Item 5. Other Information
Item 5. Other Information.
Not applicable.
15
Item 6. E xhibits.
Unless otherwise indicated, all references are to exhibits to the applicable filing by Great Elm Capital Corp. (the “Registrant”) under File No. 814-01211 with the Securities and Exchange Commission.
Exhibit
Number
Description
2.1
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)
2.2
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)
3.1
Amended and Restated Charter of the Registrant (incorporated by reference to Exhibit 3.1 to the Form 8-K filed on November 7, 2016)
3.2
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)
4.1
Form of certificate for the Registrant’s 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)
4.2
Indenture, dated as of September 18, 2017, by and between the Registrant and American Stock Transfer & Trust Company, LLC, as trustee (the “Trustee”) (incorporated by reference to Exhibit 4.1 to the Form 8-K/A filed on September 21, 2017)
4.3
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)
4.4
Global Note, 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)
4.5
Global Note, dated September 29, 2017 (incorporated by reference to Exhibit 4.3 to the Form 8-K filed on September 29, 2017)
4.6
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)
4.7
Global Note, 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)
4.8
Third Supplemental Indenture, dated as of June 18, 2019, 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. 333-227605) filed on June 18, 2019 )
4.9
Global Note, dated June 18, 2019 (incorporated by reference to Exhibit (d)(1) to the post-effective amendment to the Registration Statement on Form N-2 (File No. 333-227605) filed on June 18, 2019)
31.1*
Certification of the Registrant’s Chief Executive Officer (“CEO”)
31.2*
Certification of the Registrant’s Chief Financial Officer (“CFO”)
32.1*
Certification of the Registrant’s CEO and CFO
*
Filed herewith
16
SIGNA TURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GREAT ELM CAPITAL CORP.
Date: November 9, 2020
By:
/s/ Peter A. Reed
Name:
Peter A. Reed
Title:
Chief Executive Officer
Date: November 9, 2020
By:
/s/ Keri A. Davis
Name:
Keri A. Davis
Title:
Chief Financial Officer
17
GREAT ELM CAPITAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Assets and Liabilities as of September 30, 2020 and December 31, 2019 (unaudited)
F-2
Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)
F-3
Consolidated Statements of Changes in Net Assets for the three and nine months ended September 30, 2020 and 2019 (unaudited)
F-4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)
F-5
Consolidated Schedule of Investments as of September 30, 2020 and December 31, 2019 (unaudited)
F-7
Notes to the Unaudited Consolidated Financial Statements
F-15
F-1
GREAT ELM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (unaudited)
Dollar amounts in thousands (except per share amounts)
September 30, 2020
December 31, 2019
Assets
Investments
Non-affiliated, non-controlled investments, at fair value
(amortized cost of $144,747 and $168,269, respectively)
$
110,194
$
147,412
Non-affiliated, non-controlled short-term investments, at fair value
(amortized cost of $74,983 and $85,733, respectively)
74,980
85,733
Affiliated investments, at fair value
(amortized cost of $107,256 and $102,704, respectively)
39,364
40,608
Controlled investments, at fair value
(amortized cost of $18,740 and $10,601, respectively)
19,928
9,595
Total investments
244,466
283,348
Cash and cash equivalents
12,570
4,606
Restricted cash
600
-
Receivable for investments sold
1,531
-
Interest receivable
4,091
2,350
Dividends receivable
-
14
Due from portfolio company
750
617
Due from affiliates
-
15
Prepaid expenses and other assets
497
89
Total assets
$
264,505
$
291,039
Liabilities
Notes payable 6.50% due September 18, 2022 (including unamortized discount
of $566 and $839, respectively)
$
29,727
$
31,792
Notes payable 6.75% due January 31, 2025 (including unamortized discount
of $1,107 and $1,321, respectively)
44,503
45,078
Notes payable 6.50% due June 30, 2024 (including unamortized discount
of $1,639 and $2,058, respectively)
41,184
42,942
Payable for investments purchased
77,120
72,749
Interest payable
366
354
Distributions payable
908
1,338
Accrued incentive fees payable
8,967
8,157
Due to affiliates
781
997
Accrued expenses and other liabilities
485
743
Total liabilities
$
204,041
$
204,150
Commitments and contingencies (Note 6)
$
-
$
-
Net Assets
Common stock, par value $0.01 per share (100,000,000 shares authorized,
10,941,770 shares issued and outstanding and 10,062,682 shares issued and
outstanding, respectively)
$
109
$
101
Additional paid-in capital
196,742
193,114
Accumulated losses
(136,387
)
(106,326
)
Total net assets
$
60,464
$
86,889
Total liabilities and net assets
$
264,505
$
291,039
Net asset value per share
$
5.53
$
8.63
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 September 30,
For the Nine Months Ended September 30,
2020
2019
2020
2019
Investment Income:
Interest income from:
Non-affiliated, non-controlled investments
$
2,718
$
4,477
$
9,800
$
11,999
Affiliated investments
246
216
716
627
Affiliated investments (PIK)
1,321
1,124
3,842
2,939
Controlled investments
90
282
188
1,335
Controlled investments (PIK)
-
101
-
684
Total interest income
4,375
6,200
14,546
17,584
Dividend income from:
Non-affiliated, non-controlled investments
401
196
404
407
Controlled investments
880
480
1,760
1,280
Total dividend income
1,281
676
2,164
1,687
Other income from:
Non-affiliated, non-controlled investments
295
5
351
137
Affiliated investments
-
-
-
2
Affiliated investments (PIK)
-
108
75
564
Controlled investments
-
13
12
52
Total other income
295
126
438
755
Total investment income
$
5,951
$
7,002
$
17,148
$
20,026
Expenses:
Management fees
$
609
$
759
$
1,898
$
2,207
Incentive fees
482
654
810
2,099
Administration fees
152
282
547
734
Custody fees
20
15
59
45
Directors’ fees
49
51
151
150
Professional services
287
243
794
711
Interest expense
2,225
2,308
6,920
5,333
Other expenses
194
71
468
349
Total expenses
$
4,018
$
4,383
$
11,647
$
11,628
Net investment income
$
1,933
$
2,619
$
5,501
$
8,398
Net realized and unrealized gains (losses):
Net realized gain (loss) on investment transactions from:
Non-affiliated, non-controlled investments
$
(262
)
$
97
$
(11,760
)
$
1,115
Controlled investments
-
154
-
154
Repurchase of debt
120
-
1,237
-
Total net realized gain (loss)
(142
)
251
(10,523
)
1,269
Net change in unrealized appreciation (depreciation) on investment transactions from:
Non-affiliated, non-controlled investments
3,544
(8,075
)
(13,699
)
(7,357
)
Affiliated investments
319
(4,096
)
(5,796
)
(7,666
)
Controlled investments
2,050
(345
)
2,194
(600
)
Total net change in unrealized appreciation (depreciation)
5,913
(12,516
)
(17,301
)
(15,623
)
Net realized and unrealized gains (losses)
$
5,771
$
(12,265
)
$
(27,824
)
$
(14,354
)
Net increase (decrease) in net assets resulting from operations
$
7,704
$
(9,646
)
$
(22,323
)
$
(5,956
)
Net investment income per share (basic and diluted):
$
0.18
$
0.26
$
0.53
$
0.81
Earnings per share (basic and diluted):
$
0.72
$
(0.96
)
$
(2.17
)
$
(0.58
)
Weighted average shares outstanding (basic and diluted):
10,660,894
10,062,682
10,307,771
10,312,561
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 September 30,
For the Nine Months Ended September 30,
2020
2019
2020
2019
Increase (decrease) in net assets resulting from operations:
Net investment income
$
1,933
$
2,619
$
5,501
$
8,398
Net realized gain (loss)
(142
)
251
(10,523
)
1,269
Net change in unrealized appreciation (depreciation) on investments
5,913
(12,516
)
(17,301
)
(15,623
)
Net increase (decrease) in net assets resulting from operations
7,704
(9,646
)
(22,323
)
(5,956
)
Distributions to stockholders:
Distributions (1)
(2,681
)
(2,505
)
(7,739
)
(7,671
)
Total distributions to stockholders
(2,681
)
(2,505
)
(7,739
)
(7,671
)
Capital transactions:
Purchases of common stock
-
-
-
(5,000
)
Common stock distributed
2,287
-
3,637
-
Net increase (decrease) in net assets resulting from capital transactions
2,287
-
3,637
(5,000
)
Total increase (decrease) in net assets
7,310
(12,151
)
(26,425
)
(18,627
)
Net assets at beginning of period
$
53,154
$
103,640
$
86,889
$
110,116
Net assets at end of period
$
60,464
$
91,489
$
60,464
$
91,489
Capital share activity
Shares outstanding at the beginning of the period
10,424,957
10,062,682
10,062,682
10,652,401
Shares purchased
-
-
-
(589,719
)
Common stock distributed
516,813
-
879,088
-
Shares outstanding at the end of the period
10,941,770
10,062,682
10,941,770
10,062,682
(1)
Distributions were from net investment income for each of the periods presented.
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 Nine Months Ended September 30,
2020
2019
Cash flows from operating activities
Net increase (decrease) in net assets resulting from operations
$
(22,323
)
$
(5,956
)
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used for) operating activities:
Purchases of investments
(75,086
)
(167,138
)
Net change in short-term investments
10,750
(18,015
)
Capitalized payment-in-kind interest
(2,833
)
(3,077
)
Proceeds from sales of investments
48,097
100,229
Proceeds from principal payments
35,326
52,860
Net realized (gain) loss on investments
11,750
(1,269
)
Net change in unrealized (appreciation) depreciation on investments
17,301
15,623
Amortization of premium and accretion of discount, net
(3,583
)
(4,210
)
Net realized gain on repurchase of debt
(1,237
)
-
Amortization of discount (premium) on long term debt
906
557
Increase (decrease) in operating assets and liabilities:
(Increase) decrease in interest receivable
(1,741
)
124
(Increase) decrease in dividends receivable
14
(38
)
(Increase) decrease in due from portfolio company
(133
)
(50
)
(Increase) decrease in due from affiliates
15
(10
)
(Increase) decrease in prepaid expenses and other assets
(408
)
285
Increase (decrease) in due to affiliates
594
2,049
Increase (decrease) in interest payable
12
8
Increase (decrease) in accrued expenses and other liabilities
(258
)
(188
)
Net cash provided by (used for) operating activities
17,163
(28,216
)
Cash flows from financing activities
Purchases of common stock
-
(5,000
)
Purchase of debt
(4,067
)
-
Issuance of Notes payable
-
42,696
Distributions paid
(4,532
)
(10,277
)
Net cash provided by (used for) financing activities
(8,599
)
27,419
Net increase (decrease) in cash
8,564
(797
)
Cash and cash equivalents and restricted cash, beginning of period
4,606
4,167
Cash and cash equivalents and restricted cash, end of period
$
13,170
$
3,370
Supplemental disclosure of non-cash financing activities:
Distributions declared, not yet paid
$
908
$
835
Common stock distributed
$
3,637
$
-
Supplemental disclosure of cash flow information:
Cash paid for excise tax
$
233
$
171
Cash paid for interest
$
6,022
$
4,768
F-5
The following tables provide a reconciliation of cash and cash equivalents and restricted cash reported on the Consolidated Statements of Assets and Liabilities that sum to the total of the same such amounts on the Consolidated Statements of Cash Flows:
September 30, 2020
December 31, 2019
Cash and cash equivalents
$
12,570
$
4,606
Restricted cash
600
$
-
Total cash and cash equivalents and restricted cash shown on the Consolidated Statements of Cash Flows
$
13,170
$
4,606
September 30, 2019
December 31, 2018
Cash and cash equivalents
$
3,370
$
4,167
Restricted cash
-
-
Total cash and cash equivalents and restricted cash shown on the Consolidated Statements of Cash Flows
$
3,370
$
4,167
The accompanying notes are an integral part of these financial statements.
F-6
GREAT ELM CAPITAL CORP.
CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited)
September 30, 2020
Dollar amounts in thousands
Portfolio Company
Industry
Security (1)
Notes
Interest Rate (2)
Initial Acquisition Date
Maturity
Par Amount / Quantity
Cost
Fair Value
Investments at Fair Value
APTIM Corp.
Industrial
1st Lien, Secured Bond
11
7.75%
03/28/2019
06/15/2025
$
6,000
$
4,953
$
3,120
ASP Chromaflo Technologies Corp.
Chemicals
2nd Lien, Secured Loan
5
1M L + 8.00%, 9.00% Floor (9.00%)
08/12/2019
11/18/2024
4,644
4,512
4,550
Avanti Communications Group, plc
Wireless Telecommunications Services
1.25 Lien, Secured Bond
4, 5, 6, 10, 11, 12
12.50%
04/28/2020
05/24/2021
1,113
1,113
1,113
Avanti Communications Group, plc
Wireless Telecommunications Services
1.5 Lien, Secured Bond
4, 5, 6, 10, 11, 12
12.50%
05/24/2019
05/24/2021
9,225
9,225
9,225
Avanti Communications Group, plc
Wireless Telecommunications Services
2nd Lien, Secured Bond
4, 5, 6, 10, 11
9.00%
11/03/2016
10/01/2022
44,378
42,018
27,657
Avanti Communications Group, plc
Wireless Telecommunications Services
Common Equity
4, 5, 7, 10
n/a
11/03/2016
n/a
196,086,410
50,660
1,339
Best Western Luling
Hotel Operator
1st Lien, Secured Loan
5, 8, 9
1M L + 12.00%, 12.25% Floor (0.00%)
11/03/2016
12/18/2017
2,715
1,300
2,894
Boardriders, Inc.
Apparel & Textile Products
1st Lien, Secured Loan
5
3M L + 6.50%, 7.50% Floor (7.50%)
03/28/2019
04/06/2024
8,894
8,772
5,062
California Pizza Kitchen, Inc.
Restaurants
1st Lien, Secured Loan
5
1M L + 6.00%, 7.00% Floor (7.00%)
03/26/2019
08/23/2022
9,897
9,713
3,317
California Pizza Kitchen, Inc.
Restaurants
Debtor in Possession Loan
5
1M L + 10.00%, 11.50% Floor (11.50%)
08/03/2020
01/03/2021
4,464
4,067
4,463
California Pizza Kitchen, Inc.
Restaurants
2nd Lien, Secured Loan
5, 8
1M L + 10.00%, 11.00% Floor (0.00%)
07/17/2019
08/23/2023
4,300
4,106
127
Crestwood Equity Partners LP
Oil & Gas
Class A Preferred Equity Units
10
n/a
06/19/2020
n/a
2,157,906
12,912
12,710
Davidzon Radio, Inc.
Radio Broadcasting
1st Lien, Secured Loan
5, 8, 9
1M L + 10.00%, 11.00% Floor (0.00%)
11/03/2016
03/31/2020
8,962
8,962
5,393
Endurance International Group Holdings Inc
Technology
1st Lien, Secured Revolver
5, 10
3M L+ 4.00%, 4.00% Floor (4.23%)
02/19/2020
02/09/2021
-
(49
)
-
Endurance International Group Holdings Inc
Technology
1st Lien, Secured Revolver - Unfunded
5, 10
0.38%
02/19/2020
02/09/2021
4,000
-
(29
)
First Brands, Inc.
Transportation Equipment Manufacturing
1st Lien, Secured Loan
5
2M L + 7.50%, 8.50% Floor (8.50%)
07/23/2020
02/02/2024
2,981
2,810
2,904
The Finance Company
Consumer Finance
1st Lien, Secured Revolver
3, 5
1M L + 11.00%, 11.50% Floor (11.50%)
11/03/2016
07/02/2020
99
99
99
The Finance Company
Consumer Finance
1st Lien, Secured Loan B
3, 5, 8
1M L + 11.00%, 11.50% Floor (0.00%)
06/08/2018
07/02/2020
1,491
1,491
244
The Finance Company
Consumer Finance
Common Equity
3, 5, 7
n/a
06/08/2018
n/a
288,000
-
-
Finastra Group Holdings, Ltd.
Software Services
2nd Lien, Secured Loan
10
6M L + 7.25%, 8.25% Floor (8.25%)
12/14/2017
06/13/2025
4,000
3,856
3,746
Greenway Health, LLC
Technology
1st Lien, Revolver
5
3M L+ 3.75%, 3.75% Floor (4.17%)
01/27/2020
02/17/2022
2,809
2,057
2,596
F-7
Greenway Health, LLC
Technology
1st Lien, Revolver - Unfunded
5
0.50%
01/27/2020
02/17/2022
5,217
-
(395
)
Mitchell International, Inc.
Software Services
2nd Lien, Secured Loan
1M L + 7.25%, 7.25% Floor (7.40%)
08/02/2019
12/01/2025
3,000
2,816
2,837
Natural Resource Partners LP
Metals & Mining
Unsecured Notes
9.13%
06/12/2020
06/30/2025
2,367
2,015
2,078
OPS Acquisitions Limited and Ocean Protection Services Limited
Maritime Security Services
1st Lien, Secured Loan
4, 5, 8, 10
1M L + 12.00%, 12.50% Floor (0.00%)
11/03/2016
06/01/2018
4,903
4,240
30
OPS Acquisitions Limited and Ocean Protection Services Limited
Maritime Security Services
Common Equity
4, 5, 7, 10
n/a
11/03/2016
n/a
19
-
-
PE Facility Solutions, LLC
Building Cleaning and Maintenance Services
1st Lien, Secured Loan B
3, 5, 8
1M L + 14.00%, (0.00%)
02/28/2017
02/27/2022
164
164
162
PE Facility Solutions, LLC
Building Cleaning and Maintenance Services
Common Equity
3, 5, 7
n/a
02/28/2017
n/a
1
-
-
PEAKS Trust 2009-1
Consumer Finance
1st Lien, Secured Note
5, 8, 10
1M L + 5.50%, 7.50% Floor (0.00%)
11/03/2016
01/27/2020
940
849
-
Perforce Software, Inc.
Technology
1st Lien, Secured Revolver
5
3M L + 4.25%, 4.25% Floor (4.40%)
01/24/2020
07/01/2024
875
514
821
Perforce Software, Inc.
Technology
1st Lien, Secured Revolver - Unfunded
5
0.50%
01/24/2020
07/01/2024
3,500
-
(217
)
PFS Holdings Corp.
Food & Staples
1st Lien, Secured Loan
5, 8
3M L + 3.50%, 4.50% Floor (0.00%)
07/09/2018
01/31/2021
14,821
12,378
8,189
Prestige Capital Finance, LLC
Specialty Finance
Receivable
3, 5
13.00%
09/11/2020
09/11/2021
2,830
2,830
2,830
Prestige Capital Finance, LLC
Specialty Finance
Receivable - Unfunded
3, 5
13.00%
09/11/2020
09/11/2021
3,170
-
-
Prestige Capital Finance, LLC
Specialty Finance
Receivable
3, 5
13.00%
08/27/2020
09/28/2021
3,627
3,627
3,627
Prestige Capital Finance, LLC
Specialty Finance
Receivable - Unfunded
3, 5
13.00%
08/27/2020
09/28/2021
5,373
-
-
Prestige Capital Finance, LLC
Specialty Finance
Receivable
3, 5
13.00%
09/29/2020
09/29/2021
3,063
3,063
3,063
Prestige Capital Finance, LLC
Specialty Finance
Receivable - Unfunded
3, 5
13.00%
09/29/2020
09/29/2021
2,937
-
-
Prestige Capital Finance, LLC
Specialty Finance
Common Equity
3, 5, 10
n/a
02/08/2019
n/a
100
7,466
9,903
Research Now Group, Inc.
Internet Media
1st Lien, Secured Revolver
5
6M L + 4.50%, 4.50% Floor (4.81%)
01/29/2019
12/20/2022
6,947
6,474
6,731
Research Now Group, Inc.
Internet Media
1st Lien, Secured Revolver - Unfunded
5
0.50%
01/29/2019
12/20/2022
3,053
-
(206
)
Research Now Group, Inc.
Internet Media
2nd Lien, Secured Loan
5
6M L + 9.50%, 10.50% Floor (10.50%)
05/20/2019
12/20/2025
12,000
11,956
11,632
Subcom, LLC
Telecommunications Services
1st Lien, Secured Revolver
5
3M L + 5.00%, 5.00% Floor (5.23%)
11/21/2019
11/02/2023
-
(1,481
)
-
Subcom, LLC
Telecommunications Services
1st Lien, Secured Revolver - Unfunded
5
0.50%
11/21/2019
11/02/2023
10,000
-
(327
)
Tallage Davis, LLC
Real Estate Services
1st Lien, Secured Loan
5
11.00%
03/20/2018
01/26/2023
500
500
500
Tallage Davis, LLC
Real Estate Services
1st Lien, Secured Loan - Unfunded
5
n/a
03/20/2018
01/26/2023
8,910
-
-
Tensar Corp.
Construction Materials Manufacturing
1st Lien, Secured Loan
3M L + 4.75%, 5.75% Floor (5.75%)
06/27/2019
07/09/2021
9,297
9,101
9,099
Tensar Corp.
Construction Materials Manufacturing
2nd Lien, Secured Loan
3M L + 8.50%, 9.50% Floor (9.50%)
07/23/2020
07/09/2022
8,452
6,622
7,121
TRU (UK) Asia Limited
Retail
Common Equity
5, 7, 10
n/a
07/21/2017
n/a
776,954
22,132
8,635
TRU (UK) Asia Limited Liquidating Trust
Retail
Common Equity
5, 7
n/a
07/21/2017
n/a
16,000
900
837
Viasat, Inc.
Communications Equipment
Receivable
5
n/a
06/25/2020
09/15/2020
2,000
2,000
2,006
Total Investments excluding Short-Term Investments (280.31% of Net Assets)
270,743
169,486
Short-Term Investments
F-8
United States Treasury
Treasury Bill
0%
03/30/2019
12/31/2020
75,000
74,983
74,980
Total Short-Term Investments (124.01% of Net Assets)
74,983
74,980
TOTAL INVESTMENTS (404.32% of Net Assets)
13
$
345,726
$
244,466
Other Liabilities in Excess of Assets (304.32% of Net Assets)
$
(184,002
)
NET ASSETS
$
60,464
(1)
The Company’s 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 Company’s variable rate debt investments bear interest at a rate that is determined by reference to London Interbank Offered Rate (‘‘LIBOR” or “L”) and which is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of period end. If no reference to LIBOR 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. The one month (“1M”) LIBOR as of period end was 0.15%. The two month (“2M”) LIBOR as of period end was 0.19%. The three month (“3M”) LIBOR as of period end was 0.23%. The six month (“6M”) LIBOR as of period end was 0.26%.
(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, as 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 Company's board of directors.
(6)
Security pays, or has the option to pay, all of its interest in kind. As of September 30, 2020, each of the Avanti Communications Group, plc secured bonds pay in kind (“PIK”) and the rates above reflect the PIK interest rates.
(7)
Non-income producing security.
(8)
Investment was on non-accrual status as of period end.
(9)
The interest rate on these loans includes a default interest rate.
(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 Company’s total assets at the time of acquisition of any additional non-qualifying assets. Of the Company’s total assets, 28.2% were non-qualifying assets as of period end.
(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)
Under the terms of the credit agreement, this investment has an exit fee which requires the borrower to pay, in connection with each prepayment or other repayment a fee equal to 2.50% of the amount being repaid.
(13)
As of period end, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $6,881; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $(109,246); the net unrealized depreciation was $(102,365); the aggregate cost of securities for Federal income tax purposes was $271,851.
F-9
As of September 30, 2020 , the Company’s investments consisted of the following:
Investment Type
Investments at
Fair Value
Percentage of
Net Assets
Debt
$
136,062
225.03
%
Equity/Other
33,424
55.28
%
Short-Term Investments
74,980
124.01
%
Total
$
244,466
404.32
%
As of September 30, 2020, the industry composition of the Company’s portfolio at fair value was as follows:
Industry
Investments at
Fair Value
Percentage of
Net Assets
Wireless Telecommunications Services
$
39,334
65.05
%
Specialty Finance
19,423
32.12
%
Internet Media
18,157
30.03
%
Construction Materials Manufacturing
16,220
26.83
%
Oil & Gas
12,710
21.02
%
Retail
9,472
15.66
%
Food & Staples
8,189
13.54
%
Restaurants
7,907
13.08
%
Software Services
6,583
10.89
%
Radio Broadcasting
5,393
8.92
%
Apparel & Textile Products
5,062
8.37
%
Chemicals
4,550
7.52
%
Industrial
3,120
5.16
%
Transportation Equipment Manufacturing
2,904
4.80
%
Hotel Operator
2,894
4.79
%
Technology
2,776
4.59
%
Metals & Mining
2,078
3.44
%
Communications Equipment
2,006
3.32
%
Real Estate Services
500
0.83
%
Consumer Finance
343
0.57
%
Building Cleaning and Maintenance Services
162
0.27
%
Maritime Security Services
30
0.05
%
Telecommunications Services
(327
)
(0.54
)%
Short-Term Investments
74,980
124.01
%
Total
$
244,466
404.32
%
As of September 30, 2020, the geographic composition of the Company’s portfolio at fair value was as follows:
Geography
Investments at
Fair Value
Percentage of
Net Assets
United States
$
192,721
318.74
%
United Kingdom
51,745
85.58
%
Total
$
244,466
404.32
%
F-10
GREAT ELM CAPITAL CORP.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2019
Dollar amounts in thousands
Portfolio Company
Industry
Security (1)
Notes
Interest Rate (2)
Initial Acquisition Date
Maturity
Par Amount / Quantity
Cost
Fair Value
Investments at Fair Value
APTIM Corp.
Industrial
1st Lien, Secured Bond
11
7.75%
03/28/2019
06/15/2025
$
7,000
$
5,629
$
4,200
ASP Chromaflo Technologies Corp.
Chemicals
2nd Lien Secured Loan
5
1M L + 8.00%, 9.00% Floor (9.80%)
08/12/2019
11/18/2024
6,992
6,763
6,917
Avanti Communications Group, plc
Wireless Telecommunications Services
1.5 Lien, Secured Bond
4, 5, 6, 10, 11, 12
12.50%
05/24/2019
05/24/2021
8,413
8,413
8,413
Avanti Communications Group, plc
Wireless Telecommunications Services
1.5 Lien, Secured Bond - Unfunded
4, 5, 6, 10, 11, 12
12.50%
05/24/2019
05/24/2021
-
-
-
Avanti Communications Group, plc
Wireless Telecommunications Services
2nd Lien, Secured Bond
4, 5, 6, 10, 11
9.00%
11/03/2016
10/01/2022
42,467
39,391
29,812
Avanti Communications Group, plc
Wireless Telecommunications Services
Common Equity
4, 5, 7, 10
n/a
11/03/2016
n/a
196,086,410
50,660
2,353
Best Western Luling
Hotel Operator
1st Lien, Secured Loan
5, 8, 9
1ML + 12.00%, 12.25% Floor (0.00%)
11/03/2016
12/18/2017
2,715
1,300
3,361
Boardriders, Inc.
Apparel & Textile Products
1st Lien, Secured Loan
5
3M L + 6.50%, 7.50% Floor (8.30%)
03/28/2019
04/06/2024
8,962
8,819
8,744
California Pizza Kitchen, Inc.
Restaurants
1st Lien, Secured Loan
3M L + 6.00%, 7.00% Floor (7.91%)
03/26/2019
08/23/2022
9,923
9,671
8,524
California Pizza Kitchen, Inc.
Restaurants
2nd Lien Secured Loan
5
3M L + 10.00%, 11.00% Floor (11.91%)
07/17/2019
08/23/2023
4,300
4,080
3,448
Commercial Barge Line Company
Water Transport
1st Lien, Secured Loan
3M L + 8.75%, 9.75% Floor (10.68%)
05/17/2017
11/12/2020
15,883
14,315
8,001
Cooke Omega Investments, Inc.
Food & Staples
Bond
8.50%
09/19/2019
12/15/2022
3,000
2,927
3,022
Davidzon Radio, Inc.
Radio Broadcasting
1st Lien, Secured Loan
5, 9
1ML + 10.00%, 11.00% Floor (14.70%)
11/03/2016
03/31/2020
8,962
8,903
7,795
Duff & Phelps
Consulting
1st Lien Revolver
3M L + 3.25%, 3.25% Floor (5.16%)
09/09/2019
02/13/2022
-
(438
)
-
Duff & Phelps
Consulting
1st Lien Revolver - Unfunded
1M L + 3.25%, 3.25% Floor (5.29%)
09/09/2019
02/13/2022
5,000
-
(458
)
The Finance Company
Consumer Finance
1st Lien, Secured Revolver
3, 5
1M L + 11.00%, 11.50% Floor (12.70%)
11/03/2016
07/02/2020
806
806
806
The Finance Company
Consumer Finance
1st Lien, Secured Revolver - Unfunded
3, 5
1M L + 11.00%, 11.50% Floor (13.09%)
11/03/2016
07/02/2020
194
-
-
The Finance Company
Consumer Finance
1st Lien Secured Loan B
3, 5
Consumer Finance + 0.00%, 3, 5 (0.00%)
06/08/2018
07/02/2020
1,491
1,491
244
The Finance Company
Consumer Finance
Common Equity
3, 5, 7
n/a
06/08/2018
n/a
288
-
-
Finastra Group Holdings, Ltd.
Software Services
2nd Lien, Secured Loan
10
3M L + 7.25%, 8.25% Floor (9.45%)
12/14/2017
06/13/2025
14,000
13,353
13,655
Full House Resorts, Inc.
Gaming, Lodging & Restaurants
1st Lien, Secured Note
5, 11
3M L + 7.00%, 8.00% Floor (8.94%)
02/02/2018
02/02/2024
9,800
9,656
9,657
Mitchell International, Inc.
Software Services
2nd Lien Secured Loan
5
1M L + 7.25%, 8.00% Floor (9.05%)
08/02/2019
11/30/2025
12,000
11,302
11,801
OPS Acquisitions Limited and Ocean Protection Services Limited
Maritime Security Services
1st Lien, Secured Loan
4, 5, 8, 10
1M L + 12.00%, 12.50% Floor (0.00%)
11/03/2016
06/01/2018
4,903
4,240
30
OPS Acquisitions Limited and Ocean Protection Services Limited
Maritime Security Services
Common Equity
4, 5, 7, 10
n/a
11/03/2016
n/a
-
-
-
PE Facility Solutions, LLC
Building Cleaning and Maintenance Services
1st Lien, Secured Loan B
3, 5, 6, 8
1M L + 14.00%, (0.00%)
02/28/2017
02/27/2022
838
838
819
F-11
PE Facility Solutions, LLC
Building Cleaning and Maintenance Services
Common Equity
3, 5, 7
n/a
02/28/2017
n/a
-
-
-
PEAKS Trust 2009-1
Consumer Finance
1st Lien, Secured Note
5, 8, 10
1M L + 5.50%, 7.50% Floor (0.00%)
11/03/2016
01/27/2020
940
849
-
Peninsula Pacific Entertainment, LLC
Gaming, Lodging & Restaurants
1st Lien, Secured Loan
5
3M L + 7.25%, 7.25% Floor (9.19%)
06/27/2019
11/13/2024
2,500
2,505
2,470
PFS Holdings Corp.
Food & Staples
1st Lien, Secured Loan
5
3M L + 3.50%, 4.50% Floor (5.41%)
07/09/2018
01/31/2021
14,821
11,735
9,054
Prestige Capital Finance, LLC (fka Prestige Capital Corporation)
Specialty Finance
Common Equity
3, 5, 10
n/a
02/08/2019
n/a
-
7,466
7,726
Research Now Group, Inc.
Internet Media
1st Lien, Secured Revolver
5
3M L + 4.50%, 4.50% Floor (6.41%)
01/29/2019
12/20/2022
4,316
3,696
4,316
Research Now Group, Inc.
Internet Media
1st Lien, Secured Revolver - Unfunded
5
3M L + 4.50%, 4.50% Floor (6.75%)
01/29/2019
12/20/2022
5,684
-
(334
)
Research Now Group, Inc.
Internet Media
2nd Lien, Secured Loan
5
3M L + 9.50%, 10.50% Floor (11.41%)
05/20/2019
12/20/2025
12,000
11,951
11,941
Shearer's Foods, LLC
Food & Staples
2nd Lien, Secured Loan
1M L + 6.75%, 7.75% Floor (8.55%)
06/17/2019
06/30/2022
9,000
8,955
8,899
Subcom, LLC
Telecommunications Services
1st Lien, Secured Revolver
5
3M L + 5.00%, 5.00% Floor (6.91%)
11/21/2019
11/02/2023
-
(1,525
)
-
Subcom, LLC
Telecommunications Services
1st Lien, Secured Revolver - Unfunded
5
3M L + 5.00%, 5.00% Floor (6.91%)
11/21/2019
11/02/2023
10,000
-
(928
)
Tallage Davis, LLC
Real Estate Services
1st Lien, Secured Loan
5
11.00%
03/20/2018
01/26/2023
2,065
2,065
2,065
Tallage Davis, LLC
Real Estate Services
1st Lien, Secured Loan - Unfunded
5
11.00%
03/20/2018
01/26/2023
8,910
-
-
Tensar Corp.
Construction Materials Manufacturing
1st Lien, Secured Loan
3M L + 4.75%, 5.75% Floor (6.69%)
06/27/2019
07/10/2021
8,223
7,903
7,792
TRU (UK) Asia Limited
Retail
Common Equity
5, 7, 10
n/a
07/21/2017
n/a
776,954
22,132
11,996
TRU (UK) Asia Limited Liquidating Trust
Retail
Common Equity
5, 7
n/a
07/21/2017
n/a
16,000
1,723
1,474
Total Investments excluding Short-Term Investments (227.43% of Net Assets)
281,574
197,615
Short-Term Investments
State Street Institutional Treasury Money Market Fund
Premier Class
n/a
n/a
11,022,134
11,022
11,022
United States Treasury
Treasury Bill
0%
04/02/2020
75,000
74,711
74,711
Total Short-Term Investments (98.67% of Net Assets)
85,733
85,733
TOTAL INVESTMENTS(13) (326.1% of Net Assets)
$
367,307
$
283,348
Other Liabilities in Excess of Assets (226.1% of Net Assets)
$
(196,459
)
NET ASSETS
$
86,889
(1)
The Company’s 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 Company’s variable rate debt investments bear interest at a rate that is determined by reference to London Interbank Offered Rate (‘‘LIBOR” or “L”) and which is reset daily, monthly, quarterly or semiannually. For each debt investment, the Company has provided the interest rate in effect as of period end. If no reference to LIBOR 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. The one month (“1M”) LIBOR as of period end was 1.76%. The three month (“3M”) LIBOR as of period end was 1.91%.
(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, as 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 Company's board of directors.
(6)
Security pays, or has the option to pay, all of its interest in kind.
F-12
(7)
Non-income producing security.
(8)
Investment was on non-accrual status as of period end.
(9)
The interest rate on these loans includes a default interest rate.
(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 Company’s total assets at the time of acquisition of any additional non-qualifying assets. Of the Company’s total assets, 25.4% were non-qualifying assets as of period end.
(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)
As of period end, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $3,357; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $70,638; the net unrealized depreciation was $(67,281); the aggregate cost of securities for Federal income tax purposes was $350,629.
As of December 31, 2019 the Company’s investments consisted of the following:
Investment Type
Investments at
Fair Value
Percentage of
Net Assets
Debt
$
174,066
200.33
%
Equity/Other
23,549
27.10
%
Short-Term Investments
85,733
98.67
%
Total
$
283,348
326.10
%
F-13
As of December 31, 2019 the industry composition of the Company’s portfolio at fair value was as follows:
Industry
Investments at
Fair Value
Percentage of
Net Assets
Wireless Telecommunications Services
$
40,578
46.70
%
Software Services
25,456
29.30
%
Food & Staples
20,975
24.14
%
Internet Media
15,923
18.33
%
Retail
13,470
15.50
%
Gaming, Lodging & Restaurants
12,127
13.96
%
Restaurants
11,972
13.78
%
Apparel & Textile Products
8,744
10.06
%
Water Transport
8,001
9.21
%
Radio Broadcasting
7,795
8.97
%
Construction Materials Manufacturing
7,792
8.97
%
Specialty Finance
7,726
8.89
%
Chemicals
6,917
7.96
%
Industrial
4,200
4.83
%
Hotel Operator
3,361
3.87
%
Real Estate Services
2,065
2.38
%
Consumer Finance
1,050
1.21
%
Building Cleaning and Maintenance Services
819
0.94
%
Maritime Security Services
30
0.03
%
Consulting
(458
)
(0.53
)%
Telecommunications Services
(928
)
(1.07
)%
Short-Term Investments
85,733
98.67
%
Total
$
283,348
326.10
%
As of December 31, 2019 the geographic composition of the Company’s portfolio at fair value was as follows:
Geography
Investments at
Fair Value
Percentage of
Net Assets
United States
$
251,153
289.05
%
United Kingdom
32,195
37.05
%
Total
$
283,348
326.10
%
The accompanying notes are an integral part of these financial statements.
F-14
GREAT ELM CAPITAL CORP.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation . The Company’s functional currency is U.S. dollars and these consolidated financial statements have been prepared in that currency. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to Regulation S-X and Regulation S-K. These financial statements reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes are necessary to fairly state results for the interim periods presented. Results of operations for interim periods are not necessarily indicative of annual results of operations. The Company is an investment company following accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services – Investment Companies .
Basis of Consolidation . Under the Investment Company Act, Article 6 of Regulation S-X and GAAP, the Company is generally precluded from consolidating any entity other than another investment company or an operating company which provides substantially all of its services and benefits to the Company. The accompanying consolidated financial statements include the Company’s accounts and the accounts of the Company’s wholly-owned subsidiary, TFC-SC Holdings, 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. 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 Company’s debt investments were purchased at a discount to par as a result of the underlying credit risks and financial results of the issuer, as well as general market factors that influence the financial markets as a whole. Discounts on the acquisition of corporate debt instruments are generally amortized using the effective-interest or constant-yield method assuming there are no material questions as to collectability.
F-15
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 specific identi fication 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 appreci ation or depreciation when gains or losses are realized.
Cash and Cash Equivalents . Cash and cash equivalents typically consist of bank demand deposits. Restricted cash consists of collateral for unfunded positions held by counterparties.
Valuation of Portfolio Investments . The Company carries its investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations or alternative price sources. In the absence of quoted market prices, broker or dealer quotations or alternative price sources, investments are measured at fair value as determined by the Company’s board of directors (the “Board”).
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. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (1) are independent of the Company, (2) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (3) are able to transact for the asset, and (4) are willing to transact for the asset (that is, they are motivated but not forced or otherwise compelled to do so).
Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. The Company generally obtains market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker-dealers or market makers. Short term debt investments with remaining maturities within ninety days are generally valued at amortized cost, which approximates fair value. Debt and equity securities for which market quotations are not readily available, which is the case for many of the Company’s investments, or for which market quotations are deemed not to represent fair value, are valued at fair value using a consistently applied valuation process in accordance with the Company’s documented valuation policy that has been reviewed and approved by the Board, who also approve in good faith the valuation of such securities as of the end of each quarter. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may 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 Company’s investments than on the fair values of the Company’s 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-16
The valuation process approved by the Board with respect to investments for which mark et 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;
▪
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 Company’s total capitalization and individually less than 1% of the Company’s total capitalization may be determined by GECM in good faith in accordance with the Company’s valuation policy without the employment of an independent valuation firm.
▪
The Company’s audit committee recommends, and the Board approves, the fair value of the investments in the Company’s portfolio in good faith based on the input of GECM, the independent valuation firms (to the extent applicable) and the business judgment of the audit committee and the 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 the Company may take into account in determining the fair value of its investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, and enterprise values.
Investments in revolvers or delayed draw loans may include unfunded commitments for which the Company’s acquisition cost will be offset by compensation received on the portion of the commitment that is unfunded. As a result, the purchases of a commitment that is not fully funded may result in a negative cost basis for the funded commitment. The fair value of the unfunded commitment is adjusted for price appreciation or depreciation and may result in a negative fair value for the unfunded commitment.
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. 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 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, it generally will not be subject to corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as distributions. Rather, any tax liability related to income earned by the Company represents obligations of the Company’s stockholders and will not be reflected in the consolidated financial statements of the Company.
F-17
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 Amoun t 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 exci se 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 inco me.
The Company has not accrued any excise tax expense for the three and nine months ended September 30, 2020. The Company accrued $209 of excise tax expense for the year ended December 31, 2019.
At December 31, 2019, the Company, for federal income tax purposes, had capital loss carryforwards of $45,137 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, 2019, $45,137 are limited losses and available for use subject to annual limitation under Section 382. Of the capital losses at December 31, 2019, $16,815 are short-term and $28,322 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 Company's tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Based on its analysis of its tax position for all open tax years (the current and prior years, as applicable), the Company has concluded that it does not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740. Such open tax years remain subject to examination and adjustment by tax authorities.
Recent Accounting Developments
Fair Value Measurements In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement , resulting in various disclosures related to fair value measurements being eliminated, modified or supplemented. ASU 2018-13 is effective for interim and annual periods beginning after December 15, 2019, with an option to early adopt any eliminated or modified disclosures, and to delay adoption of the additional disclosures, until the effective date. On September 1, 2018, the Company early adopted the eliminated and modified disclosures of ASU 2018-13 and, as a result, updated its financial statement disclosures accordingly. On January 1, 2020, the Company adopted the additional disclosures of ASU 2018-13 and there was no impact to the financial statement disclosures.
Reference Rate Reform In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of the London Interbank Offered Rate (“LIBOR”) by the end of 2021. If LIBOR ceases to exist, the Company may need to renegotiate outstanding loans to our portfolio companies which extend beyond 2021, and that utilize LIBOR as a factor in determining the interest rate, to replace LIBOR with the new standard that is established. 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.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) , to facilitate the effects of reference rate reform on financial reporting. The provisions provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform on financial reporting due to the cessation of LIBOR if certain criteria are met. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. The Company adopted the amendments as of March 12, 2020 on a prospective basis and there was no impact to the accompanying financial statements and related disclosures.
F-18
Significant Subsidiaries In May 2020, the Securities and Exchange Commission (“SEC”) adopted amendments to improve financial disclosures about acquisitions and dispositions of businesses. The rule established investment company-specific disclosure requirements in the event of a fund acquisition and tailored the definition of a significant subsidiary for investment com panies. The amendments will be effective on January 1, 2021, but voluntary compliance is permitted in advance of the effective date. The Company adopted the amendments as of June 30, 2020. Under the amended definition of a significant subsidiary, none o f the Company’s investments are deemed to be significant subsidiaries.
3. SIGNIFICANT AGREEMENTS AND RELATED PARTIES
Investment Management Agreement. The Company has an investment management agreement (the “Investment Management Agreement”) with GECM. Beginning on November 4, 2016, the Company began accruing for GECM’s fees for its services under the Investment Management Agreement. This fee consists of two components: a base management fee and an incentive fee.
The Company’s 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 Company’s 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. The Company’s Chief Financial Officer is also the chief financial officer of GECM.
Management Fee The base management fee is calculated at an annual rate of 1.50% of the Company’s average adjusted gross assets, including assets purchased with borrowed funds. The base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of the Company’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the then current calendar quarter. Base management fees for any partial quarter are prorated.
For the three and nine months ended September 30, 2020 management fees amounted to $609 and $1,898, respectively. For the three and nine months ended September 30, 2019 management fees amounted to $759 and $2,207, respectively. As of September 30, 2020 and December 31, 2019, $609 and $746 remained payable, respectively.
Incentive Fee The incentive fee consists of two components that are independent of each other with the result that one component may be payable even if the other is not. One component of the incentive fee is based on income (the “Income Incentive Fee”) and the other component is based on capital gains (the “Capital Gains Incentive Fee”).
The Income Incentive Fee is calculated on a quarterly basis as 20% of the amount by which the Company’s pre-incentive fee net investment income (the “Pre-Incentive Fee Net Investment Income”) for the quarter exceeds a hurdle rate of 1.75% (7.0% annualized) of the Company’s net assets at the end of the immediately preceding calendar quarter, subject to a “catch-up” provision pursuant to which GECM receives all of such income in excess of the 1.75% level but less than 2.1875% (8.75% annualized) and subject to a total return requirement (described below). The effect of the “catch-up” provision is that, subject to the total return provision, if pre-incentive fee net investment income exceeds 2.1875% of the Company’s net assets at the end of the immediately preceding calendar quarter, in any calendar quarter, GECM will receive 20.0% of the Company’s pre-incentive fee net investment income as if the 1.75% hurdle rate did not apply. These calculations will be appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the then current quarter.
Pre-Incentive Fee Net Investment Income includes any accretion of original issue discount, market discount, PIK interest, PIK 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 September 30, 2020 was $25,001. Accrued Unpaid Income includes capitalized PIK income of $14,048 on investments still held at September 30, 2020. Accrued Unpaid Income as of December 31, 2019 was $23,495, which included capitalized PIK income of $12,279 on investments still held at December 31, 2019.
F-19
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 C ompany 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 wil l, in the applicable period of reversal, (1) reduce Pre-Incentive Fee Net Investment Income and (2) reduce the amount of Accrued Unpaid Income Incentive Fees previously deferred.
The Company will defer cash payment of any Income Incentive Fee otherwise payable to the investment adviser 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 the investment adviser 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.
Under the Capital Gains 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.
For the nine months ended September 30, 2020 and 2019, the Company incurred Income Incentive Fees of $810 and $2,099, respectively. As of September 30, 2020 and December 31, 2019, $8,967 and $8,157 of Income Incentive Fees, respectively, remained payable and none was immediately payable after calculating the total return requirement. These payable amounts may include both Accrued Unpaid Income Incentive Fees and amounts deferred under the total return requirement and will become due upon meeting the criteria described above. For the nine months ended September 30, 2020 and the year ended December 31, 2019, the Company did not have any Capital Gains Incentive Fees accrual.
The Investment Management Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GECM and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Investment Management Agreement or otherwise as an investment adviser of the Company.
Administration Fees . The Company has an administration agreement (the “Administration Agreement”) with GECM to provide administrative services, including, among other things, furnishing the Company with office facilities, equipment, clerical, bookkeeping and record keeping services. The Company will reimburse GECM for its allocable portion of overhead and other expenses of GECM in performing its obligations under the Administration Agreement.
GECM agreed that the aggregate amount of expenses accrued for reimbursement pursuant to the Administration Agreement that pertain to direct compensation costs of financial, compliance and accounting personnel that perform services for the Company, inclusive of the fees charged by any sub-administrator to provide such financial, compliance and/or accounting personnel to the Company (the “Compensation Expenses”), during the year ending November 4, 2017, when taken together with Compensation Expenses reimbursed or accrued for reimbursement by the Company pursuant to the Investment Management Agreement during such period, shall not exceed 0.50% of the Company’s average net asset value during such period.
The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GECM and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GECM’s services under the Administration Agreement or otherwise as administrator for the Company.
F-20
For the nine months ended September 30, 2020 and 2019 , the Company incurred expenses under the Administration Agreement of $5 47 and $734 , respectively. As of September 30, 2020 and December 31, 2019 , $2 2 2 and $176 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 instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Note 2 should be read in conjunction with the information outlined below.
The table below presents the valuation techniques and the nature of significant inputs generally used in determining the fair value of Level 2 and Level 3 Instruments.
Level 2 Instruments Valuation Techniques and Significant Inputs
Equity, Bank Loans, Corporate Debt, and Other Debt Obligations
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 debt and equity 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 September 30, 2020 and December 31, 2019. 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 summarizes the Company’s investment assets categorized within the fair value hierarchy as of September 30, 2020:
Assets
Level 1
Level 2
Level 3
Total
Debt
$
-
$
28,001
$
108,061
$
136,062
Equity/Other
12,710
-
20,714
33,424
Short Term Investments
74,980
-
-
74,980
Total investment assets
$
87,690
$
28,001
$
128,775
$
244,466
The following summarizes the Company’s investment assets categorized within the fair value hierarchy as of December 31, 2019:
Assets
Level 1
Level 2
Level 3
Total
Debt
$
-
$
53,635
$
120,431
$
174,066
Equity/Other
-
-
23,549
23,549
Short Term Investments
85,733
-
-
85,733
Total investment assets
$
85,733
$
53,635
$
143,980
$
283,348
F-22
The following is a reconciliation of Level 3 assets for the nine months ended September 30, 2020 :
Level 3
Beginning Balance as of January 1, 2020
Net Transfers In/Out
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 September 30, 2020
Debt
$
120,431
$
(3,735
)
$
65,342
$
(1,094
)
$
(20,737
)
$
(54,840
)
$
2,694
$
108,061
Equity/Other
23,549
-
-
-
(2,011
)
(824
)
-
20,714
Total investment assets
$
143,980
$
(3,735
)
$
65,342
$
(1,094
)
$
(22,748
)
$
(55,664
)
$
2,694
$
128,775
The following is a reconciliation of Level 3 assets for the year ended December 31, 2019:
Level 3
Beginning Balance as of January 1, 2019
Net Transfers In/Out
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, 2019
Debt
$
116,034
$
-
$
120,050
$
(313
)
$
(6,210
)
$
(112,879
)
$
3,749
$
120,431
Equity/Other
-
6,231
32,935
-
(14,003
)
(1,614
)
-
23,549
Total investment assets
$
116,034
$
6,231
$
152,985
$
(313
)
$
(20,213
)
$
(114,493
)
$
3,749
$
143,980
(1)
Purchases may include new deals, additional fundings (inclusive of those on revolving credit facilities), refinancings, capitalized PIK income, and securities received in corporate actions and restructurings. Sales and Settlements may include scheduled principal payments, prepayments, sales and repayments (inclusive of those on revolving credit facilities), and securities delivered in corporate actions and restructuring of investments.
(2)
The net change in unrealized depreciation relating to Level 3 assets still held at September 30, 2020 totaled $(22,803) consisting of the following: $(20,792) related to debt investments and $(2,011) related to equity. The net change in unrealized depreciation relating to Level 3 assets still held at December 31, 2019 totaled $(20,664) consisting of the following: $(6,661) related to debt investments and $(14,003) relating to equity/other.
One investment with a fair value of $(11,801) was transferred from Level 3 to Level 2 as a result of increased pricing transparency during the nine months ended September 30, 2020. Two investments with an aggregate fair value of $8,066 were transferred from Level 2 to Level 3 as a result of decreased pricing transparency during the nine months ended September 30, 2020.
One investment with a fair value of $2,353 was transferred from Level 1 to Level 3 during the year ended December 31, 2019 as a result of the shares being delisted from their primary exchange.
The following tables present the ranges of significant unobservable inputs used to value the Company’s Level 3 assets as of September 30, 2020 and December 31, 2019, 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 Debt is appropriate for valuing that specific debt investment, but may not be appropriate for valuing any other debt investments in this asset class. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Company’s Level 3 assets.
F-23
As of September 30, 2020
Investment Type
Fair value
Valuation Technique (1)
Unobservable Input (1)
Range (Weighted Average) (2)
Debt
$
49,190
Market Approach
Earnings Multiple
3.50 - 9.50 (5.05)
Income Approach
Discount Rate
6.16% - 30.00% (16.00%)
3,444
Market Approach
Earnings Multiple
8.00
Income Approach
Discount Rate
25.00%
Quotes
$1.83 - $32.60 ($30.06)
13,582
Market Approach
Earnings Multiple
4.50 - 6.25 (5.60)
38,731
Income Approach
Discount Rate
2.73% - 40.00% (15.80%)
2,241
Income Approach
Implied Yield
3.98% - 7.49% (6.94%)
873
Asset Recovery / Liquidation(4)
Total Debt
$
108,061
Equity/Other
$
11,242
Market Approach
Earnings Multiple
2.50 - 4.50 (2.90)
Income Approach
Discount Rate
15.50% - 37.00% (33.68%)
8,635
Market Approach
Earnings Multiple
4.10
837
Asset Recovery / Liquidation(4)
Total Equity/Other
$
20,714
As of December 31, 2019
Investment Type
Fair value
Valuation Technique (1)
Unobservable Input (1)
Range (Weighted Average) (2)
Debt
$
9,054
Market Approach
EBITDA Multiple
5.50
(1,262
)
Implied Yield
4.09% - 8.09% (7.03%)
38,225
Market Approach
Earnings Multiple
4.25
Income Approach
Discount Rate
12.75%
73,334
Income Approach
Discount Rate
3.45% - 32.50% (12.70%)
1,080
Asset Recovery / Liquidation (4)
Total Debt
$
120,431
Equity/Other
$
10,079
Market Approach
Earnings Multiple
2.80 - 4.25 (3.41)
Income Approach
Discount Rate
12.75% - 39.00% (32.87%)
11,996
Market Approach
Comparable Price (3)
6.00 - 11.00 (8.75)
1,474
Asset Recovery / Liquidation (4)
Total Equity/Other
$
23,549
(1)
The fair value of any one instrument may be determined using multiple valuation techniques or unobservable inputs.
(2)
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. The range and weighted average for an asset category consisting of a single investment represents the significant unobservable input used in the fair value of the investment.
(3)
Comparable price may include broker quotes for the exact security or similar securities.
(4)
Investments valued using the asset recovery or liquidation technique include investments for which valuation is based on current financial data without a discount rate applied.
F-24
5. DEBT
On September 13, 2017, the Company offered $28,375 in aggregate principal amount of 6.50% notes due 2022 (the "GECCL Notes"). On September 29, 2017, the Company sold to several underwriters an additional $4,256 of the GECCL Notes upon full exercise of the underwriters’ over-allotment option.
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 the Company may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. The Company pays 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, the Company offered $43,000 in aggregate principal amount of 6.75% notes due 2025 (the "GECCM Notes"). On January 19, 2018 and February 9, 2018, the Company sold an additional $1,898 and $1,500 of the GECCM Notes upon partial exercise of the underwriters’ over-allotment option.
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 the Company may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. The Company pays 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.
On June 18, 2019, the Company offered $42,500 in aggregate principal amount of 6.50% notes due 2024 (the "GECCN Notes"), which included $2,500 of the GECCN Notes sold in connection with the partial exercise of the underwriters’ over-allotment option. On July 5, 2019, the Company sold an additional $2,500 of the GECCN Notes upon another partial exercise of the underwriters’ over-allotment option.
The GECCN Notes are our unsecured obligations and rank equal with all of our outstanding and future unsecured unsubordinated indebtedness. The GECCN Notes are effectively subordinated, or junior in right of payment, to any future secured indebtedness that the Company may incur and structurally subordinated to all future indebtedness and other obligations of our subsidiaries. The Company pays interest on the GECCN Notes on March 31, June 30, September 30 and December 31 of each year beginning September 30, 2019. The GECCN Notes will mature on June 30, 2024 and can be called on, or after, June 30, 2021. Holders of the GECCN Notes do not have the option to have the GECCN Notes repaid prior to the stated maturity date. The GECCN Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.
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 the Company 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 Company may repurchase the Notes in accordance with the Investment Company Act and the rules promulgated thereunder. During the nine months ended September 30, 2020, the Company repurchased $2,338 in principal amount of the GECCL Notes, $788 in principal amount of the GECCM Notes and $2,178 in principal amount of the GECCN Notes.
F-25
Information about the Company’s senior securities (including debt securities and other indebtedness) is shown in the fo llowing table:
As of
Total Amount
Outstanding (1)
Asset Coverage
Ratio Per Unit (2)
Involuntary Liquidation
Preference Per Unit (3)
Average Market
Value Per Unit (4)
December 31, 2016
2020 Notes
$
33,646
$
6,168
N/A
$
1.02
December 31, 2017
GECCL Notes
$
32,631
$
5,010
N/A
$
1.02
December 31, 2018
GECCL Notes
$
32,631
$
2,393
N/A
$
1.01
GECCM Notes
46,398
2,393
N/A
0.98
December 31, 2019
GECCL Notes
$
32,631
$
1,701
N/A
$
1.01
GECCM Notes
46,398
1,701
N/A
1.01
GECCN Notes
45,000
1,701
N/A
1.00
September 30, 2020
GECCL Notes
$
30,293
$
1,509
N/A
$
0.87
GECCM Notes
45,610
1,509
N/A
0.82
GECCN Notes
42,823
1,509
N/A
0.82
(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 Elm’s total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
(3)
The amount to which such class of senior security would be entitled upon the voluntary liquidation of the issuer in preference to any security junior to it.
(4)
The average market value per unit for the Notes, as applicable, is based on the average daily prices of such Notes and is expressed per $1 of indebtedness.
The indenture’s covenants, include restrictions on certain activities in the event the Company falls below the minimum 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 Investment Company Act limits, with certain exceptions, the Company’s borrowing such that its asset coverage ratio, as defined in the Investment Company Act, is at least 1.5 to 1 after such borrowing.
As of September 30, 2020, the Company’s asset coverage ratio was approximately 150.9%.
As of September 30, 2020 and December 31, 2019, the Company was in compliance with all covenants under the indenture.
F-26
For the three and nine months ended September 30, 2020 and 2019 , the components of interest expense were as follows:
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2020
2019
2020
2019
Borrowing interest expense
$
1,954
$
2,049
$
6,014
$
4,776
Amortization of acquisition premium
271
259
906
557
Total
$
2,225
$
2,308
$
6,920
$
5,333
Weighted average interest rate (1)
7.43
%
7.45
%
7.59
%
7.39
%
Average outstanding balance
$
119,117
$
123,920
$
121,779
$
96,181
(1)
Annualized.
The fair value of the Company’s 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 Company’s Notes is determined by utilizing market quotations at the measurement date as they are Level 1 securities.
September 30, 2020
Facility
Commitments
Borrowings
Outstanding
Fair
Value
Unsecured Debt - GECCL Notes
$
30,293
$
30,293
$
28,463
Unsecured Debt - GECCM Notes
45,610
45,610
41,159
Unsecured Debt - GECCN Notes
42,823
42,823
37,873
Total
$
118,726
$
118,726
$
107,495
December 31, 2019
Facility
Commitments
Borrowings
Outstanding
Fair
Value
Unsecured Debt - GECCL Notes
$
32,631
$
32,631
$
32,918
Unsecured Debt - GECCM Notes
46,398
46,398
46,888
Unsecured Debt - GECCN Notes
45,000
45,000
45,180
Total
$
124,029
$
124,029
$
124,986
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 September 30, 2020, the Company had approximately $46,160 in unfunded loan commitments, subject to the Company’s 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 September 30, 2020 are included in the Company’s Statements 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. The Company has considered the net decreases in net assets and positive cash flows from operations and has concluded that it has the ability to meet its obligations in the ordinary course of business based upon an evaluation of its cash position and sources of liquidity.
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 Company rights under contracts with the Company portfolio companies.
F-27
T he Company is named as a defendant in a lawsuit filed on March 5, 2016, and captioned Intrepid Investments, LLC v. London Bay Capital, which is pending in the Delaware Court of Chancery. The plaintiff immediately agreed to stay the action in light of an on going mediation among parties other than the Company . This lawsuit was brought by a member of Speedwell Holdings (formerly known as The Selling Source, LLC), one of the Company’s portfolio investments, against various members of and lenders to Speedwell Ho ldings. The plaintiff asserts claims of aiding and abetting, breaches of fiduciary duty, and tortious interference against the Company . In June 2018, Intrepid Investments, LLC (“Intrepid”) sent notice to the court and defendants effectively lifting the sta y and triggering defendants’ obligation to respond to the Intrepid complaint. In September 2018, the Company joined the other defendants in a motion to dismiss on various grounds. In February 2019, Intrepid filed a second amended complaint to which defenda nts filed a renewed motion to dismiss in March 2019. The Company intend s to defend the matter .
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, the Company’s predecessor in interest, brought counterclaims in (i) the District Court of Caldwell County, Texas and (ii) the District Court of Harris County, Texas (the “District Court”) against, among others, Justin Bonner, an employee of GECM, in each case, alleging breach of a confidentiality agreement and tortious interference with Dr. Pumphrey’s attempted sale of a business in which he owned an interest. In August 2017, Dr. Pumphrey voluntarily withdrew his complaint against Mr. Bonner and Full Circle in the District Court of Harris County, Texas. In November 2017, Dr. Pumphrey voluntarily withdrew his complaint without prejudice against Full Circle in the District Court of Caldwell County, Texas. On November 29, 2017, Dr. 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. Pumphrey’s claims to be frivolous and intends to vigorously defend them. Furthermore, the Company continues to pursue the initial claims against Dr. Pumphrey in the District Court of Caldwell County, Texas. In September 2019, the Company received a judgment in the Company’s favor from the District Court of Caldwell County, Texas. On June 4, 2020, Dr. Pumphrey, filed a Chapter 11 Bankruptcy Petition in the United States Bankruptcy Court for the Southern District of Texas. The Company is pursuing claims against Dr. Pumphrey in the Chapter 11 proceeding.
In September 2018, the Company (as successor by merger to Full Circle), the other lenders, and the lender trustee under PEAKS Trust 2009-11 (“PEAKS Trust”), were named as defendants in a claim brought by the Chapter 7 trustee in the ITT Educational Services bankruptcy. Full Circle purchased via assignment a portion of the PEAKS Trust senior secured facility from Deutsche Bank Trust Company Americas in December 2016. The PEAKS Trust senior secured facility was supported by an underlying portfolio of student loans and guaranteed by ITT Educational Services, Inc. (“ITT”). In September 2016, ITT and its affiliates filed for relief under Chapter 7 of the Bankruptcy Code. Following the Chapter 7 filing, a trustee was appointed who initiated a proceeding against certain Deutsche Bank entities and the investors in the PEAKS Trust, including GECC. On November 2, 2018, the trustee filed a motion seeking to stay the litigation in order to facilitate settlement. In September 2020, the Company paid its pro rata share of a settlement with the trustee in an amount of $201. The settlement was approved by the bankruptcy court on October 21, 2020.
7. INDEMNIFICATION
Under the Company’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Company. In addition, in the normal course of business the Company expects to enter into contracts that contain a variety of representations which provide general indemnifications. The Company’s maximum exposure under these agreements cannot be known; however, the Company expects any risk of loss to be remote.
F-28
8 . FINANCIAL HIGHLIGHTS
Below is the schedule of financial highlights of the Company:
For the Nine Months Ended September 30,
2020
2019
Per Share Data: (1)
Net asset value, beginning of period
$
8.63
$
10.34
Net investment income
0.53
0.81
Net realized gains (loss)
(1.02
)
0.12
Net change in unrealized appreciation (depreciation)
(1.86
)
(1.53
)
Net increase (decrease) in net assets resulting from operations
(2.35
)
(0.60
)
Accretion from share buybacks
-
0.10
Distributions declared from net investment income (2)
(0.75
)
(0.75
)
Net decrease resulting from distributions to common stockholders
(0.75
)
(0.75
)
Net asset value, end of period
$
5.53
$
9.09
Per share market value, end of period
$
3.38
$
8.20
Shares outstanding, end of period
10,941,770
10,062,682
Total return based on net asset value (3)
(25.03
)%
(5.08
)%
Total return based on market value (3)
(47.85
)%
14.12
%
Ratio/Supplemental Data:
Net assets, end of period
$
60,464
$
91,489
Ratio of total expenses to average net assets (4),(5)
27.14
%
15.29
%
Ratio of incentive fees to average net assets (4)
1.44
%
2.76
%
Ratio of net investment income to average net assets (4),(5)
13.53
%
11.04
%
Portfolio turnover
51
%
72
%
(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 Company’s distributions were reinvested through its dividend reinvestment plan. Total return based on market value is calculated as the change in market value per share, assuming the Company’s 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.
(4)
Average net assets used in ratio calculations is calculated using monthly ending net assets for the period presented. For the nine months ended September 30, 2020 and 2019 average net assets were $56,318 and $101,665, respectively.
(5)
Annualized for periods less than one year.
9. AFFILIATED AND CONTROLLED INVESTMENTS
Affiliated investments are defined by the Investment Company Act, whereby the Company owns between 5% and 25% of the portfolio company's outstanding voting securities and the investments are not classified as controlled investments. The aggregate fair value of non-controlled, affiliated investments at September 30, 2020 represented 65% of the Company's net assets.
Controlled investments are defined by the Investment Company Act, whereby the Company owns more than 25% of the portfolio company's outstanding voting securities or maintains the ability to nominate greater than 50% of the board representation. The aggregate fair value of controlled investments at September 30, 2020 represented 33% of the Company's net assets.
F-29
Fair value as of September 30, 2020 along with transactions during the nine months ended September 30, 2020 in these affiliated investments and controlled investments was as follows:
For the Nine Months Ended September 30, 2020
Issue (1)
Fair value at December 31, 2019
Gross Additions (2)
Gross Reductions (3)
Net Realized
Gain (Loss)
Change in Unrealized
Appreciation (Depreciation)
Fair value at September 30, 2020
Interest
Income (4)
Fee
Income
Dividend
Income
Non-Controlled, Affiliated Investments
Avanti Communications Group PLC
1.25 Lien, Secured Bond
$
-
$
1,113
$
-
$
-
$
-
$
1,113
$
58
$
75
$
-
1.5 Lien, Secured Bond
8,413
812
-
-
9,225
830
-
-
1.5 Lien, Secured Bond - Unfunded
-
-
-
-
-
-
-
-
-
2nd Lien, Secured Bond
29,812
2,627
-
-
(4,782
)
27,657
3,670
-
-
Equity (9% of class)
2,353
-
-
-
(1,014
)
1,339
-
-
-
40,578
4,552
-
-
(5,796
)
39,334
4,558
75
-
OPS Acquisitions Limited and Ocean Protection Services Limited
1st Lien, Secured Loan
30
-
-
-
-
30
-
-
-
Equity (19% of class)
-
-
-
-
-
-
-
-
-
30
-
-
-
-
30
-
-
-
Totals
$
40,608
$
4,552
$
-
$
-
$
(5,796
)
$
39,364
$
4,558
$
75
$
-
Controlled Investments
The Finance Company
1st Lien, Secured Revolver
$
806
$
574
$
1,281
$
-
$
-
$
99
$
41
$
12
$
-
1st Lien, Secured Revolver - Unfunded
-
-
-
-
-
-
-
-
-
1st Lien, Secured Term Loan B
244
-
-
-
-
244
63
-
-
Equity (72% of class)
-
-
-
-
-
-
-
-
-
1,050
574
1,281
-
-
343
104
12
-
PE Facility Solutions, LLC
1st Lien, Secured Term Loan B
819
-
674
-
17
162
-
-
-
Equity (87% of class)
-
-
-
-
-
-
-
-
-
819
-
674
-
17
162
-
-
-
Prestige Capital Finance, LLC
Receivable
-
5,094
2,264
-
-
2,830
35
-
-
Receivable - Unfunded
-
-
-
-
-
-
-
-
-
Receivable
-
4,270
643
-
-
3,627
47
-
-
Receivable - Unfunded
-
-
-
-
-
-
-
-
-
Receivable
-
3,063
-
-
-
3,063
2
-
-
Receivable - Unfunded
-
-
-
-
-
-
-
-
-
Equity (80% of class)
7,726
-
-
-
2,177
9,903
-
-
1,760
7,726
12,427
2,907
-
2,177
19,423
84
-
1,760
Totals
$
9,595
$
13,001
$
4,862
$
-
$
2,194
$
19,928
$
188
$
12
$
1,760
(1)
Non-unitized equity investments are disclosed with percentage ownership in lieu of quantity.
(2)
Gross additions include increases resulting from new or additional portfolio investments, capitalized PIK income, accretion of discounts and the exchange of one or more existing securities for one or more new securities.
(3)
Gross reductions include decreases resulting from principal collections related to investment repayments or sales and the exchange of one or more existing securities for one or more new securities.
(4)
Income amounts include accrued PIK income.
F-30
1 0 . SUBSEQUENT EVENTS
On October 1, 2020, the Company announced the final results of the Company’s non-transferable rights offering, which entitled holders of rights to purchase one new share of common stock for each right held at a subscription price of $2.95 per share. In total, the Company sold 10,761,950 shares of the Company’s common stock for aggregate gross proceeds of approximately $31,747.
The Board set distributions for the quarter ending March 31, 2021 at a rate of $0.10 per quarter. All of the distribution is from net investment income. The schedule of distribution payment will be established by GECC pursuant to authority granted by the Board. The distribution will be paid in cash.
In October 2020:
•
the Company purchased 43,993 preferred shares in Blueknight Energy Partners L.P. (“Blueknight”) for approximately $260.
•
the Company purchased $1,000 in par value of Peninsula Pacific Entertainment, LLC (“Peninsula Pacific”) secured bonds at 100% of par value.
•
the Company sold $1,000 in par value of Peninsula Pacific secured bonds at approximately 103% of par value.
•
the Company purchased $2,000 in par value of Natural Resource Partners, L.P. unsecured bonds at approximately 90% of par value.
•
$2,000 of par value of Viasat, Inc. receivable was redeemed at 100% of par value.
•
the Company purchased $3,000 in par value of Viasat, Inc. receivable at 90% of par value.
•
the Company purchased $1,000 in par value of Cars.com Inc. secured bonds at 100% of par value.
•
the Company sold $1,000 in par value of Cars.com, Inc. unsecured bonds at 100% of par value.
•
the Company purchased $230 in par value of California Pizza Kitchen, Inc. second lien term loan at approximately 1% of par value.
•
the Company purchased $2,000 in par value of Par Petroleum, LLC secured bonds at approximately 81% of par value.
In November 2020:
•
the Company purchased 30,000 preferred shares in Blueknight for approximately $176.
F-31
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.