to or netted against the fair value amounts of the derivative financial instruments.
F-95
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 2. Significant Accounting Policies (continued)
All derivative financial instruments are carried in assets when amounts are receivable by the
Company and in liabilities when amounts are payable by the Company. During the period a contract is open, changes in the value of the contracts are recognized as unrealized appreciation or depreciation to reflect the fair value of the contract at
the reporting date. When the contracts settle, mature, terminate, or are otherwise closed, the Company records realized gains or losses equal to the difference between the proceeds from (or cost of) the
close-out
of the contracts and the original contract price. Additionally, the Company records realized gains (losses) on open swap contracts when periodic payments are received or made at the end of each
measurement period.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, including cash and accrued liabilities, approximate fair value due to their
short-term nature. The carrying amounts and fair values of the Companys long-term obligations are disclosed in Note 8.
Cash
The Company places its cash with Santander Bank, N.A. (Santander Bank) and, at times, cash held in such accounts may exceed the Federal
Deposit Insurance Corporation insured limit. The Company believes that Santander Bank is a high credit quality financial institution and that the risk of loss associated with any uninsured balances is remote. The Company may invest a portion of its
cash in money market funds, within the limitations of the 1940 Act.
Revenue Recognition
Realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their
stated costs. Realized gains or losses on the sale of investments are calculated using the specific identification method.
Interest income,
adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with senior and subordinated secured loans are accreted into interest income over the respective
terms of the applicable loans. Upon the prepayment of a senior or subordinated secured loan, any unamortized loan origination, closing and/or commitment fees are recorded as interest income. Generally, when a payment default occurs on a loan in the
portfolio, or if the Company otherwise believes that the issuer of the loan will not be able to make contractual interest payments, the Company may place the loan on
non-accrual
status and cease recognizing
interest income on the loan until all principal and interest is current through payment, or until a restructuring occurs, and the interest income is deemed to be collectible. The Company may make exceptions to this policy if a loan has sufficient
collateral value and is in the process of collection or is viewed to be able to pay all amounts due if the loan were to be collected on through an investment in or sale of the business, the sale of the assets of the business, or some portion or
combination thereof.
Dividend income is recorded on the
ex-dividend
date.
Structuring fees, excess deal deposits, prepayment fees and similar fees are recognized as Other Income from Investments as earned, usually when
received, and are
non-recurring
in nature. Other fee income, including administrative and unused line fees, is included in Other Income from Investments. Income from such sources was $2,193,940 and $727,082
for the years ended June 30, 2016 and 2015, respectively. Management fee income is included in Other Income from
Non-Investment
Sources. For the year ended June 30, 2016, the Company earned $36,758
and waived $15,396 of management fee income related to the services performed for FCCIP. For the year ended June 30, 2015, the Company earned $67,163 of management fee income related to the services performed for FCCIP.
F-96
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 2. Significant Accounting Policies (continued)
Change in unrealized gain (loss) on investments
Net change in unrealized appreciation or depreciation recorded on investments is the net change in the fair value of our investment portfolio during
the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
From time to time, the Company may enter into a new transaction with a portfolio company as a result of the sale, merger, foreclosure, bankruptcy or
other corporate event involving the portfolio company. In such cases, the Company may receive newly issued notes, securities and/or other consideration in exchange for, or resulting from, the cancellation of the instruments previously held by the
Company with regard to that portfolio company. In such cases, the Company may experience a realized loss on the instrument being sold or cancelled, and, concurrently, an elimination of any previously recognized unrealized losses on the portfolio
investment. Such elimination of unrealized loss is included on the Consolidated Statements of Operations as an increase in the Net Change in Unrealized Gain (Loss) on Investments.
Federal and State Income Taxes
The Company has elected
to be treated as a Registered Investment Company (RIC) under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is
required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of the sum of investment company taxable income (ICTI) including
payment-in-kind
(PIK) interest, as defined by the Code, and net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions) 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 carryover ICTI must be distributed prior to the 15
th
day of the ninth month after the tax
year-end.
Permanent differences between ICTI and net investment income for financial reporting purposes are reclassified among capital accounts in the
Consolidated Financial Statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. During the years ended June 30, 2016 and 2015, the
Company reclassified for book purposes amounts arising from permanent book/tax differences related as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30, 2016
|
|
|
Year Ended
June 30, 2015
|
|
Capital in excess of par value
|
|
$
|
(1,987,656
|
)
|
|
$
|
(1,302,681
|
)
|
Accumulated undistributed net investment income
|
|
|
866,605
|
|
|
|
1,043,849
|
|
Accumulated net realized gain (loss) from investments
|
|
$
|
1,121,051
|
|
|
$
|
258,832
|
|
For income tax purposes, distributions paid to stockholders are reported as ordinary income, return of capital, long
term capital gains or a combination thereof. The tax character of distributions paid for the years ended June 30, 2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30, 2016
|
|
|
Year Ended
June 30, 2015
|
|
Ordinary income
|
|
$
|
6,093,604
|
|
|
$
|
8,342,307
|
|
Distributions of long-term capital gains
|
|
|
|
|
|
|
|
|
Return of capital
|
|
|
1,051,922
|
|
|
|
1,302,681
|
|
|
|
|
|
|
|
|
|
|
Distributions on a tax basis
|
|
$
|
7,145,526
|
|
|
$
|
9,644,988
|
|
|
|
|
|
|
|
|
|
|
F-97
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 2. Significant Accounting Policies (continued)
For federal income tax purposes, the tax cost of investments owned at June 30, 2016 and 2015
was $99,533,983 and $176,255,797, respectively. The net unrealized depreciation on investments owned at June 30, 2016 and 2015 was $18,411,768 and $24,142,039, respectively.
At June 30, 2016 and 2015, the components of distributable earnings on a tax basis detailed below differ from the amounts reflected in the
Companys Consolidated Statements of Assets and Liabilities by temporary and other book/tax differences, primarily relating to the tax treatment of certain investments in partnerships and wholly-owned subsidiary corporations, fee income and
organizational expenses, as follows:
|
|
|
|
|
|
|
|
|
|
|
As of
June 30, 2016
|
|
|
As of
June 30, 2015
|
|
Accumulated capital losses
|
|
$
|
(29,119,726
|
)
|
|
$
|
(8,519,497
|
)
|
Unrealized depreciation
|
|
|
(18,411,768
|
)
|
|
|
(24,142,039
|
)
|
|
|
|
|
|
|
|
|
|
Components of distributable earnings at year end
|
|
$
|
(47,531,494
|
)
|
|
$
|
(32,661,536
|
)
|
|
|
|
|
|
|
|
|
|
For the years ended June 30, 2016 and 2015, the long-term net capital loss carryfowards were $28,528,499 and
$8,519,497, respectively, which will not expire. For the year ended June 30, 2016, the short-term net capital loss carryforwards were $591,260 and for the year ended June 30, 2015, there were no short-term net capital loss carryforwards.
The Company accounts for income taxes in conformity with ASC Topic 740 Income Taxes (ASC 740). ASC 740 provides
guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in Consolidated Financial Statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the
Companys 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 a
more-likely-than-not
threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income
tax expense in the Consolidated Statements of Operations. There were no material uncertain income tax positions at June 30, 2015. Although we file federal and state tax returns, our major tax jurisdiction is federal. The Company remains subject
to examination by the Internal Revenue Service for the first full tax year ending June 30, 2011 and all future years.
If we do not
distribute (or are not deemed to have distributed) each calendar year sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of our 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), we 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 we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable
income, we accrue 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.
Distributions
Distributions to common stockholders are recorded on the
ex-dividend
date. The amounts, if any, of our monthly
distributions are approved by our Board each quarter and are generally based upon our managements estimate of our earnings for the quarter. Net realized capital gains, if any, are distributed at least annually.
F-98
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 2. Significant Accounting Policies (continued)
Guarantees and Indemnification Agreements
We follow ASC Topic 460 Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (ASC 460). The application of ASC 460 elaborates on the disclosure requirements of a guarantor in its interim and annual Consolidated Financial Statements about its obligations under certain guarantees that it has
issued. It also requires a guarantor to recognize, at the inception of a guarantee, for those guarantees that are covered by ASC 460, the fair value of the obligation undertaken in issuing certain guarantees. ASC 460 did not have a material effect
on the Consolidated Financial Statements. Refer to Note 5 for further discussion of guarantees and indemnification agreements.
Per Share Information
Basic and diluted earnings (loss) per common share is calculated using the weighted average number of common shares outstanding for the period
presented. For the years ended June 30, 2016 and 2015, basic and diluted earnings (loss) per share, were the same because there are no potentially dilutive securities outstanding.
Offering Costs
The Company complies with the requirements of ASC
340-10-S99-1,
Expenses of Offering. Deferred offering costs consist principally of legal and audit costs incurred through
the balance sheet date that are related to an offering of equity securities. Such costs are charged against the gross proceeds of the offering or will be charged to the Companys operations if the offering is not completed. Offering expenses
related to the Companys July 14, 2014, March 30, 2015, and April 13, 2015 offerings were $1,442,780. Refer to Note 6. Previously deferred costs charged to the Companys operations during the year ended June 30, 2016
were $320,910 and are included in Other in the Statement of Operations.
Recent Accounting Pronouncements
In May 2015, the FASB issued ASU
2015-07,
Fair Value Measurement (Topic 820): Disclosures for Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU
2015-07).
ASU
2015-07
removes the requirement to categorize within the
fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. ASU
2015-07
is effective for fiscal years beginning after December 15, 2015.
The Company does not believe this standard will have an impact on its Consolidated Financial Statements.
In January 2016, the FASB issued ASU
2016-01,
Financial Instruments Overall (Subtopic
825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities (ASU
2016-01).
ASU
2016-01
affects accounting for equity investments and financial liabilities where the fair value option has been elected. ASU
2016-01
requires an entity to measure equity investments at fair value through net income. ASU
2016-01
is effective for fiscal years beginning after December 15, 2017.
The Company is currently evaluating the impact on the Consolidated Financial Statements.
Note 3. Concentration of Credit Risk and Liquidity Risk
In the normal course of business, the Company maintains its cash balances in financial institutions, which at times may exceed federally insured
limits. The Company is subject to credit risk to the extent any financial institution with which it conducts business is unable to fulfill contractual obligations on its behalf. Management monitors the financial condition of such financial
institutions and does not anticipate any losses from these counterparties.
The Company utilizes one financial institution to provide financing,
which may be essential to its business. There are a number of other financial institutions available that could potentially provide the Company with financing. Management believes that such other financial institutions would likely be able to
provide similar financing with generally comparable terms. However, a change in financial institutions at the present time could cause a delay in service provisioning or result in potential lost opportunities, which could adversely affect operating
results.
F-99
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 4. Earnings (Loss) per Common Share Basic and Diluted
The following information sets forth the computation of basic and diluted earnings (loss) per common share for the years ended June 30, 2016 and
2015:
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
2016
|
|
|
Year Ended June 30,
2015
|
|
Per Share Data
(1)
:
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Net Assets Resulting from Operations
|
|
$
|
(9,700,162
|
)
|
|
$
|
(5,200,728
|
)
|
Weighted average shares outstanding for period basic and diluted
|
|
|
22,662,947
|
|
|
|
14,803,637
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per common share
|
|
$
|
(0.43
|
)
|
|
$
|
(0.35
|
)
|
|
|
|
|
|
|
|
|
|
(1)
|
Per share data is based on weighted average shares outstanding.
|
Note 5. Related Party Agreements and Transactions
Investment Advisory Agreement
On June 22,
2016, the Board
re-approved
the investment advisory agreement (the Investment Advisory Agreement) with the Adviser under which the Adviser, subject to the overall supervision of the Board, manages
the
day-to-day
operations of, and provides investment advisory services to, us. Under the terms of the Investment Advisory Agreement, our Adviser: (i) determines
the composition of the Companys portfolio, the nature and timing of the changes to the Companys portfolio and the manner of implementing such changes, (ii) identifies, evaluates and negotiates the structure of the investments we
make (including performing due diligence on our prospective portfolio companies); and (iii) closes and monitors investments the Company makes.
The Advisers services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities
so long as its services to the Company are not impaired. For providing these services, the Adviser receives a fee from the Company consisting of two components, a base management fee and an incentive fee.
The base management fee is calculated at an annual rate of 1.75% of the Companys gross assets, as adjusted. For services rendered under the
Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of the Companys gross assets, as adjusted, at the end of the two most recently completed
calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. Base management fees for any partial month or quarter will be appropriately prorated.
The total base management fees earned by the Adviser for the years ended June 30, 2016 and 2015 were $1,992,111 and $2,280,058, respectively.
The total base management fee payable to the Adviser as of June 30, 2016 and 2015 was $379,944 and $580,607, respectively, after reflecting payments of $2,192,774 and $2,175,046 for the years ended June 30, 2016 and 2015, respectively, and
is included in the Consolidated Statements of Assets and Liabilities in Due to Affiliates.
The incentive fee has two parts. The first part of
the incentive fee (the Income incentive fee) is calculated and payable quarterly in arrears based on the Companys
pre-incentive
fee net investment income for the immediately preceding
calendar quarter. For this purpose,
pre-incentive
fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial
assistance), such as prepayment fees, management fee income and similar fees that the
F-100
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 5. Related Party Agreements and Transactions (continued)
Company receives from portfolio companies, including administrative and unused line fees accrued during the calendar quarter, minus the Companys operating expenses for the quarter
(including the base management fee, expenses payable under the Administration Agreement to Full Circle Service Company (the Administrator), and any interest expenses and dividends 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 pay in kind
interest and zero coupon securities), accrued income that the Company has not yet received in cash.
Pre-incentive
fee net investment income does not include organizational costs or any realized capital gains,
computed net of all 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 at the end
of the immediately preceding calendar quarter, is compared to a hurdle of 1.75% per quarter (7.00% annualized). The Companys net investment income used to calculate this part of the incentive fee is also included in the amount of the
Companys gross assets used to calculate the 1.75% base management fee. The Company pays the Adviser an incentive fee with respect to its
pre-incentive
fee net investment income in each calendar quarter
as follows:
|
|
|
no incentive fee in any calendar quarter in which the Companys
pre-incentive
fee net investment income does not exceed the hurdle of 1.75%;
|
|
|
|
100% of our
pre-incentive
fee net investment income with respect to that portion of such
pre-incentive
fee net investment income, if any,
that exceeds the hurdle but is less than 2.1875% in any calendar quarter (8.75% annualized). The Company refers to this portion of our
pre-incentive
fee net investment income (which exceeds the hurdle but is
less than 2.1875%) as the
catch-up.
The
catch-up
is meant to provide our investment adviser with 20% of the Companys
pre-incentive
fee net investment income as if a hurdle did not apply if this net investment income exceeds 2.1875% in any calendar quarter; and
|
|
|
|
20% of the amount of our
pre-incentive
fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized) is payable to the Adviser (once the
hurdle is reached and the
catch-up
is achieved, 20% of all
pre-incentive
fee investment income thereafter is allocated to the Adviser).
|
These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the
current quarter.
Income incentive fees of $1,263,241 and $1,798,000 were earned by the Adviser for the years ended June 30, 2016 and 2015,
respectively, and the total income incentive fee payable to the Adviser as of June 30, 2016 and 2015, was $0 and $462,350, respectively, after reflecting payment of $1,478,712 and $1,705,782 during the years ended June 30, 2016 and 2015,
respectively, and is included in the Consolidated Statements of Assets and Liabilities in Due to Affiliates. The Adviser waived $246,879 of income incentive fees for the year ended June 30, 2016 which are included in fees waiver and expense
reimbursement on the Consolidated Statements of Operations. Any such fees are not subject to reimbursement or recoupment by the Adviser.
The
second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date) and will equal 20% of the Companys realized
capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously
paid capital gain incentive fees with respect to each of the investments in our portfolio, provided that, the incentive fee determined as of December 31, 2010 was calculated for a period of shorter than twelve calendar months to take into
account any realized capital gains computed net of all realized capital losses and unrealized capital depreciation from the inception of Full Circle Capital. There were no incentive fees earned on realized capital gains for the years ended
June 30, 2016 and 2015.
F-101
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 5. Related Party Agreements and Transactions (continued)
The Adviser agreed to reimburse the Company for any operating expenses, excluding interest expenses,
investment advisory and management fees, and offering expenses, in excess of 1.50% of our net assets, beginning with our fiscal quarter ended September 30, 2014 through the end of the Companys fiscal year 2015. For the Companys
fiscal year 2016 and beyond, the Adviser had agreed to reimburse the Company for any operating expenses, excluding interest expenses, investment advisory and management fees, and offering expenses, in excess of 1.75% of our net assets; however, on
February 11, 2016, the Board authorized the termination of the Advisers operating expense reimbursement obligations, effective as of January 1, 2016. The expense reimbursements from the Adviser for the years ended June 30, 2016
and 2015 were $506,364 and $989,818, respectively, and is included in the fees waiver and expense reimbursement line on the Consolidated Statements of Operations.
The Adviser had agreed to reimburse the Company for any operating expenses, excluding interest expenses, investment advisory and management fees, and
organizational and offering expenses, in excess of 2% of our net assets for the first twelve months following the completion of the initial public offering, which occurred on August 31, 2010.
For the periods commencing on April 1, 2015 and ending on June 30, 2015, and commencing on July 1, 2015 and ending on June 30,
2016, Full Circle Advisors had agreed to waive the portion of the base management fees and incentive fees that Full Circle Advisors would otherwise be entitled to receive pursuant to our Investment Advisory Agreement to the extent required in order
for the Company to earn net investment income sufficient to support the distribution payment on the shares of the Companys common stock outstanding on the relevant record date for each monthly distribution as then declared by the Board;
however, on February 11, 2016, the Board authorized the termination of the Advisers management fee and incentive fee waiver, effective as of January 1, 2016. Full Circle Advisors will not be entitled to recoup any amounts previously
waived pursuant to this agreement. For the year to date period ending December 31, 2015, $214,129 of the base management fee waiver was accrued for and is included in the fees waiver and expense reimbursement line in the Consolidated Statements
of Operations.
The Investment Advisory 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, the Adviser 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 the Advisers services under the Investment
Advisory Agreement or otherwise as an investment adviser of the Company.
Administration Agreement
On June 22, 2016, the Board
re-approved
the Administration Agreement with the Administrator under which
the Administrator, among other things, furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities. Under the Administration Agreement, the Administrator also performs, or oversees the
performance of, the Companys required administrative services, which include, among other things, being responsible for the financial records which the Company is required to maintain and preparing reports to its stockholders. In addition, the
Administrator assists the Company in determining and publishing its net asset value, oversees the preparation and filing of the Companys tax returns and the printing and dissemination of reports to its stockholders, and generally oversees the
payment of the Companys expenses and the performance of administrative and professional services rendered to the Company by others. Payments under the Administration Agreement are equal to an amount based upon our
F-102
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 5. Related Party Agreements and Transactions (continued)
allocable portion of Full Circle Service Companys overhead in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing
compliance functions and our allocable portion of the compensation of our chief financial officer and our allocable portion of the compensation of any administrative support staff employed by the Administrator, directly or indirectly. Under the
Administration Agreement, the Administrator will also provide on our behalf managerial assistance to those portfolio companies that request such assistance. The Administration Agreement may be terminated by either party, without penalty, upon 60
days written notice to the other party.
The Administrator and Conifer Asset Solutions LLC (Conifer or the
Sub-Administrator)
may also provide administrative services to the Adviser to satisfy the Advisers obligation to us under the Investment Advisory Agreement. As a result, the Adviser also reimburses
the Administrator and/or the
Sub-Administrator
for its allocable portion of the Administrators and/or
Sub-Administrators
overhead, including rent, the fees
and expenses associated with performing compliance functions for Full Circle Advisors, and its allocable portion of the compensation of any administrative support staff. To the extent the Adviser or any of its affiliates manage other investment
vehicles in the future, no portion of any administrative services provided by the Administrator to such other investment vehicles will be charged to the Company.
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, the Administrator and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from Full
Circle Capital for any damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts reasonably paid in settlement) arising from the rendering of the Administrators services under the Administration Agreement
or otherwise as administrator for the Company.
Sub-Administration
Agreement
The Administrator has engaged Conifer to provide certain administrative services to the Company on behalf of the Administrator. In exchange for
providing such services, the Administrator pays Conifer an asset-based fee with a $200,000 annual minimum as adjusted for any reimbursement of expenses. This asset-based fee will be reimbursed to the Administrator by the Company and will vary
depending upon the Companys gross assets, as adjusted, as follows:
|
|
|
Gross Assets
|
|
Fee
|
first $150 million of gross assets
|
|
20 basis points (0.20%)
|
next $150 million of gross assets
|
|
15 basis points (0.15%)
|
next $200 million of gross assets
|
|
10 basis points (0.10%)
|
in excess of $500 million of gross assets
|
|
5 basis points (0.05%)
|
For the years ended June 30, 2016 and 2015, the Company incurred $764,277 and $731,447, respectively, of expenses
under the Administration Agreement, $246,268 and $256,236, respectively, of which were earned by the
Sub-Administrator
and $305,226 and $303,652, respectively, were reimbursed for officers compensation.
The remaining $212,783 and $171,559, respectively, were recorded as an Allocation of Overhead Expenses in the Consolidated Statements of Operations. For the year ended June 30, 2016, the Company reimbursed Full Circle Service Company $23,374
for travel expenses borne by related parties that were the responsibility of the Company. These amounts are included as Other in the Consolidated Statements of Operations.
FC Capital Investment Partners, LLC
On June 4,
2014, the Company formed FC Capital Investment Partners, LLC (FCCIP), a multiple series private fund, for which the Company serves as the managing member and investment adviser. FCCIP was formed as a Delaware limited liability company
and operates under a Limited Liability Company
F-103
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 5. Related Party Agreements and Transactions (continued)
Agreement dated June 13, 2014. FCCIP closed its first series on June 17, 2014, raising approximately $5.6 million in capital from investors. FCCIP closed its second series on
September 25, 2014, raising approximately $10.0 million in capital from investors. On November 30, 2015, the second series ceased investing and was liquidated after full realization of proceeds from its investment strategy. The
Company may
co-invest
in certain portfolio investments from time to time with one or more series issued by FCCIP where the Company determines that the aggregate available investment opportunity exceeds what it
believes would be appropriate for the Company to acquire directly, subject to certain conditions. During the year ended June 30, 2016, the Company earned $36,758 and waived $15,396 of management fee income related to the services performed for
FCCIP. During the year ended June 30, 2015, the Company earned $67,163 of management income related to services performed for FCCIP. Such amounts are included in Other Income from
Non-Investment
Sources
on the Consolidated Statements of Operations.
Managerial Assistance
As a business development company, the Company offers, and must provide upon request, managerial assistance to certain of its portfolio companies.
This assistance could involve, among other things, monitoring the operations of the Companys portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other
organizational and financial guidance. With regard to the Control Investment in Texas Westchester Financial, LLC, the Company has provided managerial assistance during the period for which no fees were charged. The Companys Chairman, John
Stuart, previously served as a director of The Finance Company, LLC, which was previously a Control Investment.
Houlihan Lokey
Houlihan Lokey, an affiliated entity of one of the Companys directors, provided services to the Company during the period subject to an
Engagement Letter approved by the Special Committee of the Board of Directors. The director affiliated with Houlihan Lokey did not participate in this decision making and selection process or any subsequent activities of the Special Committee. The
amount of expenses incurred under this agreement were $500,000 and is included in the Consolidated Statements of Operations in Professional Services Expense.
Note 6. Equity Offerings, Related Expenses, and Other Stock Issuances
Equity offerings are included in the Companys capital accounts on the date that the Company assumes the obligation to issue the shares. For
purposes of the calculation of Net Asset Value Per Share, Earnings Per Share and Per Share Data, the related shares are treated as outstanding on the same date that the equity offering is included in the Companys capital accounts.
F-104
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 6. Equity Offerings, Related Expenses, and Other Stock Issuances (continued)
Offering expenses are generally charged against
paid-in
capital in excess of par. The proceeds raised, the related underwriting fees, the offering expenses, and the price at which common stock was issued, since inception, are detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of
Common Stock
|
|
Number of
Shares
Issued
|
|
|
Gross Proceeds
Raised, Net Assets
Acquired
and
Dividends
Reinvested
|
|
|
Underwriting Fees
|
|
|
Offering
Expenses
|
|
|
Gross
Offering Price
|
|
April 16, 2010
|
|
|
100
|
|
|
$
|
1,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15.00 per/share
|
|
August 31, 2010
|
|
|
4,191,415
|
(1)
|
|
$
|
42,425,564
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10.13 per/share
|
(2)
|
August 31, 2010
|
|
|
2,000,000
|
|
|
$
|
18,000,000
|
|
|
$
|
1,350,000
|
|
|
$
|
1,052,067
|
|
|
$
|
9.00 per/share
|
|
November 27, 2012
|
|
|
1,350,000
|
|
|
$
|
10,665,000
|
|
|
$
|
533,250
|
|
|
$
|
153,330
|
|
|
$
|
7.90 per/share
|
|
January 14, 2014
|
|
|
1,892,300
|
(3)
|
|
$
|
13,492,099
|
|
|
$
|
539,684
|
|
|
$
|
261,994
|
|
|
$
|
7.13 per/share
|
|
February 27, 2014
|
|
|
630,000
|
|
|
$
|
4,920,300
|
|
|
$
|
|
(4)
|
|
$
|
47,236
|
|
|
$
|
7.81 per/share
|
|
June 19, 2014
|
|
|
1,351,352
|
|
|
$
|
10,000,005
|
|
|
$
|
|
(4)
|
|
$
|
44,826
|
|
|
$
|
7.40 per/share
|
|
July 14, 2014
|
|
|
506,000
|
|
|
$
|
3,744,400
|
|
|
$
|
|
(4)
|
|
$
|
37,775
|
|
|
$
|
7.40 per/share
|
|
March 30, 2015
|
|
|
11,205,921
|
|
|
$
|
39,220,723
|
|
|
$
|
952,214
|
(5)
|
|
$
|
449,446
|
|
|
$
|
3.50 per/share
|
|
April 13, 2015
|
|
|
80,475
|
|
|
$
|
281,663
|
|
|
$
|
|
|
|
$
|
3,345
|
|
|
$
|
3.50 per/share
|
|
|
|
|
(1)
|
|
Includes 403,662 shares that were issued on September 30, 2010 upon the expiration of the overallotment option granted to the underwriters in connection with our initial public offering.
Such shares were deemed to be outstanding at August 31, 2010.
|
(2)
|
|
Based on weighted average price assigned to shares.
|
(3)
|
|
Includes 242,300 overallotment shares that were granted to the underwriters in connection with our January 14, 2014
follow-on
offering. The
underwriters exercised their option to purchase additional shares on January 27, 2014. Such shares were deemed to be outstanding at January 14, 2014.
|
(4)
|
|
This was a registered offering placed directly with investors.
|
(5)
|
|
Shares were issued pursuant to a rights offering. The dealer manager received $952,214 for services provided in connection with the rights offering.
|
On August 26, 2015, the Board authorized the purchase of an additional 1.0 million shares to increase and
provide for the purchase of up to 2.0 million shares of the outstanding common stock as part of the share repurchase program. Under the repurchase program, the Company may, but is not obligated to, repurchase its outstanding common stock in the
open market from time to time. The timing and number of shares to be repurchased in the open market will depend on a number of factors, including market conditions and alternative investment opportunities. In addition, any repurchases will be
conducted in accordance with the 1940 Act. The number of shares repurchased, the repurchase price, cost and weighted average discount per share is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of Common Stock
|
|
Number of Shares
Repurchased
|
|
|
Average
Repurchase Price
|
|
|
Total Cost
|
|
|
Weighted Average
Discount Per Share
|
|
Three months ended September 30, 2015
|
|
|
472,407
|
|
|
$
|
3.19 per/share
|
|
|
$
|
1,504,819
|
|
|
|
25.9
|
%
(1)
|
Three months ended December 31, 2015
|
|
|
290,780
|
|
|
$
|
3.16 per/share
|
|
|
$
|
917,566
|
|
|
|
21.1
|
%
(2)
|
(1)
|
The average discount rate per share, based upon the Net Asset Value per share at June 30, 2015, is weighted based upon the total shares repurchased during the period.
|
(2)
|
The average discount rate per share, based upon the Net Asset Value per share at September 30, 2015, is weighted based upon the total shares repurchased during the period.
|
F-105
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 6. Equity Offerings, Related Expenses, and Other Stock Issuances (continued)
For the three months ended March 31, 2016 and June 30, 2016, the Company did not
repurchase any shares under the share repurchase program. As of September 28, 2016, the Company has repurchased an aggregate of 763,187 shares under the share repurchase program at the weighted average price of $3.17 per share, resulting in
$2.4 million of cash paid, under the program.
Note 7. Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30,
2016
|
|
|
Year Ended
June 30,
2015
|
|
|
Year Ended
June 30,
2014
|
|
|
Year Ended
June 30,
2013
|
|
|
Year Ended
June 30,
2012
|
|
Per Share Data
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at beginning of period
|
|
$
|
4.30
|
|
|
$
|
6.38
|
|
|
$
|
8.01
|
|
|
$
|
8.59
|
|
|
$
|
9.08
|
|
Accretion (dilution) from offering(s)
(2)
|
|
|
|
|
|
|
(0.92
|
)
|
|
|
0.03
|
|
|
|
(0.18
|
)
|
|
|
|
|
Accretion from share repurchases
(3)
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering costs
|
|
|
|
|
|
|
(0.06
|
)
|
|
|
(0.04
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
Net investment income (loss)
|
|
|
0.28
|
|
|
|
0.63
|
|
|
|
0.71
|
|
|
|
0.77
|
|
|
|
0.78
|
|
Net change in unrealized gain (loss)
|
|
|
0.24
|
|
|
|
(0.51
|
)
|
|
|
(1.36
|
)
|
|
|
0.37
|
|
|
|
(0.32
|
)
|
Net realized gain (loss)
|
|
|
(0.94
|
)
|
|
|
(0.51
|
)
|
|
|
(0.11
|
)
|
|
|
(0.60
|
)
|
|
|
(0.03
|
)
|
Dividends from net investment income
|
|
|
(0.28
|
)
|
|
|
(0.63
|
)
|
|
|
(0.69
|
)
|
|
|
(0.78
|
)
|
|
|
(0.80
|
)
|
Return of capital
|
|
|
(0.04
|
)
|
|
|
(0.08
|
)
|
|
|
(0.17
|
)
|
|
|
(0.14
|
)
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of period
|
|
$
|
3.59
|
|
|
$
|
4.30
|
|
|
$
|
6.38
|
|
|
$
|
8.01
|
|
|
$
|
8.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share market value at end of period
|
|
$
|
2.70
|
|
|
$
|
3.57
|
|
|
$
|
7.81
|
|
|
$
|
7.83
|
|
|
$
|
7.65
|
|
Total return based on market value
(4)
|
|
|
(14.98
|
)%
|
|
|
(46.78
|
)%
|
|
|
11.51
|
%
|
|
|
15.12
|
%
|
|
|
8.71
|
%
|
Total return based on net asset value
(4)
|
|
|
(6.15
|
)%
|
|
|
(21.53
|
)%
|
|
|
(11.00
|
)%
|
|
|
4.94
|
%
|
|
|
6.20
|
%
|
Shares outstanding at end of period
|
|
|
22,472,243
|
|
|
|
23,235,430
|
|
|
|
11,443,034
|
|
|
|
7,569,382
|
|
|
|
6,219,382
|
|
Weighted average shares outstanding for period
|
|
|
22,662,947
|
|
|
|
14,803,637
|
|
|
|
8,698,814
|
|
|
|
7,018,286
|
|
|
|
6,219,382
|
|
Ratio/Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
80,670,495
|
|
|
$
|
99,938,567
|
|
|
$
|
72,980,277
|
|
|
$
|
60,644,039
|
|
|
$
|
53,442,785
|
|
Average net assets
|
|
$
|
90,618,873
|
|
|
$
|
78,137,174
|
|
|
$
|
64,360,541
|
|
|
$
|
57,842,601
|
|
|
$
|
55,531,518
|
|
Ratio of gross operating expenses to average net assets
|
|
|
12.29
|
%
|
|
|
13.51
|
%
|
|
|
12.11
|
%
|
|
|
11.52
|
%
|
|
|
9.56
|
%
|
Ratio of net operating expenses to average net assets
|
|
|
11.22
|
%
|
|
|
11.69
|
%
|
|
|
12.11
|
%
|
|
|
11.52
|
%
|
|
|
8.99
|
%
|
Ratio of net investment income (loss) to average net assets
|
|
|
6.94
|
%
|
|
|
11.02
|
%
|
|
|
9.37
|
%
|
|
|
9.30
|
%
|
|
|
8.70
|
%
|
Ratio of net operating expenses excluding management fees (net of waiver), incentive fees, and interest
expense to average net assets
|
|
|
3.67
|
%
|
|
|
1.51
|
%
|
|
|
3.04
|
%
|
|
|
3.53
|
%
|
|
|
3.15
|
%
|
Portfolio Turnover
|
|
|
82
|
%
|
|
|
74
|
%
|
|
|
88
|
%
(5)
|
|
|
73
|
%
(5)
|
|
|
58
|
%
(5)
|
(1)
|
Financial highlights are based on weighted average shares outstanding.
|
(2)
|
Accretion and dilution from offering(s) is based on the net change in net asset value from each
follow-on
offering.
|
(3)
|
Accretion from share repurchases during the period is based on the net change in net asset value from the share repurchases.
|
(4)
|
Total return based on market value is based on the change in market price per share and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. Total return based on net asset value is
based upon the change in net asset value per share between the opening and ending net asset values per share in the period and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. The total returns are not
annualized.
|
F-106
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 8. Long Term Liabilities
Line of Credit
On June 3, 2013, the Company
entered into a credit facility (the Credit Facility) with Santander Bank. The facility size was originally $32.5 million and replaced the Companys credit facility with FCC. LLC d/b/a First Capital. The Credit Facility was
subsequently increased to $45.0 million on November 6, 2013. On September 12, 2014, the Company entered into an amendment to our Credit Facility with Santander Bank to give the Company the option to increase the size of the facility
from $45.0 million to $60.0 million and to provide additional criteria for eligibility of loans under the borrowing base under the Credit Facility. The Company did not exercise its option to expand the Credit Facility. On June 3,
2016, the Company entered into a further amendment to its credit facility with Santander Bank to, among other things, (i) reduce the size of the facility from $45.0 million to $5.0 million, (ii) extend the termination date until
October 3, 2016 and (iii) limit the Companys ability to make any dividends, distributions, redemptions or other acquisitions of securities or other equity interests in the Company in excess of $10.0 million in the aggregate
through October 3, 2016.
The Credit Facility matures on October 3, 2016 and bears interest based on a tiered rate structure, depending
upon utilization, ranging from LIBOR (one month, two month or three month, depending on the Companys option) plus 3.25% to 4.00% per annum, or from Santander Banks prime rate plus 1.25% to 2.00% per annum, based on the Companys
election. As of June 30, 2016, one month LIBOR, two month LIBOR, and three month LIBOR were 0.47%, 0.55%, and 0.65%, respectively. As of June 30, 2016, the Prime Rate was 3.50%. In addition, a fee of 0.50% to 1.00% per annum, depending on
utilization, is charged on unused amounts under the Credit Facility. The Credit Facility is secured by all of the Companys assets. Under the Credit Facility, the Company has made certain customary representations and warranties, and is
required to comply with various covenants, reporting requirements and other customary requirements, including a minimum balance sheet leverage ratio, for similar credit facilities. The Credit Facility includes usual and customary events of default
for credit facilities of this nature.
The fees and expenses associated with opening and expanding the Credit Facility are being amortized over
the term of the Credit Facility in accordance with ASC 470, Debt. In accordance with ASU
No. 2015-15,
Interest-Imputation of Interest (Subtopic
835-30):
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with
Line-of-Credit
Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at
June 18, 2015 EITF Meeting, debt issuance costs associated with our revolving credit facilities remain classified as an asset, regardless of whether there are any outstanding borrowings on the facility. As of June 30, 2016, of the total
$830,104 of fees and expenses incurred, $51,486 remains to be amortized and is reflected as Deferred Credit Facility Fees on the Consolidated Statements of Assets and Liabilities.
At June 30, 2016 and June 30, 2015, the Company did not have any outstanding borrowings under the Credit Facility.
Notes Payable
On June 28, 2013, the Company
issued $21.1 million in aggregate principal amount of 8.25% Notes due June 30, 2020 (the Notes) (including a partial exercise of the underwriters overallotment option in July 2013) for net proceeds of $20.0 million
after deducting underwriting commissions of approximately $860,822 and offering expenses of $246,453.
On July 14, 2014, the Company closed
an offering of $12.5 million in aggregate principal amount of the Notes. The Notes were sold at price of $25.375 per Note plus accrued interest from June 30, 2014, a premium to par value of $25.00 per Note for total gross proceeds of
approximately $12.7 million. The Notes are a further issuance of rank, equally in right of payment with, and form a single series with the $21.1 million of currently outstanding Notes that will mature on June 30, 2020 and may be
redeemed in whole or in part at any time or from time to time at the Companys option on or after June 30, 2016. The Notes are listed on the NASDAQ Global Market and trade under the trading symbol FULLL.
F-107
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 8. Long Term Liabilities (continued)
The offering expenses and underwriting commissions are being amortized over the term of the Notes in
accordance with ASC 470, Debt. Additionally, in accordance with ASU
2015-03,
debt issuance costs related to the Notes are reported on the Consolidated Statements of Assets and Liabilities as a direct deduction
from the face amount of the Notes. As such, as of June 30, 2016, of the total $1,150,940 issuance costs incurred, $675,046 remains to be amortized and is included in, and offsets, the Notes Payable balance in the Consolidated Statements of
Assets and Liabilities. Additionally, $135,498 of the $187,500 premium related to the July 14, 2014 issuance remains unamortized and is included in the Notes Payable balance in the Consolidated Statements of Assets and Liabilities.
As of June 30, 2015, of the total $1,150,940 issuance costs incurred, $833,541 remained to be amortized and is included in, and offsets, the
Notes Payable balance in the Consolidated Statements of Assets and Liabilities. Additionally, $158,504 of the $187,500 premium related to the July 14, 2014 issuance remained unamortized and is included in the Notes Payable balance in the
Consolidated Statements of Assets and Liabilities.
The Notes were issued pursuant to an indenture, dated June 3, 2013, as supplemented by
the first supplemental indenture, dated June 28, 2013 (collectively, the Indenture), between the Company 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 Companys existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to the Companys existing and future unsecured indebtedness that is not
so subordinated; effectively junior in right of payment to any of the Companys 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 Companys 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, beginning September 30, 2013. 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 Companys
option on or after June 30, 2016. The Notes are listed on the Nasdaq Global Market under the trading symbol FULLL with a par value of $25.00 per share.
The Indenture contains certain covenants, including covenants requiring 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 1940 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 1940 Act and
the rules promulgated thereunder. Any Notes repurchased by the Company may, at the Companys 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, 2016, the Company had not repurchased any of the Notes in the open market.
At June 30, 2016 and June 30, 2015, the Company had a principal balance of $33,645,525 on the Notes, which is included in Notes Payable in
the Consolidated Statements of Assets and Liabilities.
F-108
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 8. Long Term Liabilities (continued)
The following shows a summary of the Long Term Liabilities as of June 30, 2016 and
June 30, 2015:
As of June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Commitments
|
|
|
Borrowings Outstanding
|
|
|
Fair
Value
|
|
Credit Facility
(1)
|
|
$
|
5,000,000
|
|
|
$
|
|
|
|
$
|
|
|
Notes
|
|
|
33,645,525
|
|
|
|
33,645,525
|
|
|
|
34,264,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,645,525
|
|
|
$
|
33,645,525
|
|
|
$
|
34,264,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Commitments
|
|
|
Borrowings Outstanding
|
|
|
Fair
Value
|
|
Credit Facility
(1)
|
|
$
|
45,000,000
|
|
|
$
|
|
|
|
$
|
|
|
Notes
|
|
|
33,645,525
|
|
|
|
33,645,525
|
|
|
|
34,049,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
78,645,525
|
|
|
$
|
33,645,525
|
|
|
$
|
34,049,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On September 12, 2014, the Company entered into an amendment to our Credit Facility with Santander Bank to give the Company the option to increase the size of the facility from $45.0 million to
$60.0 million and to provide additional criteria for eligibility of loans under the borrowing base under the credit facility. The Company did not exercise its option to expand the facility. On June 3, 2016, the Company entered into a
further amendment to the Credit Facility with Santander Bank to, among other things, (i) reduce the size of the facility from $45.0 million to $5.0 million, (ii) extend the termination date until October 3, 2016 and
(iii) limit the Companys ability to make any dividends, distributions, redemptions or other acquisitions of securities or other equity interests in the Company in excess of $10.0 million in the aggregate through October 3, 2016.
|
The fair values of the Companys Credit Facility and Notes are determined in accordance with ASC 820, which defines fair value
in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Companys Notes is determined by utilizing
market quotations at the measurement date.
Note 9. Fair Value Measurements
The Companys assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with ASC Topic
820 Fair Value Measurements and Disclosures (ASC 820). See Note 2 for a discussion of the Companys policies.
The following tables present information about the Companys assets measured at fair value as of June 30, 2016 and June 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior and Subordinated Loans, at fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
80,701,466
|
|
|
$
|
80,701,466
|
|
Limited Liability Company Interests, at fair value
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Investments in Warrants, at fair value
|
|
|
|
|
|
|
|
|
|
|
320,749
|
|
|
|
320,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
81,122,215
|
|
|
$
|
81,122,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-109
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 9. Fair Value Measurements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior and Subordinated Loans, at fair value
|
|
$
|
|
|
|
$
|
12,275,000
|
|
|
$
|
121,630,798
|
|
|
$
|
133,905,798
|
|
Limited Liability Company Interests, at fair value
|
|
|
|
|
|
|
|
|
|
|
1,228,978
|
|
|
|
1,228,978
|
|
Investments in Warrants, at fair value
|
|
|
|
|
|
|
90
|
|
|
|
2,695,075
|
|
|
|
2,695,165
|
|
Common Stock, at fair value
|
|
|
1,308,818
|
|
|
|
|
|
|
|
12,975,000
|
|
|
|
14,283,818
|
|
Open Swap Contract, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,308,818
|
|
|
$
|
12,275,090
|
|
|
$
|
138,529,851
|
|
|
$
|
152,113,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended June 30, 2016, the senior secured term loan and warrants in US Shale Solutions, Inc. were
transferred from Level 2 to Level 3. During the year ended June 30, 2015, a portion of the Level 3 General Cannabis Corp. warrant was converted into Level 1 Common Stock.
The following table presents additional information about Level 3 assets measured at fair value. Both observable and unobservable inputs may be
used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the net unrealized gains and losses for assets within the Level 3 category may include changes in fair value that were
attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
The tables below reflect the changes in Level 3 assets and liabilities measured at fair value for the years ended June 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2016
|
|
|
|
Beginning
Balance
July 1,
2015
|
|
|
Amortization &
Accretion of
Fixed Income
Premiums &
Discounts
|
|
|
Realized &
Unrealized Gains
(Losses)
|
|
|
Transfers
Into
Level 3
(2)
|
|
|
Purchases
(1)
|
|
|
Sales &
Settlements
|
|
|
Ending
Balance
June 30,
2016
|
|
|
Change in
Unrealized
Gains (Losses)
for Investments
still held at
June 30,
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior and Subordinated Loans, at fair value
|
|
$
|
121,630,798
|
|
|
$
|
1,553,243
|
|
|
$
|
(9,832,169
|
)
|
|
$
|
4,455,000
|
|
|
$
|
87,604,057
|
|
|
$
|
(124,709,463
|
)
|
|
$
|
80,701,466
|
|
|
$
|
(9,580,531
|
)
|
Limited Liability Company Interests, at fair value
|
|
|
1,228,978
|
|
|
|
|
|
|
|
(2,448,791
|
)
|
|
|
|
|
|
|
4,325,739
|
|
|
|
(3,005,926
|
)
|
|
|
100,000
|
|
|
|
(4,225,839
|
)
|
Warrants, at fair value
|
|
|
2,695,075
|
|
|
|
|
|
|
|
(2,374,416
|
)
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
320,749
|
|
|
|
(84,926
|
)
|
Common Stock, at fair value
|
|
|
12,975,000
|
|
|
|
|
|
|
|
2,145,000
|
|
|
|
|
|
|
|
|
|
|
|
(15,120,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
138,529,851
|
|
|
|
1,553,243
|
|
|
|
(12,510,376
|
)
|
|
|
4,455,090
|
|
|
|
91,929,796
|
|
|
|
(142,835,389
|
)
|
|
|
81,122,215
|
|
|
|
(13,891,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open Swap Contract, at fair value
|
|
|
|
|
|
|
|
|
|
|
(1,882,293
|
)
|
|
|
|
|
|
|
1,882,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
138,529,851
|
|
|
$
|
1,553,243
|
|
|
$
|
(14,392,669
|
)
|
|
$
|
4,455,090
|
|
|
$
|
93,812,089
|
|
|
$
|
(142,835,389
|
)
|
|
$
|
81,122,215
|
|
|
$
|
(13,891,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes PIK interest.
|
(2)
|
Represents the transfer of US Shale Solutions, Inc. into Level 3.
|
F-110
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 9. Fair Value Measurements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2015
|
|
|
|
Beginning
Balance
July 1,
2014
|
|
|
Amortization &
Accretion of
Fixed Income
Premiums &
Discounts
|
|
|
Realized &
Unrealized
Gains
(Losses)
|
|
|
Transfers
out of
Level 3
(2)
|
|
|
Purchases
(1)
|
|
|
Sales &
Settlements
|
|
|
Ending
Balance
June 30,
2015
|
|
|
Change in
Unrealized
Gains (Losses)
for Investments
still held at
June 30,
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior and Subordinated Loans, at fair value
|
|
$
|
111,079,608
|
|
|
$
|
1,371,720
|
|
|
$
|
(6,728,531
|
)
|
|
$
|
|
|
|
$
|
113,149,706
|
|
|
$
|
(97,241,705
|
)
|
|
$
|
121,630,798
|
|
|
$
|
(7,918,295
|
)
|
Limited Liability Company Interests, at fair value
|
|
|
3,875,583
|
|
|
|
|
|
|
|
(2,474,886
|
)
|
|
|
|
|
|
|
|
|
|
|
(171,719
|
)
|
|
|
1,228,978
|
|
|
|
(1,171,144
|
)
|
Warrants, at fair value
|
|
|
3,060,421
|
|
|
|
|
|
|
|
(2,194,114
|
)
|
|
|
(486,786
|
)
|
|
|
2,328,768
|
|
|
|
(13,214
|
)
|
|
|
2,695,075
|
|
|
|
(337,902
|
)
|
Common Stock, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,975,000
|
|
|
|
|
|
|
|
12,975,000
|
|
|
|
|
|
Open Swap Contract, at fair value
|
|
|
|
|
|
|
|
|
|
|
1,081
|
|
|
|
|
|
|
|
|
|
|
|
(1,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
118,015,612
|
|
|
$
|
1,371,720
|
|
|
$
|
(11,396,450
|
)
|
|
$
|
(486,786
|
)
|
|
$
|
128,453,474
|
|
|
$
|
(97,427,719
|
)
|
|
$
|
138,529,851
|
|
|
$
|
(9,427,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes PIK interest.
|
(2) Represents the transfer of a portion of the General Cannabis Corp.
warrant out of Level 3 into Level 1 Common Stock upon conversion.
|
Realized and unrealized gains and losses are included in net realized gain (loss) and net change in unrealized gain
(loss) in the Consolidated Statements of Operations. The change in unrealized losses for Level 3 investments still held at June 30, 2016 of $13,891,296 is included in net change in unrealized gain (loss) in the Consolidated Statements of
Operations for the year ended June 30, 2016. The change in unrealized losses for Level 3 investments still held at June 30, 2015 of $9,427,341 is included in net change in unrealized gain (loss) in the Consolidated Statements of
Operations for the year ended June 30, 2015.
The following table provides quantitative information regarding Level 3 fair value
measurements as of June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Fair Value
|
|
|
Valuation Technique
|
|
Unobservable
Inputs
|
|
Range (Average)
(1)
|
Senior and Subordinated Loans
|
|
$
|
67,666,509
|
|
|
Discounted cash flows
(income approach)
|
|
Discount Rate
|
|
3.70% - 50.00%
(13.12%)
|
|
|
|
5,359,848
|
|
|
Precedent Transactions
|
|
Transaction Value
|
|
N/A
|
|
|
|
7,675,109
|
|
|
Liquidation Value
|
|
Asset Value
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
80,701,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Liability Interests and Warrants (Private Companies)
|
|
|
209,844
|
|
|
Market comparable companies
(market approach)
|
|
EBITDA multiple
|
|
6.00x 6.00x
(6.00x)
|
|
|
|
100,000
|
|
|
Liquidation Value
|
|
Asset Value
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
309,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant (Public Companies)
|
|
|
110,905
|
|
|
Option Pricing Model
|
|
Volatility
|
|
50.00% -
61.40%
(55.70%)
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 Investments
|
|
$
|
81,122,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The average values were determined using the weighted average of the fair value of the investments in each investment category.
|
F-111
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 9. Fair Value Measurements (continued)
The following table provides quantitative information regarding Level 3 fair value measurements
as of June 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Fair Value
|
|
|
Valuation Technique
|
|
|
Unobservable
Inputs
|
|
Range (Average)
(1)
|
Senior and Subordinated Loans
|
|
$
|
91,569,415
|
|
|
|
Discounted cash
flows (income
approach)
|
|
|
Discount
Rate
|
|
8.51% 55.00%(16.27%)
|
|
|
|
26,739,621
|
|
|
|
Precedent
Transactions
|
|
|
Transaction
Value
|
|
N/A
|
|
|
|
3,321,762
|
|
|
|
Liquidation Value
|
|
|
Asset
Value
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
121,630,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Liability Interests, Warrants, and Common Stock (Private Companies)
|
|
|
3,719,553
|
|
|
|
Market comparable
companies
(market approach)
|
|
|
EBITDA
multiple
|
|
4.00x 7.25x (5.15x)
|
|
|
|
12,975,000
|
|
|
|
Precedent
Transactions
|
|
|
Transaction
Value
|
|
N/A
|
|
|
|
177,500
|
|
|
|
Liquidation Value
|
|
|
Asset
Value
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,872,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant (Public Companies)
|
|
|
27,000
|
|
|
|
Option Pricing
Model
|
|
|
Volatility
|
|
32.588%
|
Open Swap Contract
|
|
|
|
|
|
|
Option Pricing
Model
|
|
|
Broker
Quotes
|
|
$212.50/share
$220.00/share
($216.50/share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 Investments
|
|
$
|
138,529,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The average values were determined using the weighted average of the fair value of the investments in each investment category.
|
The primary significant unobservable input used in the fair value measurement of the Companys debt securities (first lien debt, second lien
debt and subordinated debt), including income-producing investments in funds, is the discount rate. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. In
determining the discount rate, for the income, or yield, approach, the Company considers current market yields and multiples, portfolio company performance, leverage levels and credit quality, among other factors in its analysis. Changes in one or
more of these factors can have a similar directional change on other factors in determining the appropriate discount rate to use in the income approach.
The primary significant unobservable input used in the fair value measurement of the Companys private equity and warrant investments is the
EBITDA multiple, which is used to determine the Enterprise Value. Significant increases (decreases) in the Enterprise Value in isolation would result in a significantly higher (lower) fair value measurement. To determine the Enterprise Value for the
market approach, the Company considers current market trading and/or transaction multiples, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or
more of these factors can have a similar directional change on other factors in determining the appropriate multiple to use in the market approach.
The primary unobservable inputs used in the fair value measurement of the Companys warrant investments, when using an option pricing model, are
the discount rate and volatility. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the volatility in isolation would
result in a significantly higher (lower) fair value measurement. Changes in one or more factors can have a similar directional change on other factors in determining the appropriate discount rate or volatility to use in the valuation of a warrant
using an option pricing model.
F-112
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 10. Derivative Financial Instruments
In the normal course of business, the Company may utilize derivative contracts in connection with its investment activities. Investments in derivative
contracts are subject to additional risks that can result in a loss of all or part of an investment. The derivative activities and exposure to derivative contracts primarily involve equity price risks. In addition to the primary underlying risk,
additional counterparty risk exists due to the potential inability of counterparties to meet the terms of their contracts.
Warrants
The warrants provide exposure and potential gains upon equity appreciation of the portfolio companys equity value.
The value of a warrant has two components: time value and intrinsic value. A warrant has a limited life and expires on a certain date. As a
warrants expiration date approaches, the time value of the warrant will decline. In addition, if the stock underlying the warrant declines in price, the intrinsic value of an in the money warrant will decline. Further, if the price
of the stock underlying the warrant does not exceed the strike price of the warrant on the expiration date, the warrant will expire worthless. As a result, there is the potential for the entire value of an investment in a warrant to be lost.
Counterparty risk exists from the potential failure of an issuer of warrants to settle its exercised warrants. The maximum risk of loss from
counterparty risk is the fair value of the contracts and the purchase price of the warrants. The Companys Board of Directors considers the effects of counterparty risk when determining the fair value of its investments in warrants.
Swap contracts general
The Company
may enter into swap contracts, including interest rate swaps, total return swaps, and credit default swaps, as part of its investment strategy, to hedge against unfavorable changes in the value of investments and to protect against adverse movements
in interest rates or credit performance with counterparties. Generally, a swap contract is an agreement that obligates two parties to exchange a series of cash flows at specified intervals based upon or calculated by reference to changes in
specified prices or rates for a specified notional amount of the underlying assets. The payment flows are usually netted against each other, with the difference being paid by one party to the other. Payments are disclosed as realized gain (loss) on
open swap contracts on the Consolidated Statements of Operations. If the payment is a receivable as of the end of the period, it is disclosed as receivable on open swap contract on the Consolidated Statements of Assets and Liabilities.
The fair value of open swaps reported in the Consolidated Statements of Assets and Liabilities may differ from that which would be realized in the
event the Company terminated its position in the contract. Risks may arise as a result of the failure of the counterparty to the swap contract to comply with the terms of the swap contract. The loss incurred by the failure of counterparty is
generally limited to the aggregate fair value of swap contracts in an unrealized gain position, as adjusted for any collateral posted to us by the counterparty or by us with the counterparty. Therefore, the Company considers the creditworthiness of
each counterparty to a swap contract in evaluating potential credit risk. Additionally, risks may arise from unanticipated movements in the fair value of the underlying investments.
Total return swaps
The Company is
subject to market risk in the normal course of pursuing its investment objectives. The Company may enter into total return swaps either to manage its exposure to the market or certain sectors of the market, or to create exposure to certain
investments to which it is otherwise not exposed.
Total return swap contracts involve the exchange by the Company and a counterparty of their
respective commitments to pay or receive a net amount based on the change in the fair value of a particular security or index and a specified notional amount.
F-113
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 10. Derivative Financial Instruments (continued)
During the year ended June 30, 2015, the Company funded one synthetic secured loan in the form
of a total return swap. More specifically, the Company purchased 60,000 shares of Granite Ridge Holdings, LLC, a power generation company. The Company contemporaneously entered into a collateralized swap agreement with another private fund, which
posted approximately $10.4 million of cash collateral, whereby the Company swapped the returns on the shares for a fixed rate of 15.0% on the net loan amount. Under the terms of the swap, the Company expected to receive periodic payments from
the counterparty. These periodic payments were recorded as realized capital gains for accounting purposes in accordance with GAAP. The Company did not enter into any total return swaps during the year ended June 30, 2016.
During the year ended June 30, 2016, Granite Ridge Holdings, LLC was sold and the Company received proceeds for a redemption of the
Companys LLC interests, and the related holdback, of approximately $15.2 million, resulting in a realized gain of approximately $2.1 million. Concurrently, the total return swap was unwound and the Company realized a loss of
approximately $2.1 million on the swap contract on that date. From the inception of the swap contract through its termination in the quarter ended March 31, 2016, the Company recognized realized losses of approximately $1.9 million,
which when aggregated with the realized gain on the LLC interests in Granite Ridge Holdings, LLC, resulted in a total realized gain on the transactions of $262,707. The gains and losses on the transactions are disclosed separately in the
Consolidated Statements of Operations as realized gain (loss) on investments and realized gain (loss) on open swap contracts.
Note 11. Strategic Transaction
On June 23, 2016, the Company and Great Elm Capital Corp., a Maryland corporation (GECC) entered into a definitive merger
agreement (the Merger Agreement) under which the Company will merge with and into GECC, with GECC as the surviving corporation (the Merger). Concurrently with the execution of the Merger Agreement, GECC, Great Elm Capital
Group, Inc. (Great Elm) and certain investment funds (the Funds) managed by MAST Capital Management, LLC (MAST) entered into a subscription agreement (the Subscription Agreement). Pursuant to the
Subscription Agreement, (i) Great Elm has contributed $30 million in cash to GECC in exchange for shares of GECCs common stock and (ii) the Funds have agreed to contribute an investment portfolio, presently valued at
approximately $90 million, also in exchange for shares of GECCs common stock. The contribution of the investment portfolio will occur prior to the closing of the Merger. When the Merger becomes effective, GECC, as the surviving
corporation, will be externally managed by Great Elm Capital Management, Inc. (GECM), pursuant to a new investment advisory agreement. GECM will be owned by Great Elm. Great Elm has advised the Company that GECM will employ substantially
all of the investment and back office personnel of MAST. The obligations of the parties to the Merger Agreement and the Subscription Agreement are subject to various conditions. The Company also entered into an agreement (the Termination
Agreement) with Full Circle Advisors and Full Circle Service Company providing for the future termination of the Investment Advisory Agreement, dated July 13, 2010, and Administration Agreement, dated July 14, 2010, as required under
the Merger Agreement.
The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement,
(i) we will merge with and into GECC with GECC continuing as the surviving corporation. In the Merger, all of the Companys outstanding shares of common stock will be converted into shares of GECCs common stock. The amount of
GECCs common stock to be received by the Companys stockholders will be derived from an exchange ratio (the Exchange Ratio), which will be calculated based on our net asset value as of the
month-end
preceding the date on which the definitive proxy statement relating to the Merger is mailed to the Companys stockholders, subject to adjustments as described below.
Pursuant to the terms of the Merger Agreement, the Companys Board of Directors intends to declare a special cash distribution to the
Companys stockholders of record as of the close of business on the day on which the Merger becomes legally effective.
F-114
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 11. Strategic Transaction (continued)
The Merger Agreement provides that the Companys Board of Directors will declare a special cash
distribution, which will be payable after the Merger to the persons who are the record holders of shares of the Companys common stock immediately before the effective time of the Merger, in an aggregate amount equal to the sum of:
|
|
|
$408,763, the positive amount of the Companys net investment income, calculated in accordance with generally accepted accounting principles in the United States GAAP, from March 31, 2016 through
August 31, 2016; and
|
|
|
|
the amount of net investment income paid or accrued on the Companys investment portfolio and on its cash balances from August 31, 2016 through the effective time of the merger.
|
The amount of the special cash distribution is expected to be approximately $0.24 per share of the Companys common stock. The special cash
distribution will be paid by the exchange agent appointed to process exchanges of GECC share certificates for the Companys share certificates upon delivery by the holders of the Companys common stock of a letter of transmittal.
Neither the special cash distribution, nor any dividends or other distributions with respect to shares of GECC common stock will be paid to any
former Full Circle stockholders who held their shares in certificated form and who have not surrendered their certificates to the exchange agent for shares of GECC common stock until those certificates are surrendered in accordance with the letter
of transmittal. Following the surrender of any such certificates in accordance with the letter of transmittal, the record holders of such certificates will be entitled to receive, without interest, the special cash distribution and the amount of
dividends or other distributions with a record date after the Effective Time payable with respect to shares of GECC common stock exchangeable for those certificates and not previously paid.
The Company expects that a significant part of the $5.0 million fixed portion of the special cash distribution will be a distribution in excess
of Full Circle Capitals current and accumulated earnings and profits and could be treated as a return of capital for U.S. federal income tax purposes.
The closing of the Merger is subject to the satisfaction of customary closing conditions, including, among others, the registration and listing of
the shares of common stock of GECC that will be issued in the Merger and the approval of the Merger by the holders of a majority of the outstanding shares of the common stock of the Company (the Company Stockholder Approval).
The Merger Agreement contains customary representations, warranties and covenants of each party, including covenants providing for the Company and
GECC (i) to conduct their respective businesses in all material respects in the ordinary course of business and in a manner consistent with past practice during the period between the execution of the Merger Agreement and the effective time of
the Merger, (ii) not to engage in certain kinds of transactions during such period, and (iii) only with respect to the Company, to convene and hold a meeting of its stockholders to consider and vote upon the approval of the Merger.
The Merger Agreement contains a customary
no-shop
provision which prohibits the Company and its
subsidiaries from engaging in certain actions with respect to any other offer or proposal relating to an acquisition, merger or business combination resulting in ownership of more than 25% of the Company or its assets (an Acquisition
Proposal). Subject to certain exceptions, the Company may not: (i) initiate, solicit or knowingly encourage any inquiries with respect to any Acquisition Proposal; (ii) engage in negotiations or discussions that reasonably could be
expected to lead to an Acquisition Proposal; (iii) approve, endorse or recommend any Acquisition Proposal; or (iv) execute or enter into any letter of intent, agreement in principle, merger agreement, acquisition agreement or any similar
agreement relating to any Acquisition Proposal.
F-115
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 11. Strategic Transaction (continued)
The no shop provision is subject to a customary fiduciary out provision that
allows the Company, under certain circumstances and in compliance with certain obligations, to provide
non-public
information and engage in discussions and negotiations with any third party making an
Acquisition Proposal if the Companys Board of Directors determines in good faith, after consultation with counsel and its financial advisor, that such third party is reasonably likely to submit a Superior Proposal. A Superior
Proposal is a bona fide proposal in writing relating to an acquisition, merger or business combination resulting in ownership of more than 50% of the Company or its assets that is reasonably likely to be consummated and which has terms more
favorable to the Company and its stockholders from a financial point of view than those set forth in the Merger Agreement and related documents.
At any time prior to obtaining the Company Stockholder Approval, subject to certain conditions, the Companys Board of Directors may endorse the
Superior Proposal and may change its recommendation regarding the Merger if the Companys Board of Directors has determined in good faith (after consultation with counsel) that the failure to take action would be inconsistent with the
directors fiduciary duties. Any such action can be taken only after giving three business days advance notice to GECC and during those three business days the Company must negotiate with GECC (if GECC wishes to negotiate) to adjust the terms
and conditions of the Merger Agreement to make them at least as favorable to the Companys stockholders as the Superior Proposal.
The
Merger Agreement contains certain termination rights for both the Company and GECC, including if the Merger is not completed on or before October 31, 2016 (subject to extension under certain circumstances), or if the Company Stockholder
Approval is not obtained. In the event of a termination of the Merger Agreement under certain circumstances, including termination of the Merger Agreement by the Company to enter into a definitive agreement with respect to a Superior Proposal or
termination by GECC as a result of a change of recommendation by the Companys Board of Directors, the Company will be required to pay GECC a termination fee of $3.0 million. Additionally, in the event that the Company Stockholder Approval
is not obtained and a proposal for a business combination with a third party or an acquisition by a third party of 50% of more of the shares or assets of the Company (each, an Alternative Transaction) has been publicly announced and not
withdrawn, upon termination of the Merger Agreement by us or GECC, the Company will be required to reimburse GECC for its out of pocket expenses, up to a maximum of $1.0 million (the Expense Reimbursement). If the Company enters
into a definitive agreement for one or more Alternative Transactions within 12 months after termination of the Merger Agreement, the Company will be required to pay GECC a termination fee of $3.0 million, less the Expense Reimbursement.
Note 12. Subsequent Events
Recent Portfolio
Activity
On July 8, 2016, the subordinated secured term loan to Bioventus, LLC was sold for total proceeds of approximately
$6.0 million.
On August 17, 2016, the Company foreclosed on the commercial property underlying its loan to JN Medical Corporation
(JNI). Subsequent to the foreclosure, on September 14, 2016 the Company entered into a forbearance agreement with JNI, which among other things, required JNI to enter into a triple net lease agreement with respect to the commercial
property and to fund an initial payment of $730,723 to the Company in addition to resuming all other obligations under the loan agreement.
The
Company holds collateralized note obligations from PEAKS Trust
2009-1.
ITT Educational Services Inc. (ITT) has guaranteed payment on these notes. On August 26, 2016, ITT announced that it
would no longer be accepting new students for enrollment during the current academic year. Subsequently ITT terminated operations at its campuses and on September 16, 2016 ITT filed for Chapter 7 bankruptcy. To the degree that ITT has
liabilities in excess of the proceeds resulting from the Chapter 7 proceedings,
F-116
FULL CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
Note 12. Subsequent Events (continued)
ITT may not be able to meet obligations under its guarantee, which could impair the value of the notes. At August 31, 2016, the Company valued the notes at 70.91% of par value as compared to
83.92% of par value at June 30, 2016. The Company is currently reviewing the situation, but does not expect a significant change in the value of the notes due to the status of ITT.
Note 13. 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, 2016, the Company had approximately
$8.6 million in unfunded loan commitments, subject to the Companys approval in certain instances, to provide debt financing to certain of its portfolio companies.
The Company is currently not subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against
the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Companys rights under contracts with its portfolio companies.
While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon its business, financial condition or results of operations.
F-117
Schedule 12 14
The table below represents the fair value of control and affiliate investments at June 30, 2015 and any amortization, purchases,
sales, and realized and net unrealized gain (loss) made to such investments, as well as the ending fair value as of June 30, 2016.
Schedule of Investments in and Advances to Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/
Type of Investment
|
|
Par
Amount/
Quantity at
June 30,
2016
|
|
|
Amount of
Interest
and
Dividends
Credited
in
Income
|
|
|
Fair Value
at
June 30,
2015
|
|
|
Accretion/
Amortization
|
|
|
Purchases
|
|
|
Sales
|
|
|
Realized
and
Unrealized
Gains/
Losses
|
|
|
Fair Value at
June 30, 2016
|
|
Control Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Takoda Resources Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt/Common Stock
(1),(2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
161,585
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(168,258
|
)
|
|
$
|
6,673
|
|
|
$
|
|
|
Texas Westchester Financial, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Liability Company Interests
(1)
|
|
|
9,278
|
|
|
|
|
|
|
|
177,500
|
|
|
|
|
|
|
|
|
|
|
|
(60,000
|
)
|
|
|
(17,500
|
)
|
|
|
100,000
|
|
The Finance Company, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt
(3)
/Limited Liability
Company
Interests
(2)
|
|
$
|
|
|
|
|
498,242
|
|
|
|
5,006,194
|
|
|
|
7,938
|
|
|
|
|
|
|
|
(4,997,942
|
)
|
|
|
(16,190
|
)
|
|
|
|
|
TransAmerican Asset Servicing Group, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt
(2)
/Limited Liability
Company
Interests
(1),(2)
|
|
$
|
|
|
|
|
|
|
|
|
466,785
|
|
|
|
|
|
|
|
323,359
|
|
|
|
(717,576
|
)
|
|
|
(72,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
$
|
498,242
|
|
|
$
|
5,812,064
|
|
|
$
|
7,938
|
|
|
$
|
323,359
|
|
|
$
|
(5,943,776
|
)
|
|
$
|
(99,585
|
)
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modular Process Control, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt
(1),(2)
/Warrant
(1),(2)
|
|
$
|
|
|
|
|
287,601
|
|
|
|
3,663,827
|
|
|
|
17,082
|
|
|
|
1,306,664
|
|
|
|
(3,071,579
|
)
|
|
|
(1,915,994
|
)
|
|
|
|
|
ProGrade Ammo Group, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt
(1),(2)
/Warrants
(1),(2)
|
|
$
|
|
|
|
|
|
|
|
|
2,590,309
|
|
|
|
|
|
|
|
147,121
|
|
|
|
(1,561,268
|
)
|
|
|
(1,176,162
|
)
|
|
|
|
|
SOLEX Fine Foods, LLC; Catsmo, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt/Limited Liability Company
Interests
(1),(2)
/Warrant
(1),(2)
|
|
$
|
|
|
|
|
284,512
|
|
|
|
3,832,347
|
|
|
|
46,883
|
|
|
|
|
|
|
|
(3,861,696
|
)
|
|
|
(17,534
|
)
|
|
|
|
|
US Oilfield Company, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt/Warrants
(1)
|
|
$
|
5,768,743/5
|
|
|
|
521,338
|
|
|
|
5,683,338
|
|
|
|
12,799
|
|
|
|
6,315,061
|
|
|
|
(6,320,574
|
)
|
|
|
(5,377,269
|
)
|
|
|
313,355
|
|
West World Media, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Liability Company Interests
(1),(2)
|
|
|
|
|
|
|
|
|
|
|
249,451
|
|
|
|
|
|
|
|
|
|
|
|
(2,143,900
|
)
|
|
|
1,894,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
$
|
1,093,451
|
|
|
$
|
16,019,272
|
|
|
$
|
76,764
|
|
|
$
|
7,768,846
|
|
|
$
|
(16,959,017
|
)
|
|
$
|
(6,592,510
|
)
|
|
$
|
313,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Nonincome-producing security.
|
(2)
|
Investment is no longer held as of June 30, 2016.
|
(3)
|
Investment is no longer a control investment at June 30, 2016. The Company sold the LLC interest in The Finance Company, LLC on March 15, 2016.
|
F-118
Schedule 12 14
The table below represents the fair value of control and affiliate investments at June 30, 2014 and any amortization, purchases,
sales, and realized and net unrealized gain (loss) made to such investments, as well as the ending fair value as of June 30, 2015.
Schedule of Investments in and Advances to Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
Company/
Type of Investment
|
|
Par Amount/
Quantity at
June 30, 2015
|
|
|
Amount of
Interest and
Dividends
Credited in
Income
|
|
|
Fair Value
at
June 30,
2014
|
|
|
Accretion/
Amortization
|
|
|
Purchases
|
|
|
Sales
|
|
|
Realized
and
Unrealized
Gains/
Losses
|
|
|
Transfer from
Control to
Non-Control/
Non-Affiliate
Investment
|
|
|
Fair Value at
June 30, 2015
|
|
Control Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Media West, LLC
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt/Limited Liability Company Interests
(4)
|
|
$
|
3,811,681
|
|
|
$
|
318,461
|
|
|
$
|
5,666,679
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,015,030
|
)
|
|
$
|
(4,651,649
|
)
|
|
$
|
|
|
|
$
|
|
|
Takoda Resources Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt/Common Stock
(1)
|
|
$
|
3,054,532/749
|
|
|
|
118,703
|
|
|
|
2,557,379
|
|
|
|
|
|
|
|
453,272
|
|
|
|
(91,568
|
)
|
|
|
(2,757,498
|
)
|
|
|
|
|
|
|
161,585
|
|
Texas Westchester Financial, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Liability Company Interests
(1)
|
|
|
9,278
|
|
|
|
|
|
|
|
540,037
|
|
|
|
|
|
|
|
|
|
|
|
(171,717
|
)
|
|
|
(190,820
|
)
|
|
|
|
|
|
|
177,500
|
|
The Finance Company, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt/Limited Liability Company Interests
|
|
$
|
4,195,915/50
|
|
|
|
881,110
|
|
|
|
7,214,905
|
|
|
|
38,386
|
|
|
|
|
|
|
|
(967,632
|
)
|
|
|
(1,279,465
|
)
|
|
|
|
|
|
|
5,006,194
|
|
TransAmerican Asset Servicing Group, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt/Limited Liability Company Interests
(1)
|
|
$
|
3,563,246/75
|
|
|
|
183,042
|
|
|
|
1,560,057
|
|
|
|
9,714
|
|
|
|
1,532,467
|
|
|
|
(977,374
|
)
|
|
|
(1,658,079
|
)
|
|
|
|
|
|
|
466,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
$
|
1,501,316
|
|
|
$
|
17,539,057
|
|
|
$
|
48,100
|
|
|
$
|
1,985,739
|
|
|
$
|
(3,223,321
|
)
|
|
$
|
(10,537,511
|
)
|
|
$
|
|
|
|
$
|
5,812,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Cannabis Corp.
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock/Warrant
(1),(4)
|
|
|
654,409
|
|
|
|
|
|
|
|
2,356,212
|
|
|
|
|
|
|
|
113,214
|
|
|
|
(377,639
|
)
|
|
|
(600,986
|
)
|
|
|
(1,490,801
|
)
|
|
|
|
|
Modular Process Control, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt/Warrant
(1)
|
|
$
|
7,151,027/1
|
|
|
|
1,205,914
|
|
|
|
3,971,110
|
|
|
|
99,410
|
|
|
|
2,282,926
|
|
|
|
(1,911,704
|
)
|
|
|
(777,915
|
)
|
|
|
|
|
|
|
3,663,827
|
|
ProGrade Ammo Group, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt/Warrants
(1)
|
|
$
|
6,665,197/181,240
|
|
|
|
4,594
|
|
|
|
4,133,284
|
|
|
|
4,594
|
|
|
|
877,441
|
|
|
|
(2,305,294
|
)
|
|
|
(119,716
|
)
|
|
|
|
|
|
|
2,590,309
|
|
SOLEX Fine Foods, LLC; Catsmo, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt/Limited Liability Company Interests
(1)
/Warrant
(1)
|
|
$
|
3,861,696/1/1
|
|
|
|
512,253
|
|
|
|
3,888,914
|
|
|
|
27,904
|
|
|
|
110,000
|
|
|
|
(148,304
|
)
|
|
|
(46,167
|
)
|
|
|
|
|
|
|
3,832,347
|
|
US Oilfield Company, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Debt/Warrants
(1)
|
|
$
|
5,767,417/3
|
|
|
|
722,952
|
|
|
|
|
|
|
|
38,812
|
|
|
|
18,396,291
|
|
|
|
(12,714,465
|
)
|
|
|
(37,300
|
)
|
|
|
|
|
|
|
5,683,338
|
|
West World Media, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Liability Company Interests
(1)
|
|
|
148,326
|
|
|
|
|
|
|
|
238,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,554
|
|
|
|
|
|
|
|
249,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
$
|
2,445,713
|
|
|
$
|
14,588,417
|
|
|
$
|
170,720
|
|
|
$
|
21,779,872
|
|
|
$
|
(17,457,406
|
)
|
|
$
|
(1,571,530
|
)
|
|
$
|
(1,490,801
|
)
|
|
$
|
16,019,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Nonincome-producing security.
|
(2)
|
On June 30, 2015, New Media West, LLC transferred from a Control Investment to a
Non-Control/Non-Affiliate
Investment.
|
(3)
|
As of May 13, 2015, General Cannabis Corp. transferred from an Affiliate Investment to a
Non-Control/Non-Affiliate
Investment. All
purchases and sales after May 13, 2015 have been excluded from the purchase and sales columns in the above table. Realized and unrealized gains/losses have been prorated and only the realized and unrealized gains/losses which are attributable
to the investment as an Affiliate Investment have been included.
|
(4)
|
Investment no longer held as of June 30, 2015.
|
F-119
7,000,268 Shares
Common Stock
PROSPECTUS
, 2018
PART C OTHER INFORMATION
Item 25.
|
Financial Statements and Exhibits
|
Financial Statements
The financial statements listed in the index to consolidated financial statements to the prospectus are incorporated herein by reference.
Exhibits
Unless otherwise indicated, all references are to exhibits to
the applicable filing by the Registrant under File
No. 814-01211
with the Securities and Exchange Commission (the SEC).
|
|
|
Exhibit
Number
|
|
Description
|
|
|
(a)
|
|
Amended and Restated Charter of the Registrant (incorporated by reference to Exhibit
3.1 to the Form 8-K filed on November 7, 2016)
|
|
|
(b)
|
|
Bylaws of the Registrant (incorporated by reference to Exhibit 2 to the Registration Statement on Form
N-14
(File
No. 333-212817)
filed on August 1, 2016)
|
|
|
(d)(1)
|
|
Form of certificate of the Registrants common stock (incorporated by reference to Exhibit 5 to
the Registration Statement on Form
N-14
(File
No. 333-212817)
filed on August 1, 2016)
|
|
|
(d)(2)
|
|
Indenture, dated as of September
18, 2017, by and between the Registrant and American Stock Transfer
& Trust Company, LLC (the Trustee), as trustee (incorporated by reference to Exhibit 4.1 to the Form
8-K/A
filed on September 21, 2017)
|
|
|
(d)(3)
|
|
First Supplemental Indenture, dated as of September
18, 2017, by and between the Registrant and the Trustee (incorporated by reference to Exhibit 4.2 to the Form
8-K/A
filed on September 21, 2017)
|
|
|
(d)(4)
|
|
Second Supplemental Indenture, dated as of January
19, 2018, by and between the Registrant and the Trustee (incorporated by reference to Exhibit (d)(3) to the post-effective amendment to the Registration Statement on Form
N-2
(File
No. 333-221882)
filed on January 19, 2018)
|
|
|
(d)(5)
|
|
Global Note (6.50% Notes due 2022), dated September
18, 2017 (incorporated by reference to Exhibit 4.3 to the Form
8-K
filed on September 19, 2017, as amended September 21, 2017)
|
|
|
(d)(6)
|
|
Global Note (6.50% Notes due 2022), dated September
29, 2017 (incorporated by reference to Exhibit 4.3 to the Form
8-K
filed on September 29, 2017)
|
|
|
(d)(7)
|
|
Global Note (6.75% Notes due 2025), dated January
19, 2018 (incorporated by reference to Exhibit (d)(1) to the post-effective amendment to the Registration Statement on Form
N-2
(File
No.
333-221882)
filed on January 19, 2018)
|
|
|
(e)
|
|
Form of Dividend Reinvestment Plan (incorporated by reference to Exhibit 13(d) to the
pre-effective
amendment to the Registration Statement on Form
N-14
(File
No. 333-212817)
filed on September 26, 2016)
|
|
|
(g)
|
|
Investment Management Agreement, dated as of September
27, 2016, by and between the Registrant and Great Elm Capital Management, Inc. (GECM) (incorporated by reference to Exhibit 10.1 to the Form
8-K
filed on November 7, 2016)
|
|
|
(j)
|
|
Custodian Agreement, dated as of October
27, 2016, by and between the Registrant and State Street Bank and Trust Company (incorporated by reference to Exhibit 10.3 to the Form
10-K
filed on March 30, 2017)
|
|
|
(k)(1)
|
|
Agreement and Plan of Merger, dated as of June
23, 2016, by and between Full Circle Capital Corporation and the Registrant (incorporated by reference to the Rule 425 filing (File
No. 814-00809)
on June 27, 2016)
|
|
|
(k)(2)
|
|
Subscription Agreement, dated as of June
23, 2016, by and among the Registrant, Great Elm Capital Group, Inc. and the investment funds signatory thereto (incorporated by reference to the Rule 425 filing (File
No. 814-00809)
on June
27, 2016)
|
C-1
|
|
|
Exhibit
Number
|
|
Description
|
|
|
(k)(3)
|
|
Administration Agreement, dated as of September 27, 2016, by and between the Registrant and GECM (incorporated
by reference to Exhibit 10.2 to the Form 8-K filed on November 7, 2016)
|
|
|
(k)(4)
|
|
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.4 to the Form
8-K
filed on November 7, 2016)
|
|
|
(k)(5)
|
|
Amended and Restated Registration Rights Agreement, dated as of November
4, 2016, by and among the Registrant and the holders named therein (incorporated by reference to Exhibit 10.3 to the Form
8-K
filed on November 7, 2016)
|
|
|
(l)*
|
|
Opinion of Venable LLP
|
|
|
(n)(1)*
|
|
Consent of Deloitte & Touche LLP, Registered Independent Accounting Firm
|
|
|
(n)(2)*
|
|
Consent of RSM US LLP, Registered Independent Accounting Firm
|
|
|
(n)(3)*
|
|
Consent of Venable LLP (included in Exhibit (l))
|
|
|
(n)(4)*
|
|
Power of Attorney (included on the signature page hereto)
|
|
|
(r)(1)
|
|
Code of Ethics of Registrant (incorporated by reference to Exhibit 14.1 to the Form
10-K
filed on March 30, 2017)
|
|
|
(r)(2)
|
|
Code of Ethics of GECM (incorporated by reference to Exhibit 14.2 to the Form
10-K
filed on March 30, 2017)
|
The agreements included or incorporated by reference as exhibits to this registration statement
contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be
treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other
party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of materiality that are different from materiality under the applicable securities laws; and (iv) were made
only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement.
Item 26.
|
Marketing Arrangements
|
The information contained under the heading Plan of Distribution in the
prospectus is incorporated herein by reference and any information concerning any underwriters will be contained in the accompanying prospectus supplement, if any.
Item 27.
|
Other Expenses of Issuance and Distribution**
|
|
|
|
|
|
SEC registration fee
|
|
$
|
10,057
|
|
Nasdaq Global Select Additional Listing Fees
|
|
|
|
|
FINRA filing fee
|
|
|
|
|
Accounting fees and expenses
|
|
|
130,000
|
|
Legal fees and expenses
|
|
|
300,000
|
|
Printing and engraving
|
|
|
100,000
|
|
Miscellaneous fees and expenses
|
|
$
|
59,943
|
|
|
|
|
|
|
Total
|
|
$
|
600,000
|
|
|
|
|
|
|
**
|
These amounts (other than the SEC registration fee, Nasdaq fee and FINRA fee) are estimates.
|
All of the expenses set
forth above shall be borne by the Selling Stockholders.
C-2
Item 28.
|
Persons Controlled by or Under Common Control
|
|
|
|
|
|
|
|
|
|
Entity
|
|
Ownership
|
|
|
Jurisdiction of Organization
|
|
PF Facility Solutions LLC
|
|
|
100
|
%
|
|
|
Delaware
|
|
Double Duce Lodging, LLC
|
|
|
100
|
%
|
|
|
Texas
|
|
Item 29.
|
Number of Holders of Securities
|
The following table sets forth the number of record holders of our securities
at May 8, 2018.
|
|
|
Title of Class
|
|
Number of Record Holders
|
Common Stock, par value $0.01 per share
|
|
12
|
6.50% Notes due 2022
|
|
1
|
6.75% Notes due 2025
|
|
1
|
Reference is made to
Section 2-418
of the
Maryland General Corporation Law, Article VII of the Registrants charter and Article XI of the Registrants bylaws.
Maryland law permits a Maryland
corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or
profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Registrants charter contains such a provision which eliminates directors and
officers liability to the maximum extent permitted by Maryland law, subject to the requirements of the Investment Company Act of 1940, as amended (the Investment Company Act).
The Registrants charter authorizes the Registrant, and the Registrants bylaws obligate the Registrant, to the maximum extent permitted by Maryland law
and subject to the requirements of the Investment Company Act, to indemnify any present or former director or officer or any individual who, while serving as the Registrants director or officer and at the Registrants request, serves or
has served another corporation, real estate investment trust, partnership, joint venture, limited liability company, trust, employee benefit plan or other enterprise as a director, officer, partner, member, manager or trustee and who is made, or
threatened to be made, a party to, or witness in the proceeding by reason of his or her service in that capacity from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her
service in any such capacity and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding. The charter and bylaws also permit the Registrant to indemnify and advance expenses to any person who served a
predecessor of the Registrant in any of the capacities described above and any of the Registrants employees or agents or any employees or agents of the Registrants predecessor. In accordance with the Investment Company Act, the
Registrant will not indemnify any person for any liability to which such person would be subject by reason of such persons willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or
her office.
Maryland law requires a corporation (unless its charter provides otherwise, which the Registrants charter does not) to indemnify a director or
officer who has been successful in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to or in which they may be made, or threatened to be made, a party or witness
by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or
(2) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was unlawful. Under Maryland law, a Maryland corporation may not indemnify a director or officer in a suit by the corporation or in its right in which the director or officer was adjudged
liable to the corporation or in a suit in which the director or officer was adjudged liable on the basis that a personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and
reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit was improperly received. However, indemnification for an adverse
judgment in a suit by the corporation or in its right, or for a judgment of liability on the basis that a personal benefit was improperly received, is limited to expenses. In addition, Maryland law permits a corporation to advance reasonable
expenses to a director or officer in advance of final disposition of a proceeding upon the corporations receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of
conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct
was not met.
C-3
Investment Manager and Administrator
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, Great Elm Capital Management, Inc. (the investment adviser) and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with it
are entitled to indemnification from the Registrant for any damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts reasonably paid in settlement) arising from the rendering of the investment advisers
services under the Investment Management Agreement or otherwise as an investment adviser of the Registrant.
The Administration 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, Great Elm Capital Management, Inc. and its officers, managers, agents, employees, controlling
persons, members and any other person or entity affiliated with it are entitled to indemnification from the Registrant for any damages, liabilities, costs and expenses (including reasonable attorneys fees and amounts reasonably paid in
settlement) arising from the rendering of Great Elm Capital Management, Inc.s services under the Administration Agreement or otherwise as administrator for the Registrant.
The law also provides for comparable indemnification for corporate officers and agents. Insofar as indemnification for liability arising under the Securities Act of
1933, as amended (the Securities Act) may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant has entered into indemnification agreements with its directors. The
indemnification agreements are intended to provide the Registrants directors the maximum indemnification permitted under Maryland law and the Investment Company Act. Each indemnification agreement provides that the Registrant shall indemnify
the director who is a party to the agreement (an Indemnitee), including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any
threatened, pending, or completed proceeding, other than a proceeding by or in the right of the Registrant.
Item 31.
|
Business and Other Connections of Investment Advisor
|
For information as to the business, profession, vocation
or employment of a substantial nature of each of the officers and directors of the advisor, reference is made to GECMs Form ADV, filed with the SEC under the Investment Advisers Act of 1940, as amended, and incorporated herein by reference
upon filing.
Item 32.
|
Location of Accounts and Records
|
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act and the rules thereunder are maintained at the offices of:
|
1.
|
the Registrant, 800 South Street, Suite 230, Waltham, MA 02453;
|
|
2.
|
the Transfer Agent, American Stock Transfer & Trust Company, LLC, 6201 15th Avenue, Brooklyn, NY 11219;
|
|
3.
|
the Custodian, State Street Bank and Trust Company, 100 Huntington Avenue, Boston, MA 02116; and
|
|
4.
|
GECM, 800 South Street, Suite 230, Waltham, MA 02453.
|
C-4
Item 33.
|
Management Services
|
Not Applicable.
The Registrant undertakes:
|
1.
|
to suspend the offering of shares until the prospectus is amended if (1) subsequent to the effective date of its registration statement, the net asset value declines more than ten percent from its net asset value
as of the effective date of the registration statement or (2) the net asset value increases to an amount greater than its net proceeds as stated in the prospectus.
|
|
a.
|
to file, during any period in which offers or sales are being made, a post-effective amendment to the registration statement:
|
|
i.
|
to include any prospectus required by Section 10(a)(3) of the 1933 Act;
|
|
ii.
|
to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement; and
|
|
iii.
|
to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
|
|
b.
|
that, for the purpose of determining any liability under the 1933 Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering
of those securities at that time shall be deemed to be the initial bona fide offering thereof;
|
|
c.
|
to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering;
|
|
d.
|
that, for the purpose of determining liability under the 1933 Act to any purchaser, if the Registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 497(b), (c), (d) or (e) under the 1933 Act as
part of a registration statement relating to an offering, other than prospectuses filed in reliance on Rule 430A under the 1933 Act, shall be deemed to be part of and included in the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such date of first use; and
|
|
e.
|
that for the purpose of determining liability of the Registrant under the 1933 Act to any purchaser in the initial distribution of securities, the undersigned Registrant undertakes that in a primary offering of
securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to the purchaser:
|
|
i.
|
any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 497 under the 1933 Act;
|
C-5
|
ii.
|
the portion of any advertisement pursuant to Rule 482 under the 1933 Act relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the
undersigned Registrant; and
|
|
iii.
|
any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser.
|
|
a.
|
for the purpose of determining any liability under the 1933 Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 497(h) under the 1933 Act shall be deemed to be part of this registration statement as of the time it was declared effective; and
|
|
b.
|
for the purpose of determining any liability under the 1933 Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof.
|
C-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Waltham, and the Commonwealth of Massachusetts, on the 18th day of May, 2018.
|
|
|
GREAT ELM CAPITAL CORP.
|
|
|
By:
|
|
/s/ Peter A. Reed
|
|
|
Peter A. Reed
|
|
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Chief Executive Officer
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POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Peter A. Reed and Adam M. Kleinman (with full power to each
of them to act alone) his true and lawful
attorney-in-fact
and agent, with full power of substitution and
re-substitution,
for
him and in his name, place and stead, in any and all capacities, to sign on his behalf individually and in each capacity stated below any and all amendments (including post-effective amendments) to this registration statement (including a related
registration statement filed pursuant to Rule 462(b) of the Securities Act), and to file the same, with all exhibits thereto and other documents in connection therewith, with the SEC, granting unto said
attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact
and agents and either of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the
following persons in the capacities indicated as of May 18, 2018.
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Name
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Capacity
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/s/ Peter A. Reed
Peter A.
Reed
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Chief Executive Officer, President and Director (Principal Executive Officer)
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/s/ Michael J. Sell
Michael
J. Sell
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Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)
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/s/ Mark Kuperschmid
Mark
Kuperschmid
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Director
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/s/ Randall Revell Horsey
Randall Revell Horsey
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Director
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/s/ Michael C. Speller
Michael C. Speller
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Director
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/s/ John E. Stuart
John E.
Stuart
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Director
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